DRAX Draxis Health (MM)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 20-F

DRAXIS HEALTH INC.

(Exact name of Registrant as specified in its charter)

CANADA

(Jurisdiction of incorporation or organization)

SUITE 4700, TD BANK TOWER, TORONTO DOMINION CENTRE, TORONTO, ONTARIO,
CANADA M5K 1E6

(Address of principal executive offices)

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

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 — 42,062,538 common shares (as of 12/31/07)

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

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Item 1.    Identity of Directors, Senior Management and Advisers

Not Applicable

Item 2.    Offer Statistics and Expected Timetable

Not Applicable

Item 3.    Key Information

Selected Consolidated Financial Data

DRAXIS Health Inc. (“DRAXIS” or the “Company”) is a specialty pharmaceutical company providing products in three categories: sterile products, non-sterile products and radiopharmaceuticals.  Sterile products include liquid and freeze-dried (lyophilized) injectables and sterile ointments.  Non-sterile products are produced as solid oral, liquid and semi-solid dosage forms.  Radiopharmaceuticals are used for both therapeutic and diagnostic molecular imaging applications.  In the radiopharmaceutical category, DRAXIS has its own products and a targeted research and development program for new products.  As of January 1, 2005, all of the operations of the Company are carried out through our wholly owned subsidiary DRAXIS Specialty Pharmaceuticals Inc. (“DSPI”), which operates two major divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).  Our operations are carried out at our sole manufacturing facilities located at 16751, Trans-Canada Highway, Kirkland, Québec, H9H 4J4 , Canada (our “manufacturing facilities” or “facility”).  For the year ended December 31, 2007, 69.7% of our consolidated revenues were derived from DRAXIS Pharma (contract manufacturing) and 29.4% of our consolidated revenues were derived from DRAXIMAGE (radiopharmaceuticals).

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

Our registered office is located at Suite 4700, TD Bank Tower, Toronto Dominion Centre, Toronto, Ontario, M5K 1E6, Canada. The phone number for the registered office is 416-601-7525.  We also have a place of business at 16751 Trans-Canada Highway, Kirkland, Québec, H9H 4J4 where all of our operations are conducted. The phone number for this place of business is 514-694-8220. DRAXIS is a corporation governed by the Canada Business Corporations Act (the “CBCA” or the “Act”)

Unless otherwise indicated herein, the information presented in this Annual Report (Form 20-F) is for the year ended December 31, 2007.  All amounts expressed herein are in U.S. dollars unless specifically stated otherwise.

The selected consolidated income statement data for the years ended December 31, 2005, 2006 and 2007, and the selected consolidated balance sheet data as of December 31, 2006 and 2007, are derived from the audited Consolidated Financial Statements included elsewhere in this Annual Report (Form 20-F).  The selected consolidated income statement data for the years ended December 31, 2003 and 2004, and selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005 are derived from our audited consolidated financial statements which are not included in this Annual Report (Form 20-F).  The selected financial data set forth in the following table are presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).  All data presented below should be read in conjunction with, and is qualified in its entirety by, reference to our audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2007 which are included in this Annual Report (Form 20-F).

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Selected Five-Year Review

(in thousands of U.S. dollars except share related data)

Forward-Looking Statements

This Annual Report (Form 20-F) contains forward-looking statements (within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information that are based on management’s beliefs, as well as assumptions made by and information currently available to management.  When used in this Annual Report (Form 20-F), the words “anticipate”, “estimate”, “forecast”, “plan”, “believe”, “expect”, “potential”, “intend”, “projected”, “designed”, “should” and similar expressions are intended to identify forward-looking statements, but they are not the only way we identify such statements.  These forward-looking statements necessarily make numerous assumptions with respect to: industry performance; general business, economic and regulatory conditions; access to markets and materials; and other matters, all of which are inherently subject to significant uncertainties and contingencies and many of which are beyond our control.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions made or factors considered in making a forward-looking statement prove incorrect, actual results may vary materially from those anticipated, estimated or projected.  We believe that any of the following risk factors could cause our actual results to differ from those that may have been or may be projected in

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forward-looking statements made by us or on our behalf from time to time. We caution you that the following list of risk factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements. The forward-looking statements in this Annual Report (Form 20-F) are principally contained under Items 4 and 5.

RISK FACTORS

Our future financial condition, results of operations and business could be materially affected by the risks and uncertainties discussed below, or otherwise, and historic trends should not be used to anticipate results or trends in future periods:

Risks Related to our Industry

WE MAY NOT BE ABLE TO GET TIMELY REGULATORY APPROVAL FOR OUR PRODUCTS AND WE MUST COMPLY WITH REGULATORY REQUIREMENTS TO MANUFACTURE AND MARKET OUR PRODUCTS.

The manufacturing and marketing of our existing and potential products, as well as preclinical studies and clinical trials, are subject to extensive regulation and approval by the Therapeutic Products Directorate (“TPD”) of the Health Products and Food Branch Inspectorate of Health Canada (“HPFBI”) and other authorities in Canada and by numerous federal, state and local government authorities in the United States, including the Food and Drug Administration (“FDA”). Similar regulatory requirements exist in Europe and other countries.  To the extent we choose to distribute our products in foreign markets, we may rely on licensees to obtain regulatory approvals in such countries.  Any failure or delay by us, our collaborators or licensees to comply with applicable requirements or obtain regulatory approvals for our products could adversely affect the marketing of products developed or licensed by us and our ability to receive product or royalty revenue.

As of December 31, 2007, DRAXIMAGE had six regulatory submissions filed with European regulatory authorities: four with the Medicines Evaluation Board in the Netherlands, one with the Danish Medicines Agency, and one in Denmark under the decentralized procedure.  The submission dates for the radiopharmaceutical products filed in the Netherlands and with the Danish Medicine Agency range from June 2003 to December 2004 (except for one regulatory submission re-filed in Denmark in 2007 for rewording). All of the approvals, except for the most recent submission, sought by DRAXIMAGE in Europe are for marketing authorizations through the mutual recognition procedure, which involves obtaining approval in one state (the “reference member state”) and recognition of that approval in other member states.  Five of the approvals being sought by DRAXIMAGE in Europe are for radiopharmaceutical products already approved in Canada or the U.S. The most recent submission is for DRAXIMAGE Ò Sestamibi which has not yet received approval in Canada or the U.S. Two of these six European submissions, made for DRAXIMAGE MAA kit and MDP kit, received approval in a reference member state, the Netherlands, in February 2005 and March 2006.  The MDP kit also received approval in the United Kingdom in February 2008. The MAA kit has also been approved in Germany, the United Kingdom, Austria, Belgium and Luxembourg.  A third approval for DRAXIMAGE’s Sodium Iodide I-131 capsules was granted in reference member state, Denmark, in September 2007.

The regulatory process for innovative products generally involves preclinical studies and clinical trials of each compound to establish its safety and efficacy, takes many years and requires the expenditure of substantial resources.  For generic products, the regulatory process does not typically involve clinical studies.  Moreover, if regulatory approval of a drug or diagnostic product is granted, such approval may entail limitations on the indicated uses for which it may be marketed.  Our failure to comply with applicable regulatory requirements can, among other things, result in the suspension of our regulatory

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approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.  Further, government policy may change and additional government regulations may be established that could prevent or delay regulatory approvals for our products.  In addition, a marketed drug and its manufacturer are subject to continual review.  Later discovery of previously unknown problems with the product or manufacturer may result in restrictions on such product or manufacturer, including withdrawal of the product from the market.

On February 2, 2007, DRAXIMAGE announced it had submitted an Abbreviated New Drug Application (“ANDA”) to the FDA for its generic kit for the preparation of Tc-99m Sestamibi for injection (DRAXIMAGE Ò Sestamibi), a nuclear medicine imaging agent used in myocardial perfusion imaging (“MPI”) to evaluate blood flow to the heart in patients undergoing cardiac tests.  On July 25, 2007, DRAXIMAGE announced it had filed DRAXIMAGE Ò Sestamibi with European regulatory authorities.  The Company also filed an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGE Ò Sestamibi on August 17, 2007 with Health Canada.  On October 11, 2007, the Company was informed by Health Canada that this submission had been screened and found acceptable for review.  We cannot predict if or when we will receive regulatory approvals to market this product.

The final products in which active pharmaceutical ingredients are used are subject to regulation for safety and efficacy by the FDA, TPD and regulatory authorities in other jurisdictions, as the case may be.  All of the final products that DRAXIMAGE or DRAXIS Pharma manufacture must be approved by the FDA, TPD and the regulatory authorities in other jurisdictions, as the case may be, before they can be commercially marketed.  The process of obtaining regulatory clearance for marketing is uncertain, can be costly and time-consuming.  We cannot predict how long the necessary regulatory approvals will take or whether we or our customers for whom we manufacture products will ever obtain such approval for products.  To the extent that we and/or our customers do not obtain the necessary regulatory approvals for marketing new products, our product sales could be adversely affected.

All products manufactured by us (including those manufactured for our contract manufacturing customers) have to comply with the current Good Manufacturing Practices (“cGMP”) imposed under the laws of the U.S., Canada and other jurisdictions, as well as the guidelines and policies of TPD, FDA and the regulatory authorities in other jurisdictions, as the case may be.  In addition, products containing radioactive isotopes will have to comply with the guidelines and regulations of the Canadian Nuclear Safety Commission in Canada and the United States Nuclear Regulatory Commission and other similar regulations in other countries.   Compliance with cGMP regulations requires us to expend time, money and effort on our production facilities and to maintain precise and extensive records and quality control to ensure that our products meet applicable specifications and other requirements. The FDA, TPD and other regulators may periodically inspect our drug manufacturing facilities to ensure compliance with applicable cGMP requirements. In 2007, the Company announced it had received a notification from the FDA that its manufacturing facilities continue to maintain their classification as acceptable facilities following an extensive inspection by the FDA in January 2007 of all six products and quality systems for the contract manufacturing division.  There can be no assurance that subsequent inspections will have similar results. In addition, our customers also periodically inspect our manufacturing facilities to ascertain compliance with cGMP requirements.  If we fail to comply with the cGMP requirements, we may become subject to possible regulatory action, and manufacturing at the facility could consequently be suspended, causing possible loss of profit, regulatory fines and third-party liability.  To date we have not been subject to any notice of material non-compliance.

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

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

Our success depends, in part, on our ability to obtain, enforce and maintain patent protection for our radiopharmaceutical technologies.  Patents for our radiopharmaceutical technologies have expiry dates ranging from November 2008 to December 2020.  We cannot assure you that patents will be issued from any of our pending applications or that claims now or in the future, if any, allowed under issued patents will be sufficiently broad to protect our technology. In addition, we cannot assure you that any patents issued to or licensed by us will not be challenged, invalidated, infringed or circumvented, or that the rights granted under these patents will provide continuing competitive advantages to us.  The patent positions of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions.  In addition, we do not know whether any of our current research endeavors will result in the issuance of patents in Canada, the United States or elsewhere, or if any patents already issued will provide significant proprietary protection or will be circumvented or invalidated.  Since patent applications in the United States and Canada are maintained in secrecy for at least 18 months from the date of filing, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we will be the first to create inventions claimed by pending patent applications or that we will be the first to file patent applications for such inventions.  Our failure to obtain patents for our products could negatively affect our competitive position.

Our commercial success also depends in part on our not infringing patents or proprietary rights of others and not breaching the licenses granted to us.  In the event that we are found to have infringed other parties’ patents, licenses may not be available to us on terms that are commercially favorable or at all.  In addition, the degree of patent protection afforded to pharmaceutical or biotechnological inventions around the world is uncertain and varies significantly among different countries.  We cannot assure you that we will be able to license third-party technology or patents that we may require to conduct our business or that such technology or patents can be licensed at a reasonable cost. Failure by us or our collaborators or customers to license any technology or patents that we may need to commercialize our technologies or manufacture our products may result in delays in marketing our products or may impede our inability to proceed with the development, manufacture or sale of products requiring such licenses.  There can be no assurance that any of our products currently in development or our recently approved products will achieve market acceptance.

We may be required to engage in litigation and other patent proceedings to enforce patents issued to us, to defend our right, title and interest in patents related to our products and to determine the scope and validity of other parties proprietary rights.  These proceedings can be costly, and if the outcome of any such proceedings is adverse to us, we could lose the right to sell some of our products or could be required to pay damages, which may be substantial.

We also rely on unpatented trade secrets, improvements and know-how with respect to our contract manufacturing operations and all of our operations associated with our radiopharmaceutical kit business to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our customers, collaborators, employees and consultants.  These agreements could be breached, and we may not have adequate remedies for any breach. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

ALTHOUGH WE CARRY PRODUCT LIABILITY INSURANCE, A SUCCESSFUL

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LIABILITY CLAIM COULD NEGATIVELY IMPACT OUR BUSINESS.

We may be subject to liability claims by those who purchase our contract manufacturing services, for the use of any of our products under clinical development and the sale and use of any of our approved products.  Such claims may be made directly by customers, consumers, healthcare providers, pharmaceutical companies or others selling such products.  Although we believe that our insurance coverage is reasonably adequate to insulate us from potential product liability claims and we have not historically experienced any problems associated with claims by those who purchase our contract manufacturing services or users of our products under clinical development or the radiopharmaceutical products that we manufacture, we cannot provide any assurance that we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to this potential liability.  We may not be able to maintain or obtain additional commercially reasonable product liability insurance for any of our products approved for marketing and sale.  Even unsuccessful product liability claims could result in the expenditure of funds in litigation and the diversion of management time and resources and could damage our reputation and impair the marketability of our products, which could have a material adverse effect on our financial condition and results of operation.

On July 22, 2005, we announced that, together with other defendants, we had received a Statement of Claim filed before the Superior Court of Justice of Ontario alleging that Permax Ò , a drug that we distributed in Canada for a third party manufacturer prior to July 2003, causes “compulsive/obsessive behaviour, including pathological gambling”.  The plaintiff is seeking to have this action certified as a class action.  We believe this claim against us is without merit and we intend to vigorously defend this proceeding and any motion for certification.  Prior to July 2003, Permax Ò was distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketing division.  In July 2003, we sold the DRAXIS Pharmaceutica division to Shire BioChem Inc. (“Shire”).  On February 29, 2008, the plaintiff served an Amended Statement of Claim and a Motion Record in support of the plaintiff’s motion for certification of this action as a class proceeding.  The defendants must file a response to plaintiff’s motion for certification by July 31, 2008.

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

There can be no assurance that any of our products currently in development, or those awaiting approval or our recently approved products will achieve market acceptance.  The degree of market acceptance will depend upon a number of factors, including the receipt of regulatory approvals (generic and innovative products), the establishment and demonstration in the medical community of the clinical efficacy and safety of our products (innovative products), the establishment and demonstration of their potential advantages to existing and new diagnostic and treatment methods and the reimbursement policies of government and third-party payers and, most importantly, the launching of competing products by our competitors that become established prior to the launch of our products in development. There can be no assurance that physicians, patients, payers or the medical community in general will accept and utilize any of our existing or future products.

We anticipate that we will face increased competition in the future as new products enter the market, as we enter new markets with generic and potentially proprietary products and advanced technologies become available.  There can be no assurance that existing products or new products developed by our competitors will not be more effective, or be more effectively marketed and sold, than any of the products that may be developed, manufactured or sold by us.  Competitive products may render our products obsolete and uncompetitive prior to recovering our research, development or commercialization expenses incurred with respect to any such products.

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We may lose market exclusivity for one or more of our proprietary products due to generic challenges.  This is because the introduction of a generic version of the same or similar products typically results in a significant reduction in net sales for the relevant product, given that generic manufacturers typically offer their versions of the same product at sharply lower prices.

For example, in a press release dated November 1, 2007, we announced that the Company was ceasing all further activities related to its product INFECTON Ò and redeploying its development teams to other projects following the results of additional formulations for the product which indicated that sufficient specifity and sensitivity could be achieved in a cost effective manner which would be commercially important.  In another press release dated March 27, 2006, we announced that although our product FIBRIMAGE Ò had met primary end points in its Phase III clinical trial in Canada, further market analysis had shown that new technologies had successfully captured the current deep venous thrombosis indications and there was no longer an economically interesting market opportunity at this time in either the at-risk asymptomatic patient, or those with symptoms.  We further indicated that we had decided that no significant further work would be conducted in the development of this product for its current indications but that other potential opportunities for this product would be explored.  In 2006 and 2007, no other potential opportunities were uncovered.

We believe that AZEDRA Ô , being developed by Molecular Insight Pharmaceuticals, Inc. (“MIPI”) may compete with our DRAXIMAGE Ò I-131 MIBG product under clinical development.  AZEDRA Ô has received Orphan Drug status and a Fast Track designation by the FDA.  According to information set forth in its website, MIPI is conducting a Phase I dosimetry study with AZEDRA Ô in adults at Duke University.  The initial target market for AZEDRA Ô dosimetry study is the treatment of metastatic neuroendocrine tumours such as pheochromocytoma, carcinoid and neuroblastoma that are not amenable to treatment with surgery or conventional chemotherapy.  Metastatic tumours are tumours that spread to other organs or parts of the body.  Additionally, according to information set forth in its website, MIPI initiated a Phase I/II study dose-finding and therapeutic evaluation of the product in patients with malignant Pheochromocytoma/Paraganglioma, which completion is expected for July 2012. The primary objectives of this study are to determine the maximum tolerated dose of the product and then, to determine the objective tumor response rate nine months following treatment.

On February 27, 2008, Covidien announced it had received tentative approval from the FDA for its generic Sestamibi.  This product will compete with our DRAXIMAGE Ò Sestamibi product for which we filed an ANDA with the FDA in February 2007 and for which we have not yet received an approval.  Failure to receive this approval could have a material negative impact on the expected future results of our operations.

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

Many of our existing 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 in undertaking research, preclinical studies and human clinical trials of new pharmaceutical products, including innovative and generic products, obtaining regulatory approvals, manufacturing and marketing such products.  Accordingly, our competitors may succeed in commercializing or manufacturing products more rapidly or effectively than we can.

WE OPERATE IN A VERY COMPETITIVE MARKET.

DRAXIS Pharma, our contract manufacturing division, competes with pharmaceutical companies that have in-house manufacturing capabilities as well as with third-party contract manufacturers,

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including Hospira Inc., Boehringer Ingelheim GmbH, Catalent Pharma Solutions Inc., DPT Laboratories Ltd, Haupt Pharma AG, Patheon Inc., Hollister-Stier Laboratories LLC and DSM Pharmaceuticals, Inc.

DRAXIMAGE, our radiopharmaceuticals division, competes with the following companies that have significant radiopharmaceutical operations: Lantheus Medical Imaging (formerly Bristol-Myers Squibb Imaging), GE Healthcare, Covidien, CISbio, and Bracco S.p.A.  In addition, there are a number of companies that are developing and/or marketing other radiopharmaceutical products, including MDS Nordion Inc., Immunomedics Inc., IBA Molecular, Cytogen Corporation, International Isotopes Inc. and Molecular Insight Pharmaceuticals, Inc.

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

The development of new products is subject to a number of significant risks.  Potential products that appear to be promising in various stages of development may not reach the market for a number of reasons.  Such reasons include, but are not limited to, the possibility that the potential product will be found ineffective or unduly toxic during preclinical or clinical trials, fails to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or not achieve market acceptance, will not qualify for third-party reimbursement, or will be precluded from commercialization by proprietary rights of third parties.  Certain products we are attempting to develop have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in a quantity to render such products commercially viable.  Production of such products may require the development of new manufacturing technologies and expertise.  The impact on our business in the event that new manufacturing technologies and expertise would have to be developed is uncertain.  Many of our potential products will require significant additional research and development efforts and significant additional preclinical and clinical testing prior to any commercial use.  We cannot assure you that we will successfully meet any of these technological challenges or others that may arise in the course of product development.

The research and development process of a new pharmaceutical product can take up to ten years or longer, from discovery to commercial product launch.  New products do not only need to undergo intensive pre-clinical and clinical testing, but must also pass a highly complex, lengthy and expensive approval process.  During each stage of the process, there is a substantial risk that we will encounter serious obstacles or will not achieve our goals and accordingly we may abandon a product in which we have invested substantial amounts of time and money.

Before obtaining regulatory approval for the commercial sale of any innovative product under development, we must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious.  In November 2006, we announced that DRAXIMAGE had received approval from the FDA to run two clinical trials using radioactive Iobenguane I-131 Injection (also known as I-131 Metaiodobenzylguanidine or I-131 MIBG) to treat high-risk neuroblastoma, a rare form of cancer that affects mostly infants and young children, one trial is a Phase II study and another is a Phase I study.  Both trials are ongoing.  The results of preclinical studies and early-stage clinical trials may not be totally predictive of results obtained in larger late-stage clinical trials, and there can be no assurance that our clinical trials will demonstrate safety and efficacy, achieve regulatory approvals or result in marketable products.  A number of companies in the biotechnology and pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier clinical trials.

OUR PROFITABILITY DEPENDS IN PART ON REIMBURSEMENT POLICIES AND REGULATIONS OF GOVERNMENT HEALTH ADMINISTRATION AUTHORITIES, PRIVATE

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HEALTH INSURERS AND OTHER ORGANIZATIONS.

The business and financial condition of pharmaceutical companies will continue to be affected by the efforts of governments and third-party payers to contain or reduce the costs of healthcare through various means.  For example, in certain markets, pricing or profitability of pharmaceutical products, medical devices and diagnostic products is subject to government control.  In Canada, the Patented Medicine Prices Review Board (“PMPRB”) monitors and controls prices of patented drug products marketed in Canada.  The PMPRB may assert jurisdiction over our products under development which may limit the prices that can be charged for such products in Canada.  We may not be able to obtain prices for our products under development that will make them commercially viable exclusively in Canada.  In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar pricing controls by government.  In addition, the emphasis on managed healthcare in the United States has increased and will continue to increase the pressure on pharmaceutical pricing.  While we cannot predict whether such legislative or regulatory proposals will be adopted or the effects such proposals or managed healthcare efforts may have on our business, the announcement of such proposals or efforts could have a material adverse effect on the market price of our securities and, if adopted, on our business and financial condition and that of our current and prospective customers.  Accordingly, our ability to establish strategic alliances may be adversely affected.  In addition, in Canada, the United States and elsewhere, sales of prescription pharmaceutical products and radiopharmaceutical products are dependent, in part, on the availability of reimbursement to the consumer from third-party payers, such as government and private insurance plans.  Third-party payers are increasingly challenging the prices charged for medical products and services.  To the extent we succeed in bringing new products to market, we cannot assure you that these products will be considered cost-effective and that reimbursement to consumers will be available or will be sufficient to allow the sale of these products on a competitive basis.

Risks Related to our Company

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

A substantial portion of our consolidated revenues are now, and are expected to continue to be, realized in U.S. dollars.  Our operating expenses are primarily paid in Canadian dollars.  We may be adversely affected by a significant and rapid strengthening of the Canadian dollar against the U.S. dollar, should the Canadian dollar rise in value compared to the U.S. dollar by more than 10 cents.  We do not currently use derivative instruments to hedge our foreign exchange risk and currently have no plans to do so in the near future.  For fiscal year 2007, U.S. dollar revenue accounted for approximately 51% of the Company’s consolidated revenue.  During this same period, the value of the Canadian dollar versus the U.S. dollar strengthened by 18% from January 1, 2007 to December 31, 2007.  As a result, in 2007 we had to charge to income $1.7 million of foreign exchange loss related to the strengthening of the Canadian dollar.

OUR MANUFACTURING FACILITIES ARE CURRENTLY LOCATED IN THE SAME LOCATION AND FACTORS BEYOND OUR CONTROL COULD CAUSE AN INTERRUPTION IN OUR MANUFACTURING OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR REPUTATION IN THE MARKETPLACE AND OUR RESULTS OF OPERATIONS.

Our manufacturing facilities are currently located in the same location in Kirkland, Québec.  To succeed, we must be able to operate our manufacturing facilities without significant interruption and deliver radiopharmaceutical and contract manufacturing products in a timely manner. We could suffer an interruption in our manufacturing operations caused by damage from a variety of sources, many of which

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are not within our control, including fire, flood, earthquake and other natural disasters; power loss and telecommunication failure; disruption to transportation systems; major equipment or machinery failure; software and hardware errors, failures or crashes and similar disruptions; or undue delays or restrictions with air transport systems and cross-border shipments. Any significant interruptions in our manufacturing operations or our ability to receive key raw materials or components or to deliver time-sensitive products would damage our reputation in the marketplace and have a negative impact on our results of operations.  For example, our radiopharmaceutical revenues were adversely impacted by lower demand related to an industry shortage of radioactive medical isotopes in the fourth quarter of 2007.  This was related to an extended shutdown at one of the largest global suppliers of radioactive isotopes late in 2007.  While the Company has an alternative approved source of supply for its radioactive isotopes, the shutdown affects the ability of radiopharmacies to carryout procedures resulting in lower demand.  In addition, during the third quarter of 2005, DRAXIS Pharma, our contract manufacturing operating division, extended its regularly scheduled summer shutdown period at the beginning of the third quarter in the sterile area of our manufacturing facilities, in order to correct an electrical panel failure and make associated repairs.  The revalidation of the entire sterile area following these repairs and the related recalibration of production schedules due to this interruption had material financial implications which negatively affected third and fourth quarter 2005 results.  As a further example, if there were a cessation of flights leaving Canada for the U.S., then the radiopharmaceutical products manufactured by DRAXIMAGE, which are delivered in part via airplanes, could not be delivered to customers on a timely basis and our products would be harmed due to their short shelf-life.  Also, if there were a prolonged loss of hydroelectric power at our sole manufacturing facilities, then the manufacturing of our products may be impaired because we may not have sufficient back-up electrical power from our independent generators for the duration of the hydroelectric interruption.  Although we believe that we carry adequate property and business interruption insurance, we cannot assure you that we will be able to maintain such insurance coverage at a reasonable cost or in sufficient amounts to protect us against all potential eventualities.

In addition, because our products are intended to promote the health of patients, any supply disruption could lead to allegations that the public health, or the health of individuals, has been endangered and could subject us to lawsuits.

IF OUR COLLABORATIVE AND COMMERCIAL RELATIONSHIPS WITH THIRD PARTIES ON WHOM WE RELY ARE UNSUCCESSFUL, OUR BUSINESS MAY SUFFER.

To be successful, we must continually establish and maintain strategic or key relationships with other companies or organizations in a number of biotechnology and pharmaceutical industry segments.  This is critical to our success because such relationships enable us to extend the reach of our products and sales in various jurisdictions, generate additional revenue and develop and deploy new products in various marketplaces.  Entering into strategic relationships is complicated, as some of our current and future strategic partners may decide to compete with us in some or all of the markets in which we operate or refuse to fulfill or honor their contractual obligations to us.  In addition, our relationships with customers always require us to manufacture products in accordance with their specifications that are provided 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 relationships with our four largest customers (i) GlaxoSmithKline Inc. (“GSK”) to supply it with established sterile products marketed by GSK in multiple international markets and a prescription sterile injectable product for the U.S. market, (ii) Genzyme Corporation (“Genzyme”) to manufacture Hectorol® Injection, (iii) Johnson & Johnson Consumer Companies, Inc. (“JJC”) to manufacture a broad portfolio of multiple non sterile specialty semi-solid products currently marketed in the United States, as well as Johnson & Johnson, Inc. (prior to December 20, 2006, Pfizer Consumer Healthcare, a division of Pfizer Canada, Inc.), that covers several non-prescription products for

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the Canadian market including Polysporin®, Sudafed® and Actifed®, and (iv) Cardinal Health 414, LLC with respect to our Iodine I-131 kits, MAA, DTPA and MDP products sold in the U.S.

During the third quarter of 2007, the Company announced it had expanded its existing contract manufacturing relationship with JJC and entered into a new definitive supply agreement to manufacture a broad portfolio of multiple non-sterile specialty semi-solid products currently marketed in the United States.  This new multi-year contract runs to the end of 2013 and may be extended beyond that date. It includes approximately two years of manufacturing site transfer and process validation activities followed by five years of commercial production, that is scheduled to begin in 2009. We expect commercial production to generate incremental revenues in excess of $120 million over the five year period of 2009 through 2013. The transfer of equipment and production technologies, currently in progress, is expected to generate additional cumulative revenues during 2007 and 2008 of approximately $6 million to $8 million.  In 2007, revenues of $2.6 million were generated from this contract.

On December 20, 2007, DRAXIS announced that DRAXIMAGE, its radiopharmaceutical division, appointed GE Healthcare, an industry leader in nuclear medicine, as the exclusive distributor of DRAXIMAGE ^® Sestamibi in the United States. DRAXIMAGE ^® Sestamibi is a generic kit for the preparation of Technetium (Tc-99m) Sestamibi injection, a diagnostic cardiac imaging agent used in myocardial perfusion imaging (MPI) to evaluate blood flow to the heart.

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

For the year ended December 31, 2007, our four largest customers, GlaxoSmithKline, Genzyme Corporation, Johnson & Johnson Inc. (which includes JJC) and Cardinal Health 414, LLC, represented 55% of our consolidated revenues (19%, 15%, 11% and 10% respectively). The termination by any of these customers of its relationship with us would have a material adverse effect on our business, financial condition and results of operations unless we could replace these customers in a timely fashion.  Moreover, we are exposed to a concentration of credit risk as a result of this concentration among our customers.  Should one or more of our key customers experience financial difficulties, the effect would be substantially greater than it would have been the case in the past.  Each of these factors could have a material negative impact on our results of operations.

IF OUR COLLABORATORS, EMPLOYEES, OR CONSULTANTS DISCLOSE OUR CONFIDENTIAL INFORMATION TO OTHERS DESPITE CONFIDENTIALITY AGREEMENTS IN PLACE, OUR BUSINESS MAY SUFFER.

Our practice is to require our key employees, collaborators, consultants and outside scientific advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships.  These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties, subject to certain specific limited exceptions.  In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property.  These agreements, however, may not provide meaningful protection for our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information.  For example, trade secrets regarding the recipe to manufacture our radiopharmaceutical kits or capsule products could be disclosed, allowing our competitors to copy the recipe and manufacture a competing product.

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

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Pharmaceutical drug manufacturing is a highly regulated industry, requiring significant documentation and validation of manufacturing processes and quality control assurance prior to approval of the facility to manufacture a specific drug.  There can be considerable transition time between the initiation of a contract to manufacture a product and the actual initiation of the manufacturing of that product.  Any lag time in the initiation of a contract to manufacture a product and the actual initiation of the manufacturing at our facilities could cause us to lose profits.

We have in place facilities and procedures designed to reduce and, to the extent possible, eliminate the risk of environmental contamination resulting from the processing of raw materials and, more specifically, from the radiopharmaceutical business of DRAXIMAGE and the contract manufacturing business of DRAXIS Pharma.  We also have in place regular maintenance programs 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 in all material respects with applicable health and safety, environmental and nuclear safety laws.

Canadian and U.S. federal, state, local and provincial regulations govern extensively the use, manufacture, storage, handling, transport and disposal of hazardous material and associated waste products.  Although we believe that the operations at our facilities comply in all material respects with applicable laws and regulations, we cannot completely eliminate the risk of substantial environmental liabilities especially in respect of environmental contamination resulting from the processing of raw materials from the radiopharmaceutical business of DRAXIMAGE and the manufacturing business of DRAXIS Pharma.  Any failure by us or any of our subsidiaries to comply with such present or future laws and regulations could result in any of the following: (i) cessation of portions or all of our or our subsidiaries’ operations; (ii) imposition of fines; (iii) restrictions on our or 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.  As of December 31, 2007, we have not received any notice stating that we are not in compliance with any such legislation applicable to us.

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

The products manufactured by DRAXIS Pharma represent a significant amount of our consolidated revenues.  For the year ended December 31, 2007, 69.7 % of our consolidated revenues were derived from DRAXIS Pharma.  Although a collective agreement with a five-year term to April 30, 2008 between DRAXIS Pharma and the United Food & Commercial Workers International Union, Local 291 (AFL-CIO) was ratified in February 2004, we cannot assure you that labour difficulties will not arise, and if they did arise then the production and delivery of those products manufactured by DRAXIS Pharma would be impaired for the duration of those labor difficulties.  Those products manufactured by DRAXIMAGE may also be impaired if access to our sole manufacturing facilities is hindered by these labor difficulties. The present collective agreement terminates on April 30, 2008.  We are presently preparing to negotiate a new collective agreement with the union and cannot assure you that we will negotiate the same terms as the existing agreement.

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

We will need to maintain, expand and upgrade our manufacturing facilities and operations to execute current commercial obligations to customers, widen our customer base and increase manufacturing efficiencies over the next few years.  We cannot be certain that DRAXIS Pharma will be able to enter into enough lucrative third-party manufacturing contracts to increase its profitability.  If we

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do secure advantageous agreements, we cannot be certain that our employees, systems, procedures, controls, productive capacity and existing space will be adequate to support expansion of the operations.  Our future operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems and operational excellence in order to achieve established business objectives.  An unexpectedly large increase in the volume of manufacturing business or the number of orders placed by customers may require us to expand capacity and further upgrade our manufacturing facilities and the technology related to our manufacturing.  We may not be able to project the rate of timing of such increases or customer demands accurately or to expand and upgrade our manufacturing facilities and supporting systems and infrastructure to accommodate such increases.  Difficulties in managing future growth and meeting customers’ expanded requirements could have a significant negative impact on our business and its profitability.

IF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING ARE FOUND NOT TO BE EFFECTIVE OR IF WE MAKE DISCLOSURE OF EXISTING OR POTENTIAL SIGNIFICANT DEFICIENCIES OR MATERIAL WEAKNESSES IN THOSE CONTROLS, INVESTORS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTS, AND OUR STOCK PRICE MAY BE ADVERSELY AFFECTED.

Beginning with this Annual Report (Form 20-F) for the year ending December 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a report of management on the Company’s internal control over financial reporting with our Annual Report (Form 20-F).  That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year.  Additionally, beginning with our Annual Report for the year ending December 31, 2007, our independent registered public accounting firm is required to issue a report on the effectiveness of our internal controls over financial reporting.  This Annual Report (Form 20-F) includes a report on the effectiveness of our internal controls over financial reporting from our independent registered public accountants as of December 31, 2007.

We continue to evaluate our existing internal controls over financial reporting according to the standards adopted by the Public Company Accounting Oversight Board (“PCAOB”).  During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review.  Despite the existence of material weaknesses or significant deficiencies in our internal controls over financial reporting, we may fail to identify them.  Remedying any deficiencies, significant deficiencies or material weaknesses that we and/or our independent registered public accounting firm are able to identify, may require us to incur significant costs and expend significant time and management resources.  Further, any of the measures we implement to remedy any such deficiencies may not effectively mitigate or remedy such deficiencies.

Any failure to remedy the deficiencies identified by management, any failure to implement required new or improved controls and the discovery of unidentified deficiencies could harm our operating results, cause us to fail to meet our reporting obligations, subject us to increased risk of errors and fraud related to our financial statements or result in material misstatements in, and untimely filing of, our financial statements.  The existence of a material weakness could also cause a restatement of future presented financial statements.  Investors could lose confidence in our financial reports, and our stock price may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or by an independent registered public accounting firm, or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.

OUR FINANCIAL RESULTS MAY FLUCTUATE, AND OUR FUTURE REVENUE AND

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PROFITABILITY ARE UNCERTAIN.

Our ability to achieve and maintain profitability in the foreseeable future depends on the commercial success of our products and services.  Because we have recently launched new products in new markets such as our SMART-FILL Ô Capsule Filler which was launched in the U.S. in August 2007, revenues are difficult to predict and may fluctuate substantially from period to period.  In addition, product development programs will require substantial additional investment, including the cost of clinical trials for innovative products (such as the costs of our clinical trials for DRAXIMAGE Ò I-131 MIBG) and obtaining regulatory approvals for the sale of our products such as DRAXIMAGE Ò Sestamibi for which we filed an ANDA with the FDA in February 2007, a submission to European authorities in July 2007 and an A/NDS in Canada in August 2007.  Our sole manufacturing facilities will continue to require capital investment in order to maintain, upgrade and expand their operations.  The success of DRAXIMAGE and DRAXIS Pharma will rely significantly on the ability of both divisions to maintain and to substantially increase their manufacturing capabilities 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 for our own marketing purposes or for third parties.  DRAXIS Pharma may fail to renew its existing manufacturing contracts or may fail to secure sufficiently lucrative new third-party manufacturing contracts to increase its profitability.  For example, revenues for DRAXIMAGE were impacted in the fourth quarter of 2007 by lower demand related to an industry shortage of radioactive medical isotopes.  This was related to an extended shutdown at one of the largest global suppliers of radioactive isotopes late in 2007.  While DRAXIMAGE has an alternative FDA approved source of supply of its radioactive isotopes, the shutdown affected the ability of radiopharmacies to carryout procedures resulting in lower demand.  In addition, DRAXIS Pharma may lose anticipated volumes of products if the customers for whom it manufactures said products do not receive required approvals for the commercial sale of same.  DRAXIS Pharma may also lose anticipated volumes of existing products if its customers lose market share for products due to decreased demand for said products.  DRAXIMAGE may fail to increase its market penetration of its radioactive products, particularly in the U.S.  DRAXIMAGE may also fail to increase its international sales of its key Tc-99m kits and Iodine I-131 products, particularly in Europe, if it does not receive approvals to market said products or if it is not able to capture a significant market share for those products once they are approved.  DRAXIMAGE may not receive timely regulatory approval of its DRAXIMAGE Ò Sestamibi product.  The research, development, production and marketing of new products like MOLY-FILL Ô (our Technetium Tc-99m Generator) or DRAXIMAGE Ò I-131 MIBG will require the application of considerable technical and financial resources by us and our customers, while revenues that are generated by such products, if approved and successfully developed and marketed, may not be realized for several years.  We may not be able to sustain current and planned levels of profitability.  We may require external financing to complete certain aspects of our three-year strategic plan, and external sources of capital may not be available to us at an acceptable cost, if at all.

IF WE CANNOT ADAPT TO CHANGING TECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE AND OUR BUSINESS COULD SUFFER.

Because the biotechnology, pharmaceutical and radiopharmaceutical industry is characterized by technology change and obsolescence, we may be unable to anticipate changes in our current and potential customer requirements that could make our existing technology obsolete.  Our success will depend, in part, on our ability to continue to enhance our existing products and services, develop new technology that addresses the increasing sophistication and varied needs of our respective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis.  The development of our proprietary technology and investing in certain niche markets entails significant technical, financial and business risks.  We may not be successful in

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using our new technologies or exploiting our niche markets effectively or adapting our businesses to evolving customer requirements or emerging industry standards.

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 which 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 we believe that is growing driven largely by the continued growth of computer tomography (“CT”) and enhanced magnetic resonance imaging (“MRI”) procedures.

AN INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS

Our success depends upon skilled personnel in key parts of the Company.  The loss of the service of key members of the Company, particularly principal members of our management team, may delay or prevent achievement of major business objectives.  We have employment agreements with all principal members of our management team with no fixed duration.  We face intense competition for qualified individuals from numerous pharmaceutical companies, universities, governmental entities and other research institutions.  As a result, we may be unable to attract and retain qualified individuals in sufficient numbers, which would have a material negative impact on our results of operations.

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

In 1998, a Canadian legal proceeding was launched against us and our subsidiary DAHI by a former consultant, Jozsef Knoll, claiming royalty entitlements based on the net profit from sales of ANIPRYL ® (the “Knoll proceeding”).  Total damages claimed are $100 million, including a claim to certain shares of DAHI. However, the plaintiff has taken no steps in the last eight years to move the claim forward.  While we believe that we have good defenses to the Knoll proceeding, this dispute may not be resolved in our favor, if it is pursued.  It is possible that a court or arbitration tribunal may find us to be in breach of certain agreements, or infringing validly issued patents of third parties or practicing the intellectual property of others.  In that event, in addition to the cost of defending the underlying proceeding, we may have to pay license fees, additional royalties and/or damages and may be ordered to assign certain ANIPRYL®- related patents and be prohibited from conducting certain activities.  Under such circumstances, we could incur substantial loss and our business could be negatively affected.

On July 22, 2005, we announced that, together with other defendants, we had received a Statement of Claim filed before the Superior Court of Justice of Ontario alleging that Permax Ò , a drug that we distributed in Canada for a third party manufacturer prior to July 2003, causes “compulsive/obsessive behaviour, including pathological gambling”.  The plaintiff is seeking to have this action certified as a class action.  We believe this claim against us is without merit and we intend to vigorously defend this proceeding and any motion for certification.  Prior to July 2003, Permax Ò was distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketing division.  In July 2003, we sold the DRAXIS Pharmaceutica division to Shire. On February 29, 2008, the plaintiff served an Amended Statement of Claim and a Motion Record in support of the plaintiff’s motion for certification of this action as a class proceeding.  The defendants must file a response to plaintiff’s motion for certification by July 31, 2008.

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Risks Related to our Common Shares

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

The market prices for the securities of smaller pharmaceutical and biotechnology companies, including ours, have historically been volatile, and the market has, from time to time, experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.  For the last two fiscal years, the price of our stock has ranged from a low of $3.27, to a high of $6.64 on NASDAQ (CDN$3.29 to CDN$7.59 on the Toronto Stock Exchange).  We believe that in the first half of 2007 the increase in the share price and volumes of shares traded was impacted by positive financial results that differed from market expectations as well as an increased recognition of the potential future value of the products in our R&D pipeline, particularly products under development at DRAXIMAGE.  We believe that the reduction of the share price and volumes of shares trading in the second half of 2007 occurred as a result of significant declines in financial performance that were well below market expectations and that caused the Company to twice reduce its earnings guidance during this period.  We believe that in the first half of 2006 the volatility in the share price and volumes of shares traded was impacted by financial results that differed from market expectations as a continuing result of the extended shutdown in 2005 of production of sterile products at DRAXIS Pharma. We believe that the appreciation of the share price and volumes of shares trading in the second half of 2006 occurred as a result of improved financial results that came closer to market expectations and a growing recognition of the potential value of new products in development.

Factors such as fluctuations in our operating results, announcements of competing technological innovations or new products by our competitors, clinical trial results, governmental regulation and enforcement actions, developments in patent or other proprietary rights, public concern as to the safety of drugs developed by us or others and general market conditions can have an adverse effect on the market price of our shares.  In particular, the realization of any of the risks described herein could have a material adverse impact on such market price.  Unusual sales of substantial amounts of our shares in the public market over a relatively short time period, or the perception that such sales will occur, could also adversely affect the market price of our shares and make it more difficult in the future for us to raise funds through equity offerings.

Item 4.  Information on the Company

DRAXIS is a specialty pharmaceutical company providing products in three categories: sterile products, non-sterile products and radiopharmaceuticals.  Sterile products include liquid and freeze-dried (lyophilized) injectables and sterile ointments.  Non-sterile products are produced as solid oral, liquid and semi-solid dosage forms.  Radiopharmaceuticals are used for both therapeutic and diagnostic molecular imaging applications.  In the radiopharmaceutical category, DRAXIS has its own products and a targeted research and development program for new products.  As of January 1, 2005, all of the operations of the Company are carried out through our wholly owned subsidiary DRAXIS Specialty Pharmaceuticals Inc., which operates two major divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).  For the year ended December 31, 2007, 69.7% of our consolidated revenues were derived from DRAXIS Pharma (contract manufacturing) and 29.4% of our consolidated revenues were derived from DRAXIMAGE (radiopharmaceuticals).

In addition, DRAXIS has continuing financial interests associated with its collaboration agreements with Pfizer Inc. with respect to ANIPRYL ® .

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

DRAXIS has emerged from a transitional phase of its development.  In past years, we were reliant on income earned from ANIPRYL ® .  For the year ended December 31, 2007, our collaboration agreement with Pfizer Inc. with respect to ANIPRYL ® represented 2.2% of our consolidated revenues which represented the majority of our income from royalties and licensing.

The common shares of DRAXIS are listed on the Toronto Stock Exchange (ticker symbol DAX) and on NASDAQ (ticker symbol DRAX).  The shares of DRAXIS have been included in the NASDAQ Healthcare Index Ò (symbol: IXHC) since July 27, 2005 and the NASDAQ Global Select Market ^SM since July 3, 2006.

Our registered office is located at Suite 4700, TD Bank Tower, Toronto Dominion Centre, Toronto, Ontario, M5K 1E6, Canada. Our telephone number at this location is 416- 601-7525.

The Company’s only manufacturing, research and development facilities are located at 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H 4J4.  Our telephone number at this location is 514-694-8220.

The Company’s website is:  www.draxis.com.

History and Development of the Company

DRAXIS Health Inc. (“DRAXIS”) was incorporated under the name Deprenyl Research Limited on October 13, 1987 under the CBCA .  The Company was founded principally to engage in the marketing in Canada of prescription pharmaceuticals discovered, developed or acquired by Chinoin Pharmaceutical and Chemical Works Co. Ltd., the first of which was ELDEPRYL ® (selegiline; 1-deprenyl), for the treatment of Parkinson’s disease.  We changed our name to DRAXIS Health Inc. in May 1994.

We completed an initial public offering of our common shares in February 1988 on the Toronto Stock Exchange.  Our common shares were listed on NASDAQ in August 1989.

Beginning in 1990, we expanded our scientific knowledge of selegiline through contract research arrangements, to use with companion animals.  This ultimately resulted in the formation of our subsidiary DAHI, through which we developed and commercialized a companion animal health product, ANIPRYL ® .

In 1991, we began to invest in the applications of aminolevulinic acid photodynamic therapy, which resulted in the formation of a subsidiary, DUSA Pharmaceuticals, Inc. (“DUSA”).  Through a series of transactions from 1991 to 1996, we divested all of our interest in DUSA.

By late 1992, we faced considerable uncertainty due to the impending threat of generic competition for ELDEPRYL ® , which, at that time, still accounted for almost 100% of our consolidated revenues.  Faced with this as well as other business challenges, in 1992 we began the process of recruiting new senior management to develop and implement a new strategic business plan for the Company to (i) address the generic threat to our lead drug by expanding and diversifying our established Canadian pharmaceuticals franchise; (ii) strengthen our financial position; and (iii) diversify from our historical Canadian base through the acquisition of niche pharmaceutical products and/or manufacturing-oriented businesses with international growth potential.

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In 1993, the leadership of the Company changed with the appointment of Dr. Martin Barkin as President and Chief Executive Officer.  Several measures were taken to strengthen our financial position and to address the threat of generic competition for Eldepryl Ò , including (i) expanding and diversifying our established Canadian pharmaceutical business, and (ii) diversifying our product mix through the acquisition of niche pharmaceutical products which the Company believed had the potential for global growth.

In April 1996, a public offering of 3,000,000 common shares generated net proceeds of $8.5 million.  In November 1996, we acquired the shares of DAHI that we did not previously own through a mandatory share exchange transaction valued at $17.4 million.

In July 1997, we acquired from Merck Frosst Canada Inc. its radiopharmaceutical business, which became DRAXIMAGE Inc. (since January 1, 2005, known as DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.).

In December 1997, we licenced the worldwide marketing rights for Anipryl Ò to Pfizer but retained manufacturing rights for the product.  Cumulatively to December 31, 2007 $46.4 million has been received in upfront and milestone payments, royalties and royalty-related payments from Pfizer.

In May 1998, we acquired our current manufacturing facilities in Kirkland, Québec for $11.1 million.

During the period of 1998 to 2000, we undertook a capital expansion plan, adding our lyophilization and our radiopharmaceutical operations. Our operations subsequently expanded over the following two years to support our new contract manufacturing and radiopharmaceutical business, respectively.  In 2000, we sold a 34.1% equity interest in DRAXIS Pharma Inc. (since January 1, 2005 known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) to SGF Santé Inc. (“SGF”) and DRAXIS Pharma senior management to help finance the lyophilization expansion at our facilities.

In 2000, we also divested our dermatology product lines to Block Drug Company (Canada) Limited (now part of GlaxoSmithKline Consumer Healthcare).

In 2001, we began producing DRAXIMAGE products in our facilities.

In 2001, DRAXIS Pharma signed a long term supply agreement to manufacture several GSK products for multiple international markets.

In 2003, we launched a new radiotherapeutic Iodine I-131 kit in the U.S. for the treatment of thyroid cancer and hyper-thyroidism and received $6.5 million from affiliates of Elan Corporation, plc (“Elan”) for the return of Canadian rights for several neurology products.

In July 2003, we also sold DRAXIS Pharmaceutica, our Canadian sales and marketing division, to Shire BioChem Inc. for $9.6 million in cash plus up to $2-9 million in market driven contingent milestones.

On April 22, 2004, we issued 3,053,436 units of the Company at a purchase price of $4.82 (CDN$6.55) per unit, for aggregate proceeds net of related expenses of $13.4 million (CDN$18.2 million).  Each unit consisted of one common share of DRAXIS and one-half of one share purchase warrant.  Each whole warrant entitled the holder to acquire one common share of DRAXIS at a price of

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CDN$8.50 at any time prior to April 24, 2006.  The warrants were transferable. Holders of warrants did not, as such, have any voting rights or other right attaching to the common shares until the warrants were properly exercised and common shares issuable upon the exercise of the warrants were issued.  All warrants expired unexercised on April 24, 2006.

                On April 22, 2004, DRAXIS acquired SGF’s 32.7% interest in DRAXIS Pharma for a cash consideration of $9.6 million (CDN$13 million).  DRAXIS used part of the proceeds from the offering completed in April 2004 to pay for the acquisition and to repay $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debt owed by DRAXIS Pharma to Investissement Québec.  The DRAXIS Pharma senior management interest was also bought so that the Company became the sole shareholder of DRAXIS Pharma.

                In June 2004, we negotiated new credit facilities with our bankers, the National Bank of Canada, providing an operating facility of CDN$15 million (or U.S. equivalent), payable within 364 days of drawing upon the facility and a term facility of CDN$10 million (or U.S. equivalent), repayable in full in three years.  The Company chose not to renew its credit facilities upon their scheduled expiration date in June 2007. The Company plans to explore new credit facility arrangements in conjunction with new business opportunities. The Company believes that its current cash position and cash flows are sufficient to achieve the Company’s current business plans.

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

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

                As of January 1, 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 DRAXIS Specialty Pharmaceuticals Inc., continues to conduct business as two divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals), and serves as our operating arm.

In February 2005, we announced that DRAXIMAGE had received approval from the Dutch regulatory authority for its kit for 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 product in additional European Union countries.

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

In October 2005, we announced the appointment of Mr. Dan Brazier to the newly created position of Chief Operating Officer.

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

In January 2006, we announced we had received approval from the FDA for our supplemental drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral.  We began selling these capsules in the U.S. in May 2006.

In March 2006, we announced that although our product FIBRIMAGE Ò had met primary end

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points in its Phase III clinical trial in Canada, further market analysis had shown that new technologies have successfully captured the current deep venous thrombosis indications and that there was no longer an economically interesting market opportunity at the time in either the at-risk asymptomatic patient, or those with symptoms.  We further indicated that we had decided that no significant further work would be conducted in the development of this product for its current indications but other potential opportunities for this product would be explored.  In 2006 and 2007, no other potential opportunities were uncovered.

In November 2006, DRAXIMAGE was approved by the FDA to run two clinical trials using radioactive Iobenguane I-131 Injection (also known as I-131 Metaiodobenzylguanidine or I-131 MIBG) to treat high risk neuroblastoma, a rare form of cancer that affects mostly infants and young children.  These trials are ongoing.

In February 2007, DRAXIMAGE announced it had submitted an ANDA to the FDA for its generic kit for the preparation of Tc-99m Sestamibi for injection (DRAXIMAGE Ò Sestamibi), a nuclear medicine imaging agent used in MPI to evaluate blood flow to the heart in patients undergoing cardiac tests.  On July 7, 2007, the Company was informed by the FDA that it’s ANDA submission was accepted for filing.  On July 25, 2007, DRAXIMAGE announced it had filed DRAXIMAGE Ò Sestamibi with European regulatory authorities.  The Company also filed an A/NDS for DRAXIMAGE Ò Sestamibi on August 17, 2007 with Health Canada.  On October 11, 2007, the Company was informed by Health Canada that this submission had been screened and found acceptable for review.  We cannot predict if or when we will receive regulatory approvals to market this product.

In September 2007, the Company announced it had expanded its existing contract manufacturing relationship with JJC and entered into a new definitive supply agreement to provide commercial manufacturing services for a broad portfolio of multiple non-sterile specialty semi-solid products currently marketed in the United States.

In connection with the supply agreement with JJC, DRAXIS Pharma also signed a credit agreement with Johnson & Johnson Finance Corporation (“JJFC”) as of September 4, 2007 which provides that JJFC shall provide credit facilities of up to $12.2 million.  The credit facilities will be used by DRAXIS Pharma solely to finance the acquisition and installation of equipment and to finance the cost of transfer of the technology required for the pre-validation work in support of the manufacture by DRAXIS Pharma of the products under the supply agreement.

On October 31, 2007, the Company announced that Dr. Martin Barkin informed the Board of Directors that he would retire as President and Chief Executive Officer of the Company effective December 31, 2007.  For the period of January 1, 2008 to January 9, 2009, he will act as a Special Advisor to the Board of the Company.

On November 1, 2007, DRAXIS announced that the Company was ceasing all further activities related to its product INFECTON Ò and redeploying its development teams to other projects following the results of additional formulations for the product which indicated that sufficient specificity and sensitivity could not be achieved in a cost effective manner which would be commercially important.

On December 20, 2007, DRAXIS announced that DRAXIMAGE, its radiopharmaceutical division, has appointed GE Healthcare, an industry leader in nuclear medicine, as the exclusive distributor of DRAXIMAGE ^® Sestamibi in the United States. DRAXIMAGE ^® Sestamibi is a generic kit for the preparation of Technetium (Tc-99m) Sestamibi injection, a diagnostic cardiac imaging agent used in myocardial perfusion imaging (MPI) to evaluate blood flow to the heart.  GE Healthcare will be able to sell DRAXIMAGE ^® Sestamibi once the primary innovator patent expires and marketing authorizations

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are received from the FDA.

Recent Developments

In response to a request by securities regulators with respect to increased trading in its common stock, DRAXIS announced on March 17, 2008 that it is currently in exclusive discussions regarding a potential transaction that could lead to a sale of the Company.  There can be no certainty at this stage that these discussions will continue or result in any agreement or transaction or result in pricing that will be acceptable either to the Board of Directors of the Company or to its shareholders.

The Board of Directors of DRAXIS appointed Mr. Dan Brazier, the Company’s Chief Operating Officer since October 2005, as the new President and Chief Executive Officer effective January 1, 2008 and Mr. Jean-Pierre Robert as Chief Operating Officer of DRAXIS. Mr. Robert is also President of DSPI.

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

Business Strategy

                We believe that both DRAXIMAGE and DRAXIS Pharma have significant long-term growth potential and have invested considerable financial and management resources in developing these businesses.

Our general business strategy is to:

·                   Focus on specialty pharmaceutical markets in which we can develop and sustain a competitive advantage.

·                   DRAXIS has focused its operations on two core businesses:  radiopharmaceuticals and specialty pharmaceutical contract manufacturing.  Both businesses target highly differentiated, specialized markets which feature significant regulatory requirements and specialized manufacturing requirements and standards.

·                   Develop new pharmaceutical products and services consistent with our strengths and capabilities.

·                   DRAXIS has established a growing franchise in the highly differentiated radiopharmaceutical segment with a portfolio of 22 currently marketed products plus innovative proprietary products in various stages of development, including DRAXIMAGE Ò Sestamibi for which DRAXIMAGE filed an ANDA with the FDA in February 2007, a submission to European authorities in July 2007 and an A/NDS in Canada in August 2007 and MOLY-FILL Ô , a “next-generation” version of a Technetium Tc-99m Generator. In addition to our radiopharmaceutical platform, our expanding lyophilization capability positions us to offer new services to customers and to take advantage of growth opportunities in contract manufacturing.

·                   Pursue growth opportunities with international market potential.

·                   We are leveraging our capabilities, experience and regulatory compliance in radiopharmaceuticals and manufacturing to expand our product and service offerings in the United States, Europe and other international markets.

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·                   Leverage alliances with customers.

·                   We are pursuing multiple opportunities with new and existing customers.  Meeting the strict quality and service standards of such customers positions us to expand on these relationships in both our radiopharmaceuticals and pharmaceutical contract manufacturing businesses.

Our primary operational focus for 2008 continues to be: (i) improving near-term financial and operational performance of our radiopharmaceutical and manufacturing businesses through increasing sales of existing products and services, improving manufacturing efficiency and effectiveness, and obtaining additional regulatory approvals; and (ii) securing and advancing our base for long-term growth through the development of our existing product pipeline as well as identifying new business opportunities that are consistent with our capabilities and that contribute to the long-term value of the Company.

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

(1)          See Note 19 in our 2007 Consolidated Financial Statements and Notes beginning on page F-1

(2)          Revenues are attributable to countries based upon the location of the customer.

Our two main operating businesses, radiopharmaceuticals and contract manufacturing (sterile and non-sterile products), are not characterized by significant seasonality.  However, plant activities at DRAXIS Pharma (contract manufacturing) are generally reduced or shut down once a year, usually during our third quarter, for approximately two to four weeks in order to conduct regular required maintenance.

DRAXIMAGE’s principal raw materials are radioactive isotopes, particularly radioactive iodine isotopes, that are used to label other compounds that act as carriers or molecular targeting agents.  The isotopes are obtained from companies and agencies that are licensed by governmental regulators to produce purified radioactive chemicals.  Radioactive materials, by their nature, decay over time — some rapidly and some more slowly, depending on specific isotopes.  Therefore, DRAXIMAGE receives shipments of chemical-grade radioisotopes several times each week and converts these to finished pharmaceutical-grade products within days or weeks.  While prices of selected isotopes can be somewhat volatile over the medium term, DRAXIMAGE endeavors to negotiate long-term supply arrangements with appropriate suppliers, especially for the more important isotopes such as radioactive Iodine.

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DRAXIS Pharma, as a contract manufacturer of pharmaceutical products, obtains its chemical raw materials from approved chemical suppliers of both active pharmaceutical ingredients (“API”) and inactive or excipient ingredients such as fillers, stabilizers, preservative agents and coloring agents.  In many instances the API is supplied by the customer.  DRAXIS Pharma conducts full quality control testing of all ingredients and packaging materials before they are incorporated into the finished product.  Prices of principal API are not generally volatile, although prices can vary between alternative suppliers.

Contract Manufacturing (DRAXIS Pharma)

Contract manufacturing accounted for 69.7% of our consolidated revenues for the year ended December 31, 2007.  Our DRAXIS Pharma division is responsible for our contract pharmaceutical manufacturing and has 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 Kirkland, Québec, DRAXIS Pharma manufactures pharmaceutical products for DRAXIMAGE, as well as for over 26 other pharmaceutical clients in many international jurisdictions.

Key business development transactions involving DRAXIS Pharma have included:

·                   May 1998 — $11.1 million acquisition of DRAXIS Pharma’s pharmaceutical manufacturing facility.

·                   July 1999 — signing of a five-year manufacturing supply agreement with Warner-Lambert Canada Inc. (which then became known as Pfizer Consumer Healthcare, a division of Pfizer Canada Inc.).  In September 2005, the Company announced that Pfizer Canada had renewed this agreement for a three year term effective January 1, 2005.  The agreement was subsequently renewed for a one-year period ending December 31, 2008.  The parties are presently negotiating a possible renewal of the agreement.  On December 20, 2006, DRAXIS Pharma was advised that Johnson & Johnson, Inc. (“J&J”) had purchased Pfizer’s consumer healthcare business and that the agreement had been assigned to J&J.

·                   February 2000 — sale of 34.1% equity interest to SGF and DRAXIS Pharma senior management for net proceeds of $5.4 million.

·                   December 2001 — signing of a long-term manufacturing and supply agreement for the renewal and expansion of DRAXIS Pharma’s existing contract manufacturing relationship with GSK.

·                   March 2003 — initiation of production under a manufacturing and supply agreement with Bone Care International, Inc. (now Genzyme) for Hectorol® Injection.

·                   April 2004 — acquisition by the Company of SGF’s 32.7% interest in DRAXIS Pharma and repayment of $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debt owed by DRAXIS Pharma to Investissement Québec.  The DRAXIS Pharma senior management interest was also bought so that the Company became the sole shareholder of DRAXIS Pharma.

·                   September 2007 — the Company announced it had expanded its existing contract manufacturing relationship with JJC and entered into a new definitive supply agreement

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to manufacture a broad portfolio of multiple non-sterile specialty semi-solid products currently marketed in the United States.

In 2004, 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 sterile manufacturing capabilities to support recently announced contracts, improvements to production line efficiency, improvements to infrastructure, new raw material handling facilities and support systems to maintain the DRAXIS Pharma facility at the forefront of regulatory compliance.   DRAXIS Pharma’s three-year, $12 million capital plan was initially financed through loans and 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 from the proceeds of the Company’s public offering.

Since DRAXIS acquired DRAXIS Pharma, DRAXIS Pharma’s revenues have risen from $6.1 million for the eight-month period ended December 31, 1998 to $54.9 million for the year ended December 31, 2007.

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

·                   obtaining and maintaining all required regulatory approvals for DRAXIS Pharma’s manufacturing facility;

·                   securing additional manufacturing contracts with existing and new customers;

·                   focusing on DRAXIS Pharma’s distinctive capabilities in sterile and lyophilized product manufacturing;

·                   providing manufacturing and related services to DRAXIS’ other businesses; and

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

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Overview of Pharmaceutical Contract Manufacturing

In a report prepared by TD Newcrest, a Division of TD Securities Inc. (Equity Research) and dated July 26, 2005 entitled “DRAXIS Health — Initiating Coverage”, it was estimated that the secondary, or dosage-form, manufacturing portion of the $550 billion global pharmaceutical market was $65 billion, with approximately $10 billion of that being outsourced.  Since 2005, we believe that the contract manufacturing market for pharmaceuticals has continued to grow.

The reasons pharmaceutical companies outsource manufacturing include:

·                   productivity benefits — plant utilization rates in the pharmaceutical industry are declining and have created increased need to lower operating costs;

·                   moving assets off the balance sheet — contract manufacturers are a solution to high levels of industry assets tied up in under-utilized facilities;

·                   leveraging external expertise — third-party contractors provide a logical route to specialist services and access to updated technologies; and

·                   pharmaceutical industry consolidation — continuing mergers will likely force rationalization of manufacturing capacity.

The Company believes that there is currently a significant global demand for sterile lyophilization capacity and that this sector offers significantly higher margin growth potential for DRAXIS Pharma due to its technical complexity and its increasing demand as a favored dosage form for biotechnology products in particular.

DRAXIS Pharma believes that the key competitive factors in the contract manufacturing industry include the reliability of supply, quality of product, strict compliance with governmental regulations, capacity availability, competitive pricing and the technical and manufacturing ability to produce a full range of quantities — from small pilot batches often required for clinical trials to larger commercial quantities.

Competition

DRAXIS Pharma competes with pharmaceutical companies that have in-house manufacturing capabilities as well as with third-party contract manufacturers, including Hospira Inc., Boehringer Ingelheim GmbH, Catalent Pharma Solutions Inc., Hollister-Stier Laboratories LLC, DPT Laboratories Ltd, Haupt Pharma AG, Patheon Inc. and DSM Pharmaceuticals, Inc.

Manufacturing Capabilities

DRAXIS Pharma is a customer-driven pharmaceutical contract manufacturing division that is positioned to manufacture a variety of dosage forms.  DRAXIS Pharma is one of a few existing full-scale pharmaceutical contract manufacturing facilities in Canada that has FDA-approved sterile manufacturing and sterile lyophilization capabilities.

In 2006 and 2007, the organization of this contract manufacturing business was further refined as we implemented separate business unit accountability for sterile and non sterile product operations to achieve a flatter, more responsive organization.

Plant operations at our sole manufacturing facilities in Kirkland, Québec are further organized into four manufacturing areas, supported by packaging and warehousing and distribution functions.

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Sterile Lyophilization

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

DRAXIS Pharma’s existing sterile manufacturing capabilities were enhanced by the addition of sterile lyophilization, which became fully operational and approved by the FDA in the latter half of 2001.  This fully automated line includes a vial washer, a depyrogenation tunnel, an in-line filling machine, robot loaders and unloaders, the freeze-drier unit and a capper.  This first freeze-drier has a capacity based on 11 square meters (120 square feet) of shelf space, while the second unit installed in 2004, with 24 square meters (254 square feet) of shelf space, has double the shelf space.

In 2004, the Company completed a three-year, $12 million capital plan for DRAXIS Pharma, including the addition of the second lyophilizer, new sterile manufacturing capabilities to support recently announced contracts, improvements to production line efficiency, improvements to infrastructure, new raw material handling facilities and supporting systems to maintain DRAXIS Pharma at the forefront of regulatory compliance.

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

The second lyophilization unit completed validation and began commercial production during 2005.  At optimum configuration and given the appropriate mix of lyophilization cycles, the second lyophilizer could potentially allow us to approximately triple existing lyophilization capacity over time.  We did not achieve full capacity utilization of the new lyophilizer in 2007; however the transfer of some current products and the introduction of new products will continue to occur in 2008 and beyond.

Other Sterile Products

The Sterile Products Department (“SPD”) includes preparation and pharmaceutical areas with manufacturing, filling and inspection rooms for the manufacture of injectable liquids, ophthalmic and otic products.  We believe that DRAXIS Pharma possesses one of the most modern facilities of its kind in Canada approved for the manufacture of sterile prescription pharmaceuticals for Canada, the United States and other global markets.

Including the new lyophilization line, SPD covers approximately 17,100 square feet and is designed for segregated operations complemented by secure access controls.

Computerized systems are utilized for both topical and automated ointment lines in order to optimize process control.  Both of these lines are closed-loop systems to ensure sterile integrity.  The sterile ointment system utilizes an automated system to place tubes on the fillers, thereby minimizing human intervention.

The processes that are incorporated in the operation include aseptic manufacturing and filling, terminal sterilization, clean in place (“CIP”), and sterilize in place (“SIP”).  The dosage forms/product

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types manufactured include solutions in ampoules and vials, suspensions and solutions in drop dose form and ointments in tubes.  The department currently has the capacity to fill vials ranging in size from 1 ml to 30 ml, ampoules ranging in size from 1 ml to 10 ml, and 3.5 g to 4.5 g tubes.

Ointments, Creams and Liquids

The 17,420-square-foot Ointments, Creams and Liquids (“OCL”) Department offers substantial flexibility in production scale.  Production of ointments and creams utilizes a gravity-fed system and incorporates segregated wash areas and clean storage areas for equipment.

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

During 2007, capacity in the OCL Department was increased by nearly fifty percent (50%) to accommodate the manufacturing of additional products under a new contract with JJC for a broad portfolio of non-sterile specialty semi-solid products, which was announced in September of 2007.

Solid Dosage

The Solid Dosage Department covers approximately 10,300 square feet of space and is comprised of two suites for granulating powders prior to compression plus four isolated compression suites in which the powders are pressed into tablets and caplets of various forms and sizes.  The first granulation suite is designed for large-batch blending, granulating and drying, while the second granulation suite is equipped with smaller scale equipment that can be used for small production or pilot batches.

Each granulation and compression suite has its own testing equipment and cleaning area.  The rooms are isolated and have purpose-built airflow systems to contain powder.

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

Packaging

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

Within the department there are packaging lines for ointments and creams, a line for liquid packaging, lines for tablets (bottles and blisters), a sterile product packaging line which includes automatic inspection and a line dedicated for lyophilized products and topical packaging.  The inspection of finished sterile products in glass ampoules includes automated inspection by a leak pinhole detector.  An automatic inspection machine has been validated to detect particles in sterile products packaged in vials and ampoules.  These products may also be inspected manually.

During the second half of 2007, construction was initiated on a second facility in Ste-Anne-de-Bellevue, within 10 miles of the current facility in Kirkland, Québec.  This new facility will be leased

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from the developer and will initially be dedicated to secondary packaging and warehousing of products and components related to the new contract signed in September 2007 with JJC for the manufacture of a broad portfolio of non-sterile specialty semi-solid products.  This additional packaging facility is expected to be completed during 2008 and operating prior to the start of commercial production under the contract with JJC, which is scheduled for the beginning of 2009.

Regulatory

The manufacturing of our existing and potential products are subject to regulation and approval by the TPD of the HPFBI and other authorities in Canada and by numerous federal, state and local government authorities in the United States, including the FDA.  Similar regulatory requirements exist in Europe and other countries.

Manufacturing operations at DRAXIS Pharma, from receipt of raw materials and packaging ingredients, through compounding, dosage form processing, filling, labeling and packaging, to final product release by quality control, are all conducted in accordance with cGMP requirements and other appropriate international regulatory standards.  Regular inspections of facilities, production processes, and control and validation systems, as well as employee training programs, are conducted by DRAXIS Pharma, by U.S., Canadian and international governmental regulatory agencies and by customer inspection teams throughout the year.  DRAXIS Pharma maintains a distinct internal team to provide effective liaison with various external inspection groups.

DRAXIS Pharma has a strong regulatory track record.  This includes 16 successful audits of our facilities in 2007 (3 regulatory inspections and 13 client audits) and 13 successful audits of our facilities in 2006 (0 regulatory inspection and 13 client audits).

Warehousing and Distribution

The warehousing and distribution facilities at DRAXIS Pharma at our facilities in Kirkland, Québec, allow additional manufacturing flexibility and efficiency.  A five-tier pallet-racking warehouse has a full height of 29 feet, covers approximately 48,900 square feet of space and has six shipping and receiving docks.  The warehouse has separately locked areas, including refrigeration units to control sensitive raw materials and finished goods.

DRAXIS Pharma also has a raw material storage and dispensing area, which provides an improved environment for the handling and accurate dispensing of raw materials. This installation improves the flow of material and personnel.

Customers

Third-Party Contract Manufacturing

DRAXIS Pharma manufactures prescription and non-prescription pharmaceutical products for more than 26 pharmaceutical companies (excluding inter-company manufacturing) pursuant to manufacturing supply contracts.  Such contract manufacturing services represented 69.7% of our consolidated revenues for the year ended December 31, 2007.  A significant portion of this contract manufacturing business is focused on our three largest customers, GSK, Genzyme and Johnson & Johnson Inc. (including JJC) which together represented 45% of our consolidated revenues in 2007.  See “Risk Factors — Risks Related to our Company — A Significant Portion of our Business is Dependent on a Small Number of Key Customers”.

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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 the sterile injectable product in March 2003.  A manufacturing and supply agreement was signed on March 3, 2003.  The agreement is for a five-year term and was automatically renewed at the end of its term for a one year period to March 2009.  The contract requires either party to give written notice of non renewal to the other party one year prior to the end of the term or the end of a renewal period.  To date, the Company has not received notice of non renewal.

O n December 18, 2001, DRAXIS Pharma finalized supply and related agreements with GSK for the renewal and expansion of an existing contract manufacturing relationship between the companies.  The products transferred to DRAXIS Pharma were all established, sterile products marketed by GSK in multiple international markets.  In 2002, a prescription sterile injectable product for the U.S. market was added under this contract and commercial production of this product commenced in the second quarter of 2002.  During 2002, site transfer and related activities associated with the other GSK products were undertaken and production started in the second quarter of 2003 and ramped up through 2003 and 2004 with full production of all products achieved by the end of 2004.  DRAXIS Pharma will manufacture the products covered by the agreement until it receives a termination notice from GSK which may be given by a two-year advance written notice given on or after December 31, 2007.  To date, the Company has not received any termination notice.

On July 1, 1999, DRAXIS Pharma entered into a five-year manufacturing and supply agreement with Warner-Lambert Canada Inc. (which then became known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.) covering several non-prescription products for the Canadian market, including Polysporin®, Sudafed® and Actifed®.  Manufacturing of these products commenced in early 2000.  On September 1, 2005, DRAXIS announced it had renewed its agreement with Pfizer Canada for a three-year term, effective January 1, 2005.  On December 20, 2006, DRAXIS Pharma was advised that J&J had purchased Pfizer’s consumer healthcare business and that the agreement had been assigned to J&J.  The agreement was subsequently renewed for a one-year period ending December 31, 2008.

During the third quarter of 2007, the Company announced it had expanded its existing contract manufacturing relationship with JJC and entered into a new definitive supply agreement to manufacture a broad portfolio of multiple non-sterile specialty semi-solid products currently marketed in the United States.  This new multi-year contract runs to the end of 2013 and may be extended beyond that date. It includes approximately two years of manufacturing site transfer and process validation activities followed by five years of commercial production, that is scheduled to begin in 2009. We expect commercial production to generate incremental revenues in excess of $120 million over the five year period of 2009 through 2013. The transfer of equipment and production technologies, currently in progress, is expected to generate additional cumulative revenues during 2007 and 2008 of approximately $6 million to $8 million.  In 2007, revenues of $2.6 million were generated from this contract.  A copy of the supply agreement is filed as Exhibit 4.68 to this Annual Report (Form 20-F).

In connection with the supply agreement with JJC, DRAXIS Pharma also signed a credit agreement with Johnson & Johnson Finance Corporation (“JJFC”) as of September 4, 2007 which provides that JJFC shall provide credit facilities of up to $12.2 million.  The credit facilities will be used by DRAXIS Pharma solely to finance the acquisition and installation of equipment and to finance the cost of transfer of the technology required for the pre-validation work in support of the manufacture by DRAXIS Pharma of the products under the supply agreement.  A copy of the credit agreement is filed as Exhibit 4.69 to this Annual Report (Form 20-F).

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Inter-Company

Beginning in early 2002, DRAXIS Pharma became the FDA-approved manufacturing site for DRAXIMAGE’s lyophilized Tc-99m kits.  In addition, DRAXIS Pharma has been qualified as the manufacturing site for ANIPRYL® tablets.

Employees

As at December 31, 2007, DRAXIS Pharma had 389 employees (representing approximately 78% of the Company’s employees), consisting of: 51 managerial employees, 54 clerical employees, 62 quality operations employees, 17 technical employees and 205 unionized hourly employees.  The unionized hourly employees are represented by the United Food & Commercial Workers International Union, Local 291 (AFL-CIO).  A collective agreement with a five-year term to April 30, 2008 was ratified in February 2004.  DRAXIS Pharma currently has no significant unresolved issues with the union and is presently preparing to negotiate a new collective agreement with the union.  See “Risk Factors — Risks Related to our Company — Our Business Could be Harmed if there were a Dispute 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 equity interest in DRAXIS Pharma Inc.  In 2002 and 2003, DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) repurchased and cancelled shares held by a former DRAXIS Pharma employee and members of DRAXIS Pharma’s management team in exchange for cash and settlement of existing loans.  In April 2004, the Company acquired from SGF its 32.7% interest in DRAXIS Pharma and also repaid $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF.  The DRAXIS Pharma senior management interest was also bought at that time so that the Company became the sole shareholder of DRAXIS Pharma.

Radiopharmaceuticals

Radiopharmaceuticals accounted for 29.4% of our consolidated revenues for the year ended December 31, 2007.  Our DRAXIMAGE division is responsible for discovering, developing, manufacturing, and marketing our diagnostic imaging and therapeutic radiopharmaceutical products for the global nuclear medicine marketplace.  Nuclear medicine entails the use of radioactive drugs (radiopharmaceuticals) for imaging and therapeutic purposes.  The energy released as these products decay can be harnessed to:  (i) elicit a visual representation of various organs and tissues (nuclear imaging); or (ii) destroy cancerous cells (radiotherapy).  Products currently marketed by DRAXIMAGE include a line of lyophilized Technetium Tc-99m kits (“Tc-99m”) used in nuclear imaging procedures and a line of imaging and therapeutic products labeled with a variety of isotopes, including iodine.

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 Ò Sestamibi”), a nuclear medicine imaging agent used in myocardial perfusion imaging (“MPI”) to evaluate blood flow to the heart in patients undergoing cardiac tests.  On July 7, 2007, the Company was informed by the FDA that its ANDA submission was acceptable for filing.  On July 25, 2007, DRAXIMAGE announced it had filed DRAXIMAGE Ò Sestamibi with European regulatory authorities.  The Company also filed an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGE Ò Sestamibi on August 17, 2007 with Health Canada.  On October 11, 2007, the Company was informed by Health Canada that this submission had been screened and found acceptable for review.  See Risks Factors — Risks related to our industry —

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We may not be able to get timely regulatory approval for our products and we must comply with regulatory requirements to manufacture and market our products.

According to BIO-TECH SYSTEMS, in 2007 there were 8.3 million nuclear cardiology procedures (out of 17.5 million total nuclear procedures) in the U.S.A.  Sales of nuclear cardiology products were $1,291.6 million in 2007 (67.0% of total diagnostic radiopharmaceutical sales).  Sales of Cardiolite Ò , the largest single revenue producer, were $360.7 million (55% of cardiology perfusion sales) followed by Myoview Ô with sales of $202.3 million (31% of cadiology perfusion sales).  Cardiolite Ò is the product of Lantheus Medical Imaging (formerly Bristol-Myers Squibb Imaging).  Myoview Ô is the product of GE Healthcare.

Once DRAXIMAGE Ò Sestamibi is approved, DRAXIMAGE plans to enter the MPI market after the key patent for the currently marketed Tc-99m Sestamibi product expires, which is expected to be in 2008 for the United States, 2009 for Canada and from 2007 and onwards in various European countries, and after it receives regulatory approval for the sale of DRAXIMAGE Ò Sestamibi.

DRAXIMAGE also has a number of other products in development. DRAXIMAGE has received approval in November 2006 from the FDA to run two clinical trials in the U.S. using radioactive Iobenguane I-131 Injection (also known as 131 I-metaiodobenzylguanidine, or I-131 MIBG) to treat high-risk neuroblastoma, a rare form of cancer that affects mostly infants and young children.  Given the inherent uncertainties associated with new drug development, it is difficult to predict if, or when, this product will achieve commercialization.

DRAXIMAGE is developing MOLY-FILL Ô , a “next-generation” version of a Technetium Tc-99m Generator, which is the source of Technetium Tc-99m in virtually every radiopharmacy worldwide.  According to the Bio-Tech Systems Report 270 (issued in November 2007), entitled “The U.S. Market for Diagnostic Radiopharmaceuticals”, the generator market in the United States is currently estimated at approximately $166.7 million and is growing at approximately 5% annually.  Nearly 85% of generators are located in radiopharmacies and the rest are in other institutions such as hospitals and clinics.

Technetium (Tc-99m) is one of the most widely used radiopharmaceuticals. Due to its short half-life, it has to be produced on site or nearby by generators shipped with a longer half-life mother isotope, the molybdenum (Mo99).  In other words, generators are used to produce technetium on site at the hospital or radiopharmacy. A generator consists of a column loaded with Mo99, encased within lead shielding designed to provide protection from radiation.  It can typically provide Tc 99m for a period of approximately one week, depending on the degree of usage by the radiopharmacy.  During the fourth quarter of 2007, the Company completed a test evaluation of the prototype version of this product and the results of the evaluation will contribute to the continuing product development process.  DRAXIMAGE is in discussions with potential development, marketing and manufacturing partners for its MOLY-FILL Ô generator.

See “Risk Factors — Risks Related to our Industry — If the Market Does Not Accept our Products Currently in Development, our Business Could Be Harmed”.

Founded in 1950 as a division of Charles E. Frosst & Co., the predecessor business to DRAXIMAGE pioneered and became a leader in the medical application of nuclear technology after assuming the development function from Atomic Energy of Canada Ltd.  Following the 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

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DRAXIS in 1997.  As part of the acquisition, the Company retained all of the business’s managers, scientists and employees as well as its existing products and intellectual property.

The acquisition of this business was consistent with our strategy of acquiring specialty pharmaceutical platforms with potential for expansion into global markets.  We believe that DRAXIMAGE is one of the few companies that manufacture I-131 radiopharmaceutical products in Canada.

DRAXIMAGE and its predecessor have a long history of technological and scientific progress in the field of radiopharmaceuticals.  Notable achievements include the development of lyophilized kits for the in-situ preparation of Technetium Tc-99m radiopharmaceutical products for nuclear medical imaging (“Tc-99m kits”); the development of chelates for the indium/yttrium and Technetium/rhenium groups of metals; and the development of stabilizers for use in iodinated radiopharmaceuticals, which resulted in DRAXIMAGE being one of the few providers to market iodinated products that do not require refrigeration.

Key business development transactions involving DRAXIMAGE have included:

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

·                   October 1999 — licensing from Isogenic Science Ltd. (“Isogenic”) of the rights to Isogenic’s proprietary technology related to radioactive brachytherapy implants (“ BrachySeed ® ”) for the treatment of various localized cancers.

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

·                   December 2000 — entering into license, distribution and supply agreements for BrachySeed ® for the U.S. market with Cytogen Corporation.  In April 2003, this license was terminated.

·                   March 2001 — licensing from BTG International Limited (formerly known as the British Technology Group) of the rights to INFECTON ® , an agent for imaging infection.  In November 2007, DRAXIMAGE announced it would discontinue all work related to INFECTON Ò .

·                   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.

·                   May 2003 — expansion of agreements with Isogenic for global rights to proprietary technology related to brachytherapy implants.  November 2005 — DRAXIMAGE announced it would discontinue the manufacture and sale of implantable brachytherapy seeds as of December 15, 2005.

·                   July 2003 — extension and expansion of strategic partnership with Bristol-Myers Squibb Canada Co. (“Bristol-Myers Canada”) for the marketing and distribution of

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radiopharmaceutical products in Canada.  This agreement was terminated as of December 31, 2007.

·                   August 2003 — amendment to the July 2000 agreement with Cardinal Health 414, LLC to enable DRAXIMAGE to distribute the new radioactive Iodine I-131 kit product to independent radiopharmacies in the U.S.

·                   February 2005 — announcement that DRAXIMAGE had received approval from the Dutch regulatory authority for its kit for 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 product in additional European Union countries.

·                   April 2005 — announcement of the appointment of Mr. Jean-Pierre Robert as the new President of the DRAXIMAGE division.

·                   January 2006 — DRAXIMAGE announced it had received approval from the FDA for its supplemental new drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral.

·                   November 2006 — DRAXIMAGE announced it had been approved by FDA to run two clinical trials using radioactive Iobenguane I-131 Injection (also known as I-131 metaiodobenzylguanidine or I-131 MIBG) to treat high risk neuroblastoma, a rare form of cancer that affects mostly infants and young children.

·                   February 2007 — DRAXIMAGE announced it had submitted an ANDA to the FDA for its generic kit for the preparation of DRAXIMAGE Ò Sestamibi.  On July 7, 2007, the Company was informed by the FDA that its ANDA submission was acceptable for filing.

·                   On July 25, 2007, DRAXIMAGE announced it had filed DRAXIMAGE Ò Sestamibi with European regulatory authorities.

·                   The Company also filed an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGE Ò Sestamibi on August 17, 007 with Health Canada.  On October 11, 2007, the Company was informed by Health Canada that this submission had been screened and found acceptable for review.

·                   December 2007 — DRAXIMAGE appointed GE Healthcare as the exclusive distributor of DRAXIMAGE Ò Sestamibi in the United States. DRAXIMAGE granted GE Healthcare the exclusive right to market, distribute and sell its generic DRAXIMAGE Ò Sestamibi in the U.S. market and through its U.S. and Canadian radiopharmacy network once the primary innovator patent expires and marketing authorizations are received from the FDA and Health Canada.  Furthermore, GE Healthcare agreed to purchase Technetium 99m Sestamibi injections exclusively from DRAXIMAGE.  The initial term of the distribution agreement is for a minimum of three years following FDA approval of the DRAXIMAGE Ò Sestamibi.

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

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·                   Increasing the market penetration of its radioactive products, particularly in the U.S.;

·                   Increasing international sales of its key Tc-99m kits and Iodine I-131 products, particularly in Europe, but also in other global markets;

·                   Timely, cost-effective development of its portfolio of proprietary, innovative imaging and therapeutic radiopharmaceutical products; and

·                   Identifying and capitalizing on additional new business opportunities and strategic partnerships which are consistent with DRAXIMAGE’s capabilities, including the monitoring of products that will come off patent protection in key markets that can be manufactured, marketed and sold by DRAXIMAGE and monitoring products that are owned by third parties and which could be divested in the consolidation that is taking place in the radiopharmaceutical industry.

Overview of Radiopharmaceuticals

The medical specialty of nuclear medicine involves the use of short-lived radioisotopes for both diagnostic imaging and therapeutic applications.  Pharmaceutical products used in such applications are commonly called radiopharmaceuticals.  Radiopharmaceuticals represent a well-defined, growing niche market that involves challenges such as regulatory approvals, specialized manufacturing standards, access to supply and critical delivery logistics.

Diagnostic Imaging Applications

The diagnostic imaging applications of nuclear medicine normally involve the intravenous administration of a radiopharmaceutical consisting of a targeting molecule, which has a particular binding affinity for a specific organ or tissue linked to a low intensity, short-lived, gamma-emitting radioisotope such as Tc-99m.  Following administration, the radiopharmaceutical with its radioactive isotope concentrates at the biological target, which is then imaged using a scanning device such as a gamma camera.  A gamma camera consists of a scintillation crystal which, when placed over a region of the body, is capable of detecting gamma rays emitted by radionuclides in underlying tissues.  The gamma camera and its associated computerized peripheral devices accurately measure the radiation being emitted by the radioisotope and so provide both a visual picture of the target and quantitative data concerning the distribution of radioactivity.

A nuclear medicine image provides both static and functional, or dynamic, information about a biological target, thereby revealing functional and morphological information normally unobtainable by other imaging techniques such as X-ray, magnetic resonance imaging, computer tomography, and ultrasound, all of which provide primarily anatomical information.

Nuclear medical imaging procedures are established and trusted medical procedures with many years of safe and effective use.  Most procedures are non-invasive, are performed with a minimum of discomfort and inconvenience to the patient and are normally less costly and involve less risk than other currently available high-tech alternative techniques.

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Therapeutic Applications

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

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

·                   phosphorous-32 for the palliative treatment of bone pain for patients with advanced metastatic bone cancer; and

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

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

Competition

The radiopharmaceutical field is highly specialized, particularly in the therapeutic area.  Challenges include meeting pharmaceutical product and nuclear regulatory requirements, having the ability to handle radioactive materials and establishing facilities and procedures to manufacture products in a sterile lyophilized or freeze-dried form, which involves manufacturing standards higher than those typically employed for most pharmaceutical products.  In addition, manufacturing and distribution logistics systems must be well-integrated and supportive to ensure that radiopharmaceutical products can be produced rapidly and delivered to the end user in a timely manner with the prescribed level of strength.

Companies with significant radiopharmaceutical operations include Lantheus Medical Imaging (formerly Bristol-Myers Squibb Imaging), GE Healthcare, Covidien, CISbio, and Bracco S.p.A.  In addition, there are a number of companies that are developing and/or marketing other radiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc., IBA Molecular, Cytogen Corporation, International Isotopes Inc. and Molecular Insights Pharmaceuticals, Inc.

Marketed Products

DRAXIMAGE’s products are divided into two groups: (i) radioactive products, particularly products containing radioactive iodine, which are in a radioactive and ready-to-use form when shipped to customers, and (ii) non-radioactive products (predominantly Tc-99m kits).  The non-radioactive kit products are sold in lyophilized (freeze-dried), non-radioactive form consisting of sterile, pyrogen-free complexes of chemical and/or biological substances.  Tc-99m kits are reconstituted with radioactive Tc-99m in the nuclear medicine laboratory of a hospital or a unit-dose service supplier, or radiopharmacy, prior to use.

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Radioactive Products

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

The following table summarizes the DRAXIMAGE radioactive products.  All products listed have received approval for sale by the applicable regulatory body in the territory in which the product is sold.

*This product is approved for sale in Denmark, however it is not currently sold in that country as the Company is seeking distributors for same.

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Sodium Iodide I-131 Radiotherapy

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

In January 2003, DRAXIMAGE received FDA approval to produce and market a new radiopharmaceutical kit product for the preparation of Sodium Iodide I-131 Capsules and Oral Solution for the treatment of thyroid cancer and hyperthyroidism.  This was the first such product on the market that allows physicians and radiopharmacists to prepare an FDA-approved I-131 gelatin capsule or oral solution.  In March 2003, DRAXIMAGE launched the new kit product and initiated shipments to the Nuclear Pharmacy Services group of Cardinal Health 414, LLC, under a five-year, non-exclusive distribution agreement for the product for the United States and its possessions.  As of 2003, this product was made available to other customers and distributors in the U.S.

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

In November 2005, DRAXIMAGE announced it had received FDA approval for a new larger format version of its I-131 kit for the preparation of Sodium Iodide I-131 Capsules and Oral Solution.  DRAXIMAGE introduced this product in the U.S. market in January 2006.

In January 2006, DRAXIMAGE announced it had received approval from the FDA for 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 the radioactive iodide (RAI) uptake test to evaluate thyroid function prior to treatment with stronger therapeutic doses of Sodium Iodide I-131.  Diagnostic doses of Sodium Iodide I-131 may also be employed in localizing metastases associated with thyroid malignancies.  DRAXIMAGE introduced the new diagnostic capsules into the U.S. market in May 2006.

Non-Radioactive Products

DRAXIMAGE currently markets the following non-radioactive products. All products listed have received approval for sale by the applicable regulatory body in the territory in which the product is sold.

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*These Products are approved for sale in these countries, however they are not currently sold in these countries as the Company is seeking distributors for same.

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

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

Prior to 2002, DRAXIMAGE produced Tc-99m kits at its Merck Frosst location.  Following FDA approval of the Company’s new lyophilization production facilities in early 2002, the resulting increased manufacturing capacity provided the opportunity to increase sales volumes of these products in existing markets in the U.S. and Canada and to build new markets in Europe and Asia, territories in which product approvals are either already in place or expected to be granted in the near future.

In March 2004, DRAXIMAGE received 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 Medronate Injection.  In September 2005, MDP-25 was approved by Health Canada.

Products under Development

As of March 18, 2008, DRAXIMAGE had the following products under development:

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The clinical development of radiopharmaceutical imaging agents differs from that of therapeutics in several areas. While therapeutics are developed to offer improved efficacy and safety in the treatment of a specific disorder, radiopharmaceutical imaging agents are elaborated for demonstrating the existence and extent of a specific condition. Therefore the trial design for establishing efficacy is not the same. In the case of radiopharmaceutical imaging agents the endpoint is the actual image. The analysis is therefore centered around various quantitative and qualitative aspects of the image. For example, the image quality is assessed at various time points to determine the time to best quality. Also a blinded read of images is conducted to determine the accuracy as well as the sensitivity and specificity of the test in comparison to the modality that is currently accepted as the gold standard. In order for the test to be useful across clinical sites the inter-rater reliability should also be high. This is an important endpoint that is measured by a weighted Kappa test. These are the main efficacy considerations for radiopharmaceutical imaging agents. The analysis of safety is similar to that of therapeutic agents and includes the usual vital sign monitoring as well as the capturing of side effects through adverse event reporting.

DRAXIMAGE Ò I-131 MIBG

Description - DRAXIMAGE Ò I-131 MIBG is used to treat neuroendocrine (cardinoid) tumours, adrenal tumors (neuroblastoma in children and phaechromocytoma) and on rare occasions it can be used to treat thyroid cancer.  Iobenguage is m-iodo-benzylguanidine (MIBG), a guanethidine derivative structurally resembling norepinephrine. There exists extensive literature reports that indicate that I-131 MIBG has been used over the last two decades as a therapeutic agent for the treatment of pheochromocytoma, paraganglioma, neuroblastoma, carcinoid, and medullar thyroid carcinoma.  The diagnostic use of I-131 MIBG is approved in Europe, the U.S. and Canada.  The therapeutic use of I-131 MIBG is approved in Europe but is investigational in the United States and Canada.   DRAXIMAGE manufactures the I-131 MIBG at its facility.

Regulatory Status - DRAXIMAGE is providing I-131 MIBG for two clinical trials approved by the FDA under an Investigational New Drug (“IND”) application.  One trial is a Phase II study in which I-131 MIBG is being 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, are being administered in combination with I-131 MIBG to determine safety and tolerability in patients with resistant/relapsed high-risk neuroblastoma.

Both clinical trials are being coordinated by a group of eleven children’s hospitals and two universities in the United States known as the New Advances in Neuroblastoma Therapy (NANT) consortium.  These two trials are continuations of earlier NANT studies.  The clinical trials started early in 2007 and are currently ongoing.  NANT member institutions are:

·                                           C.S. Mott Children’s Hospital, University of Michigan — Ann Arbor, MI

·                                           Children’s Healthcare of Atlanta — Atlanta, Georgia

·                                           Children’s Hospital and Regional Medical Center — Seattle, WA

·                                           Children’s Hospital Boston, Dana-Farber Cancer Institute — Boston, MA

·                                           Children’s Hospital Los Angeles — Los Angeles, CA

·                                           Children’s Hospital Medical Center — Cincinnati, OH

·                                           Children’s Hospital of Philadelphia — Philadelphia, PA

·                                           Children’s Memorial Hospital — Chicago, IL

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·                                           Lucile Packard Children’s Hospital — Palo Alto, CA

·                                           Riley Hospital for Children, Indiana University — Indianapolis, IN

·                                           Texas Children’s Cancer Center, Baylor College of Medicine — Houston, TX

·                                           University of California, San Francisco — San Francisco, CA

·                                           University of Wisconsin Comprehensive Cancer Center — Madison, WI

Competing Therapeutic Products - We also believe that AZEDRA Ô , being developed by Molecular Insight Pharmaceuticals, Inc. (“MIPI”) may compete with our DRAXIMAGE Ò I-131 MIBG product under clinical development.  AZEDRA Ô has received Orphan Drug status and a Fast Track designation by the FDA.  According to information set forth in its website, MIPI is conducting a Phase I dosimetry study with AZEDRA Ô in adults at Duke University.  The initial target market for AZEDRA Ô dosimetry study is the treatment of metastatic neuroendocrine tumours such as pheochromocytoma, carcinoid and neuroblastoma that are not amenable to treatment with surgery or conventional chemotherapy.  Metastatic tumours are tumours that spread to other organs or parts of the body.  Additionally, according to information set forth in its website, MIPI initiated a Phase I/II study dose-finding and therapeutic evaluation of the product in patients with malignant Pheochromocytoma/Paraganglioma, which completion is expected for July 2012. The primary objectives of this study are to determine the maximum tolerated dose of the product and then, to determine the objective tumor response rate nine months following treatment.

Technetium Tc-99m Generators

DRAXIMAGE is developing MOLY-FILL Ô , a “next-generation” version of a Technetium Tc-99m Generator, which is the source of Technetium Tc-99m in virtually every radiopharmacy worldwide.  According to the Bio-Tech Systems Report 270 (issued in November 2007), entitled “The U.S. Market for Diagnostic Radiopharmaceuticals”, the generator market in the United States is currently estimated at approximately $166.7 million and is growing at approximately 5% annually.  Nearly 85% of generators are located in radiopharmacies and the rest are in other institutions such as hospitals and clinics.

Technetium (Tc 99m) is one of the most widely used radiopharmaceuticals. Due to its short half-life, it has to be produced on site or nearby by generators shipped with a longer half-life mother isotope, the molybdenum (Mo99).  In other words, generators are used to produce technetium on site at the hospital or radiopharmacy. A generator consists of a column loaded with Mo99, encased within lead shielding designed to provide protection from radiation.  It can typically provide Tc 99m for a period of approximately one week, depending on the degree of usage by the radiopharmacy.  During the fourth quarter of 2007, the Company completed a test evaluation of the prototype version of this product and the results of the evaluation will contribute to the continuing product development process.  DRAXIMAGE is in discussions with potential development, marketing and manufacturing partners for its MOLY-FILL Ô generator.

Other Development Products

SOMATOSCAN ® /Somatostatin Therapy

Description - SOMATOSCAN ® and Somatostatin Therapy are radiolabelled somatostatin peptides derived from a synthetic peptide based on MK-678, originally developed by Merck, which shows a high binding affinity for the somatostatin receptors expressed in neuroendocrine tumors, lymphoma and carcinoid and small-cell lung cancer.  This peptide may be developed as both a diagnostic imaging agent ( SOMATOSCAN ® ) and therapeutic product (Somatostatin Therapy) and we believe that it may permit the

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identification and treatment of primary tumors and the correct diagnosis of metastatic lesions. No substantial work related to SOMATOSCAN Ò or Somatostatin Therapy has been carried out since 2005.

Paclitaxel

Description - Paclitaxel is a novel, anti-tumor agent referred to in some scientific and medical literature as “taxol”.  Paclitaxel is currently marketed in the U.S. under the brand name Taxol Ò by Bristol-Myers Squibb Company.  In January 1997, DRAXIS acquired from Mylan Laboratories Inc. (“Mylan”) the exclusive Canadian marketing rights to the Mylan formulation of paclitaxel.  In June 1998, DRAXIS filed with the HPFBI a New Drug Submission in Canada for paclitaxel, and the HPFBI has completed its review process.  Prior to approval, DRAXIS must comply with Canadian Patented Medicines Regulations with respect to generic competition.  Mylan is currently assessing the status of patent infringement litigation in Canada regarding paclitaxel, and the Company has agreed to defer launch in Canada until such issues have been clarified.

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

Manufacturing

Radioactive Products

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

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

Most of the radioisotopes used to produce radiopharmaceuticals are supplied to DRAXIMAGE primarily, but not exclusively, by MDS Nordion, a subsidiary of MDS Inc. (NYSE: MDZ; TSX: MDS) and one of the world’s largest supplier of chemical-grade isotopes for use as medical radioisotopes.

A key distinguishing characteristic of the radiopharmaceuticals business is the need for a sophisticated logistics system.  Radiopharmaceuticals, by their nature, decay continually over time, thereby losing their potency.  Therefore, manufacturing and product delivery systems must be well coordinated to ensure that the level of radioactivity present in the product supplied to the physician is correct at the time of administration.

Lyophilized Products

DRAXIMAGE’s Tc-99m kits are currently manufactured by DRAXIS Pharma in its Kirkland, Québec facility, which was first accepted as a manufacturing site by the FDA in October 2001.  Subsequent manufacturing site transfer approvals for the Tc-99m kits were received during the period December 2001 to March 2002.

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Regulatory

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

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

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

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

In September 2005, MDP-25 was approved by Health Canada but is not currently sold by DRAXIMAGE.

In November 2005, DRAXIMAGE announced it had received FDA approval for a new larger format version of its I-131 kit for the preparation of Sodium Iodide I-131 Capsules and Oral Solution.  DRAXIMAGE introduced this product in the U.S. market in January 2006.

In January 2006, DRAXIMAGE announced it had received approval from the FDA for 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 the radioactive iodide (RAI) uptake test to evaluate thyroid function prior to treatment with stronger therapeutic doses of Sodium Iodide I-131.  Diagnostic doses of Sodium Iodide I-131 may also be employed in localizing metastases associated with thyroid malignancies.  We introduced the new diagnostic capsules in the U.S. market in May 2006.

In November 2006, DRAXIMAGE announced it had been approved by 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.  See “Products under Development”.

DRAXIMAGE has a strong regulatory track record.  This includes 1 successful audit of our facilities in 2007 (1 regulatory inspection and 0 client audit) and 2 successful audits of our facilities in 2006 (1 regulatory inspection and 1 client audit).

Sales and Marketing

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

United States

DRAXIMAGE sells Tc-99m kits in the U.S. to several customers and distributors including Cardinal Health 414, LLC, which operates the largest chain of radiopharmacies, Covidien (formerly Tyco Healthcare), GE Healthcare, United Pharmacy Partners Inc. and large university hospitals.

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Tc-99m kits sold in the U.S. are marketed under the DRAXIMAGE trademark.

On February 2, 2007, DRAXIMAGE announced it had submitted an ANDA to the FDA for its generic kit for the preparation of Tc-99m Sestamibi for injection (“DRAXIMAGE Ò Sestamibi ” ), a nuclear medicine imaging agent used in myocardial perfusion imaging (“MPI”) to evaluate blood flow to the heart in patients undergoing cardiac tests.  On July 7, 2007, the Company was informed by the FDA that its ANDA submission was acceptable for filing.

According to BIO-TECH SYSTEMS, in 2007 there were 8.3 million nuclear cardiology procedures (out of 17.5 million total nuclear procedures) in the U.S.A.  Sales of nuclear cardiology products were $1,291.6 million in 2007 (67.0% of total diagnostic radiopharmaceutical sales).  Sales of Cardiolite, the largest single revenue producer, were $360.7 million (55% of cardiology perfusion sales) followed by Myoview Ô with sales of $202.3 million (31% of cadiology perfusion sales).

The Sestamibi kit is used in nuclear medicine imaging to show how well the heart muscle (myocardium) is supplied with blood (perfused) both at rest and during strenuous activity.  The radioisotope Technetium Tc-99m is attached to the sestamibi molecule forming Tc-99m Sestamibi.  When injected into the bloodstream this radiopharmaceutical agent is distributed throughout the heart muscle in proportion to the blood flow received by various portions of the heart.  Heart images are then obtained using a gamma camera that can detect the Technetium Tc-99m.  Two sets of images are typically taken, one while the patient is at rest and a second set while the patient is under stress, often by exercising on a treadmill or stationary bicycle.  The resulting two sets of images are compared with each other to diagnose the presence of coronary heart disease by detecting areas of the heart that may not be receiving normal blood flow.  This imaging technique is known as cardiac stress testing or myocardial perfusion imaging (MPI).

Once its product is approved, DRAXIMAGE plans to enter the MPI market after the key patent for the currently marketed Tc-99m Sestamibi product expires, which is expected to be in 2008 for the United States, 2009 for Canada and from 2007 onwards in various European countries, and after it receives regulatory approval for the sale of DRAXIMAGE Ò Sestamibi.

See “Risk Factors — Risks Related to our Industry — If the Market Does Not Accept our Products Currently in Development, our Business Could Be Harmed”.

Canada

From January 1, 2003 to December 31, 2007, DRAXIMAGE marketed, in Canada, most of its products directly to end-users through a co-operative agreement with Bristol-Myers Canada, pursuant to which Bristol-Myers Canada’s sales force promoted the non-competitive product lines of each party.  This distribution agreement terminated on December 31, 2007 and has not been renewed.  As of January 1, 2008, DRAXIMAGE is marketing its products in Canada directly to hospitals and radiopharmacies and through non-exclusive distributors.

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

The Company also filed an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGE Ò Sestamibi on August 17, 2007 with Health Canada.  On October 11, 2007, the Company was informed by Health Canada that this submission had been screened and found acceptable for review.

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Europe

The radiopharmaceutical market in Europe is characterized by strong regional fragmentation, which gives the leading market share to the individual manufacturer located in each of the major countries (e.g. GE Amersham Health in the UK, Covidien (formerly Tyco Healthcare) in Holland and CIS Bio in France).  DRAXIMAGE’s marketing activities in Europe are at their earliest stages pending regulatory approvals in this jurisdiction.  As of December 31, 2007, DRAXIMAGE had six regulatory submissions filed with European regulatory authorities: four with the Medicines Evaluation Board in the Netherlands, one with the Danish Medicines Agency, and one in Denmark under the decentralized procedure.  The submission dates for the radiopharmaceutical products filed in the Netherlands and with the Danish Medicine Agency range from June 2003 to December 2004. The regulatory submission for our product in Denmark was filed in 2007. All of the approvals, except for the most recent submission, sought by DRAXIMAGE in Europe are for marketing authorizations through the mutual recognition procedure, which involves obtaining approval in one state (the “reference member state”) and recognition of that approval in other member states.  Five of the approvals being sought by DRAXIMAGE in Europe are for radiopharmaceutical products already approved in Canada or the U.S. The most recent submission is for DRAXIMAGE Ò Sestamibi which has not yet received approval in Canada or the U.S. Two of these six European submissions, made for DRAXIMAGE MAA kit and MDP kit, received approval in a reference member state, the Netherlands, in February 2005 and March 2006.  The MDP kit also received approval in the United Kingdom in February 2008.  The MAA kit has also been approved in Germany, the United Kingdom, Austria and Luxembourg.  A third approval for DRAXIMAGE’s Sodium Iodode I-131 capsules was granted in reference member state, Denmark, in September 2007.

DRAXIMAGE has concluded one distribution agreement in respect of the Benelux countries, with Netherlands-based IDB Holland B.V.  DRAXIMAGE is seeking to expand its distribution network in Europe through strategic alliances with commercial partners and is currently in discussions with potential partners.

On July 25, 2007, DRAXIMAGE announced it had filed DRAXIMAGE Ò Sestamibi with European regulatory authorities.

Research and Development

DRAXIMAGE conducts both basic research on its own products and development work on in-licensed products and technology developed by other firms, predominantly in the biotechnology field.  DRAXIMAGE applies its chelating expertise and technologies to link these compounds with radioisotopes to create innovative diagnostic and therapeutic radiopharmaceuticals.

In October 2003, DRAXIMAGE received a U.S. patent for a new family of chelating compounds that have significant potential for the development of imaging and radiotherapeutic agents to diagnose and treat diseases, including cancerous tumors or metastases.  We believe that the new family of chelating compounds may permit the discovery of diagnostic imaging agents to visualize important biological receptors or receptor-positive tumors when combined with gamma-emitting radioisotopes.  We believe that the compounds are also potentially useful as therapeutic radiopharmaceuticals for the in-vivo treatment of tumors and metastases.

DRAXIMAGE is also able to provide labeling technology for other companies for use with monoclonal antibodies and peptides.  We are also working on the development of novel therapeutic uses of radioactivity.

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On August 22, 2007 DRAXIMAGE announced that it had established a research collaboration agreement with Med Discovery SA of Switzerland to explore the combination of Med Discovery’s targeted protein therapeutics with DRAXIMAGE’s radiopharmaceutical expertise in the therapeutic and diagnostics field.

Med Discovery’s lead proteins are themselves potential therapeutic agents for prostate cancer and a variety of other cancers.  This collaboration provides initially for the radiolabelling of certain Med Discovery’s proteins by DRAXIMAGE to assess the enhancement of their therapeutic action and their capability to detect micro tumors.  The proteins will be produced at Med Discovery’s facility in Switzerland and radiolabelled by DRAXIMAGE in Canada.

DRAXIMAGE personnel have extensive experience developing and optimizing formulations applicable to the lyophilization manufacturing processes used in the production of cold Tc-99m kit products.

Employees

As at December 31, 2007, DRAXIMAGE had 94 employees (representing approximately 20% of the Company’s employees), consisting of 9 general management and administration employees, 9 marketing, selling and customer service employees, 24 quality operations employees, 39 manufacturing employees, and 13 research and development employees.  None of these employees is unionized.

Patents

Most of DRAXIMAGE’s development products as well as currently sold products such as SMART-FILL Ô are covered by patents held (or for which patents have been applied) by DRAXIMAGE or licensed from third parties.  DRAXIMAGE has numerous patents issued and allowed and patent applications pending in the United States, Canada, Europe and Japan.  For example, DRAXIMAGE has various U.S. issued patents related to chelates for radiopharmaceutical applications and process patents for the preparation of certain radiopharmaceuticals.  The patents held by DRAXIMAGE have expiry dates ranging from November 2008 to December 2020.  See “Risk Factors — Risks Related to our Industry — We May not be Able to Obtain and Enforce Effective Patents to Protect our Proprietary Rights From Use by Competitors, and the Patents of Other Parties Could Require Us to Stop Using or to Acquire a License for Conducting Certain Business Activities, and our Competitive Position and Profitability Could Suffer as a Result.”

DRAXIMAGE also relies on trade secrets, know-how and other proprietary information to protect its current products and technologies.  To protect DRAXIMAGE’s rights in these areas, it requires all licensors, licensees, customers and significant employees to enter into confidentiality agreements.  There can be no assurance, however, that these agreements will provide meaningful protection to DRAXIMAGE’s patents, trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such patents, trade secrets, know-how or other proprietary information.  See “Risk Factors — Risks Related to our Company — If our Collaborative and Commercial Relationships with Third Parties on Whom we Rely are Unsuccessful, our Business May Suffer.”

Other Collaboration Agreements

We have continuing financial interests associated with our collaboration agreements with Pfizer with respect to ANIPRYL ® and with Shire with regard to Canadian sales of products divested in 2003.  As of January 31, 2005 all deferred revenue related to the SpectroPharm Ò line of products from GSK was fully amortized by the Company.

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ANIPRYL ®

Beginning in 1990, we expanded on our knowledge and experience with selegiline by initiating directly on our own behalf, as well as through contract research arrangements, studies designed to investigate the potential of selegiline for companion animal use.  This initiative ultimately resulted in the formation of our subsidiary DAHI, through which the Company developed and commercialized a companion animal health product, ANIPRYL ® .

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

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

CDS, sometimes known as “Old Dog Syndrome,” refers to the onset in elderly dogs of behavioral problems unrelated to a generalized medical condition such as neoplasia, infection or organ failure.  Typical signs of this disorder can include confusion, disorientation, decreased activity, changes in sleep/wake cycles, loss of house training and loss 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, the Company took DAHI private in a mandatory share exchange transaction.

In December 1997, we entered into an alliance with Pfizer whereby Pfizer was granted a perpetual exclusive license to market, sell and distribute ANIPRYL ® in exchange for non-refundable fees, royalties based on the worldwide sales of ANIPRYL ® , a manufacturing and supply agreement and a research collaboration.

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

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

In December 2001, the Company and Pfizer further amended the term of the alliance (the “Second Amendment”) whereby the Company received a payment of $3.1 million with respect to minimum royalty entitlements for the second and third three-year periods ended December 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 the Company, forfeiture of any additional minimum royalty entitlements and the termination of any future collaborative research on new indications or formulations for ANIPRYL ® .

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Cumulatively to December 31, 2007, we received a total of $28.1 million in non-refundable fees and $18.3 million in royalties and royalty-related payments relating to ANIPRYL Ò .

Under the amended arrangement, we will not be entitled to receive any additional non-refundable fees but will continue to earn royalties on Pfizer’s sales of ANIPRYL ® in the United States and Canada.  The $28.1 million of non-refundable fees already received from Pfizer have been deferred and were recognized as revenue on a straight-line basis over the period to December 31, 2006 in conformity with Staff Accounting Bulletin No. 101 published by the U.S. Securities and Exchange Commission.  The amortization of these deferred revenues terminated on December 31, 2006.

We currently do not intend to pursue any additional or expanded indications for ANIPRYL ® .

ANIPRYL ® is currently approved for sale in Canada, the United States, Australia, United Kingdom, New Zealand and Brazil.  However, ANIPRYL ® is not currently sold in Australia, New Zealand, the United Kingdom or Brazil.

In 1997, DAHI filed for regulatory approval of ANIPRYL ® in Europe by using the decentralized procedure.  This procedure allows DAHI to file the ANIPRYL ® submission in a country of its choice, and to designate five additional member states of the European Union as the countries that will review and approve the regulatory submissions.  DAHI chose the United Kingdom as the country in which to file the initial ANIPRYL ® applications.  In July 2003, DAHI received authorization from the Veterinary Medicines Directorale (“VMD”) to market ANIPRYL ® tablets for dogs in the United Kingdom.  The United Kingdom submission has been reformatted in order to be suitable for submission to other European Union member states.  The VMD has acted as DAHI’s advocate in this procedure.

Sales and Marketing

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

In July 2003 DRAXIS granted Ceva Santé Animale S.A. (“CEVA”) an exclusive license for the marketing and distribution of ANIPRYL ® in Europe.  On March 25, 2008, CEVA and DRAXIS mutually terminated the licence agreement between them effective December 31, 2007.  The Company will not seek to continue to have ANIPRYL ® approved in Europe.

Manufacturing

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

Under its supply agreement with Pfizer, DAHI is entitled to designate a third-party supplier or to manufacture ANIPRYL ® itself in a qualified facility.

During 2000, Pfizer qualified one of its own facilities to manufacture ANIPRYL ® for the North American marketplace.  During 2000 and 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.

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Competition

The animal health marketplace is generally served by veterinary, agricultural or animal health divisions of large international pharmaceutical and chemical companies that are involved in research and development activities.  Products resulting from their activities may, in the future, compete directly with ANIPRYL ® .

We are not aware of any other HPFBI, BVA or FDA approved product available at this time that competes directly with ANIPRYL ® .  In the United States, the 1988 Generic Animal Drug and Patent Term Restoration Act offers marketing protection from veterinary generic applicants in the United States for a period of five years.  This period ended in 2002, in the case of ANIPRYL ® .  However, that law does not prevent other companies from repeating the full clinical New Drug Application process to seek FDA approval for a bio-equivalent product, nor does it prohibit human generic versions of ANIPRYL ® from being sold to veterinarians.  Any such competitor, 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 ® has been experienced to date in Canada or the United States from products approved for veterinary or human use.  However, there are two other treatments available that have not been approved in Canada or the United States to treat canine Cushing’s disease, that we believe may be being used off-label for canine Cushing’s disease:  LYSODREN ® (mitotane) by Bristol-Myers Squibb Co., which was approved for use in the treatment of human inoperable cancer of the adrenal gland and NIZORAL ® (ketoconazote) tablets by Johnson & Johnson, Inc., an anti-fungal medication, which was approved for the treatment of various internal and external fungal and yeast infection in humans.  These competitive treatments work by selectively killing the outer layer of the adrenal gland, thereby limiting production of corticosteroid.  The human generic version of ELDEPRYL ® is not approved for the treatment of canine Cushing’s disease or CDS in Canada, the United States or elsewhere.  However, we believe that such use of human selegiline may compete with the use of ANIPRYL ® in dogs.  The dosage required for dogs suffering from canine Cushing’s disease and CDS, in most cases, is much higher than the human 5mg dose for selegiline.

Patents for the use of ANIPRYL ® for the treatment of dogs with conditions including canine Cushing’s disease and CDS are issued in Canada, the United States and other jurisdictions.  We believe DAHI is positioned to enforce its proprietary patent rights and defend itself against infringement by other parties.

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Patents

In September 1992, the United States Patent and Trademark Office issued a patent to DAHI entitled “Use of l-deprenyl for Retention of Specific Physiological Function”.  The patent claims specific uses of l-deprenyl for use in treating dogs and covers currently sold products.  Similar patents have also issued to DAHI in many foreign jurisdictions, including Canada, New Zealand, Venezuela and Europe.  Six additional U.S. patents have also issued to DAHI.  These patents cover various veterinary pharmaceutical uses of l-deprenyl such as treatment of Cushing’s Disease, weight loss, treatment of immune system dysfunction, extension of life expectancy of dogs, and treatment of hearing loss.  Four of these six patents were also filed in foreign countries that have major companion animal markets.  The markets for the cognitive disease patents are Canada, U.S., Europe, Japan, Mexico, Venezuela, New Zealand and Malaysia.  The markets for the Cushing’s Disease patent are Europe, Canada and the U.S.  The markets for the survival cure shifting patent are Canada, Norway, Finland and Europe.  The markets for the treatment of hearing loss patent are Japan and Canada.  The patents held by DAHI have expiry dates ranging from August 31, 2010 to June 3, 2016.

The European CDS patent was subject to an opposition procedure initiated by CEVA.  CEVA holds patents in the United States, Canada and Europe relating to the use of selegiline for treating behavioral disorders with change of mood in dogs and cats.  CEVA’s European patent was subject to an opposition procedure by DAHI.  In July 2003, DRAXIS and CEVA agreed to discontinue the opposition proceedings between them before the EPO.  DRAXIS also granted CEVA an exclusive license for the marketing and distribution of ANIPRYL ® or the use of ANIPRYL ® claims in Europe.  In return, CEVA agreed to pay DAHI a percentage royalty on European sales of ANIPRYL ® and/or the use of ANIPRYL ® claims, in addition to nominal milestone payments upon the regulatory approval of ANIPRYL ® in the UK and in subsequent additional jurisdictions within the European Community.  The agreement also gave DAHI the rights to use Chinoin selegiline in any jurisdiction.  On March 25, 2008, CEVA and DRAXIS mutually terminated the licence agreement between them effective December 31, 2007.  The Company will not seek to continue to have ANIPRYL ® approved in Europe.

SpectroPharm® Product Line

In May 2000, we entered into an arrangement with Block Drug Company (Canada) Limited, now part of GlaxoSmithKline 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 a non-refundable fee, the acquisition of inventory on hand, a supply agreement and a technical services arrangement.  The $9 million we received with respect to the SpectroPharm ® product rights was deferred and was recognized as revenue on a straight-line basis over the period to January 31, 2005.  As of January 31, 2005, all deferred revenue related to the SpectroPharm Ò line of products was fully amortized.

Discontinued Operations (DRAXIS Pharmaceutica)

In July 2003, we completed the divestiture of our Canadian pharmaceutical sales and marketing division, DRAXIS Pharmaceutica, with the sale to Shire of substantially all remaining products of the division, including the Canadian product rights for Alertec ® , Diastat ® , Hectorol ® , Permax ® and Zanaflex ® .  Shire agreed to pay DRAXIS through a combination of cash and contingent milestone payments plus royalties on future product sales.  In addition, Shire assumed responsibility for the financial provisions of the license agreement related to Permax ® .

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Government Regulation

Our business is governed by a variety of industry-specific statutes and regulations in Canada, the United States and other countries.

DRUGS

Drug Approval Process

Human Pharmaceuticals

In Canada, pharmaceutical research, development and marketing activities are regulated by the Food and Drugs Act (Canada) and the rules, regulations, policies and guidelines made thereunder.  Insofar as it relates to drugs for human use, the Food and Drugs Act (Canada) is administered by the Therapeutic Products Directorate of the Health Products and Food Branch (“TPD”), which regulates the use and sale of diagnostic and therapeutic products in Canada.  In the United States, these activities are regulated under laws administered by the Food and Drug Administration (“FDA”), which also have a significant impact on the Company’s activities.

The drug research and development process consists of both pre-clinical and clinical phases.  The pre-clinical phase consists of screening compounds to identify the most promising leads for continued drug development prior to human clinical trials and evaluating the drug’s toxicologic and pharmacologic effects to show that the drug is reasonably safe for use in the initial clinical studies.  The clinical phase involves clinical trials with healthy participants, as well as patients with specific diseases or conditions.

Before commencing clinical trials in Canada or the United States, a Clinical Trial Application (“CTA”) must be submitted with the TPD (in the United States an Investigational New Drug (“IND”) application must be submitted with the FDA).  The CTA or IND application includes manufacturing data, pre-clinical data, information about use of the drug in humans for other purposes and a detailed protocol for the conduct of clinical trials.

In Canada and the United States, clinical trials of new pharmaceutical products involve three phases.  In Phase I, the product’s safety is assessed during clinical trials involving a limited number 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 is administered to a larger number of patients with a known disease, and further information relating to safety and efficacy is gathered.  Further, in Phase III, the effectiveness of the product is, in certain cases, compared to that of accepted methods of treatment.  If clinical studies establish that the product has value, an applicant files a New Drug Submission with the TPD (or a New Drug Application, or Product License Application or Biologic License Application (for biological products) with the FDA) to obtain marketing approval for the product.  The New Drug Submission/New Drug Application/Product License Application/Biologic License Application includes a comprehensive summary and analysis of the results of the clinical trials, information relating to proposed labeling and packaging materials, and data relating to the proposed manufacturing and quality control procedures.  If the New Drug Submission/New Drug Application/Product License Application/Biologic License Application is found to be satisfactory, a marketing authorization is issued (in Canada, the TPD issues a Notice of Compliance).

The process of completing clinical trials and obtaining regulatory approvals for a new drug will, in general, take a number of years and require the expenditure of substantial resources.  Once a New Drug Application/New Drug Submission or Product License Application/Biologic License Application is submitted, there can be no assurance that the TPD or FDA will review and approve the application in a

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timely manner.  In certain limited circumstances, the TPD will permit a New Drug Submission to be subject to a priority review.  The TPD’s Priority Review Process allows for a faster review to make available promising drug products for a serious, life-threatening or severely debilitating illness or condition for which there is substantial evidence of clinical effectiveness that the drug provides: (i) effective treatment, prevention or diagnosis of a disease or condition for which no drug is presently marketed in Canada; or (ii) a significant increase in efficacy and/or significant decrease in risk such that the overall benefit/risk profile is improved over existing therapies, preventatives or diagnostic agents for a disease or condition that is not adequately managed by a drug marketed in Canada.

Even after initial approval has been obtained, further studies, including post-marketing studies, may be required to provide additional data on safety necessary to gain approval for the use of the product as a treatment for clinical indications other than those for which the product was initially tested.  The TPD and FDA may also require post-marketing surveillance programs in order to monitor long-term risks and benefits of the drug, to study different dosages or evaluate different safety and efficacy parameters.  Results of post-marketing studies may limit or expand the further marketing of products.  A serious safety or effectiveness problem involving an approved new drug may result in TPD or FDA action requiring withdrawal of the product from the market and possible civil action.

The Special Access Program of the TPD provides practitioners with access to pharmaceutical, biologic and radiopharmaceutical products that are not yet approved for sale in Canada to treat patients with serious or life-threatening illness or conditions when conventional therapies have failed, are unsuitable or unavailable.  The FDA administers a similar program in the United States to treat patients with immediately life-threatening diseases.

Outside of Canada and the United States, the regulatory approval process for the manufacture and sale of pharmaceuticals varies from country to country, and the time required may be longer or shorter than that required for TPD or FDA approval.  To the extent it chooses to explore foreign markets, the Company may rely on foreign licensees to obtain regulatory approval for marketing its products in foreign countries.

Veterinary Pharmaceuticals

In Canada, the drug approval process for veterinary pharmaceuticals is similar to the process for obtaining approvals for human pharmaceuticals.  To receive regulatory approval, a new animal drug must successfully complete a number of developmental phases which include the establishment of safety and efficacy in target species, establishment of manufacturing procedures and the conduct of controlled clinical trials in which the drug is administered to a large number of animals in order to gather further information relating to safety and efficacy.

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

Drug Marketing

Human Pharmaceuticals

Prescription drug products generally are made known to healthcare professionals through advertisements and visits 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.

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An increasing percentage of sales of prescription pharmaceuticals relates to sales of products which are paid for, in whole or in part, by government or private insurance drug plans.  In many jurisdictions, governments have established regimes to control drug pricing at the retail pharmacy level.  Most Canadian provinces have implemented drug benefit formularies.  A formulary lists the drugs for which a provincial government will reimburse qualifying persons and the prices at which those drugs will be reimbursed.  Although there is not uniformity among provinces, generally speaking, provincial governments will reimburse an amount equal to the lowest available price of the generic versions of any drug listed on the provincial formulary.  The legislative regimes of most provinces also permit generic drug substitution, even for patients who do not qualify for government reimbursement.  The effect of these initiatives is to encourage the sale of lower-priced generic versions of pharmaceutical products.  In the United States, beginning in 2006, Medicare beneficiaries will be offered a prescription drug benefit.  Medicare will contract with at least two risk-bearing drug plans in each of 34 regions to provide the new benefit.  The prescription drug plans will cover at least two drugs in each therapeutic class or category of covered drugs, but may establish formularies and tiered-cost amounts.  The prescription drug plans may limit their coverage to two drugs in each therapeutic class or category of covered drugs.  The effect of this new program will allow prescription drug plans to negotiate price discounts and rebates with drug companies.

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

Veterinary Pharmaceuticals

In Canada, veterinary “prescription” pharmaceuticals are available only through veterinarians.  Veterinary prescription drugs are generally promoted by manufacturers through advertisements to veterinarians and sales visits to animal health clinics.  In Canada, unlike the United States, product-specific advertising to the general public is generally not permitted, subjected to very limited exceptions.

The PMPRB has the jurisdiction to regulate maximum pricing of veterinary drugs (see below), but actively exercises that jurisdiction only in response to complaints it may receive.  There are no government reimbursement plans in the veterinary pharmaceutical marketplace.  There are a few private pet insurance plans; however, these plans do not cover a significant portion of the purchase for veterinary drugs.  Accordingly, the veterinary marketplace is not subject to the same cost containment measures that are prevalent in the human pharmaceutical market.

Patent Protection and Price Controls

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

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

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

Remedies for patent infringement are created under the laws of Canada and the United States.  In addition to the standard legal action for patent infringement, in 1993, the Canadian Government enacted Regulations under the Patent Act (Canada) whereby a company proposing a generic version of a drug which has been marketed in Canada under a Notice of Compliance and in respect of which patents have been listed on the Patent Register, must address those patents before a Notice of Compliance may be granted.  The originator of the drug may apply to the Federal Court of Canada for an order prohibiting the Minister of National Health and Welfare from issuing a Notice of Compliance until the issue of possible patent infringement has been resolved or the passage of twenty-four months from commencement of Federal Court proceedings, whichever comes first.  Similar proceedings are available in the United States if a generic drug manufacturer seeks approval for a drug in respect of which patents have been listed in the Orange Book (the United States equivalent of the Patent Register).

As mentioned above, in Canada, the PMPRB monitors and controls prices of drug products marketed in Canada by persons holding, or licensed under, one or more patents relating to those drug products.  The PMPRB approves the introductory price of a drug product (based on a comparative analysis) and requires that subsequent price increases do not exceed the annual increase of the Canadian Consumer Price Index.  Thus, in Canada, the existence of one or more patents relating to a drug product, while providing some level of proprietary protection for the product, also triggers a governmental price control regime which significantly impacts on the Canadian pharmaceutical industry’s ability to set pricing.

Drug Manufacturing

Pharmaceutical companies are required to submit as part of their New Drug Submission in Canada, or as part of their New Drug Application in the United States, detailed descriptions regarding the proposed manufacturing and packaging process and the identities of the manufacturers in respect of a particular drug.  A decision to manufacture or package products in a facility other than that originally approved under the New Drug Application or New Drug Submission (as may be the case with contract manufacturing outsourcing) requires notification of the regulatory authorities and can result in significant delays in production.

Pharmaceutical manufacturing facilities are subject to strict quality control standards including current good manufacturing practices (“cGMPs”).  Production processes within a facility are subject to one-time validation testing, as well as periodic review.  In the case of sterile product manufacturing, including lyophilized products, the standards are even higher than for the manufacturing of non sterile products.  The manufacture of radioactive drugs is subject not only to cGMPs but also the environmental safety, handling and transportation requirements of the Canadian Nuclear Safety Commission (“CNSC”)

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and the United States Nuclear Regulatory Commission (“NRC”).  There are no issues with respect to radioactive waste disposal since all of the isotopes used in nuclear medicine are short-lived and can be easily stored on site until decayed and then disposed of.

The FDA, the Health Products and Food Branch of Health Canada (“HPFBI”), CNSC and NRC conduct regular audits of the Company’s facilities to ensure compliance with cGMPs and other statutory requirements.  See “Risk Factors — Risks related to our industry”.

ENVIRONMENTAL LAWS

Canadian and U.S. federal, state, local and provincial regulations govern extensively the use, manufacture, storage, handling, transport and disposal of hazardous materials and associated waste products.  The Company is not aware of any material environmental issues that affect the Company’s utilization of its assets.  As of December 31, 2007, the Company has not received any notice stating that it is not in compliance with environmental legislation applicable to it.

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ORGANIZATIONAL STRUCTURE

The following chart illustrates the corporate organizational structure and governing jurisdictions of the Company and its significant affiliates as at March 31, 2008.

All of the below-depicted companies are wholly owned subsidiaries of DRAXIS.

(1)DRAXIS Specialty Pharmaceuticals Inc. has two divisions, DRAXIMAGE (radiopharmaceuticals) and DRAXIS Pharma (contract manufacturing).

PROPERTY, PLANTS AND EQUIPMENT

Our sole operating facility is a 247,000-square-foot pharmaceutical manufacturing facility which houses the DRAXIMAGE and DRAXIS Pharma operations.  The facility is owned by DRAXIS Specialty Pharmaceuticals Inc., a wholly-owned subsidiary of the Company and is located at 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H 4J4.  See “Risk Factors — Risks Related to our Company — We only have one manufacturing facility and factors beyond our control could cause an interruption in our manufacturing operations, which could adversely affect our reputation in the market place and our results of operations.”

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On November 27, 2007, the Company announced that it had initiated construction of a 77,000 square foot new secondary packaging and warehousing facility in the Montréal area to aid DRAXIS in fulfilling its obligation under its recently announced contract to produce a broad portfolio of multiple non-sterile specialty semi-solid products for JJC.  The new facility is expected to be completed by mid-2008, after which equipment will be installed and validated to ensure compliance with applicable regulatory requirements.

The new facility has been custom designed by and is being built by Montréal based developer Broccolini Construction Inc., specifically to meet the needs of DRAXIS with respect to this major new contract but will be owned by the Broccolini Group of Companies and leased to DRAXIS under a seven year agreement with options to renew.  The facility will be situated in the Montréal area in the community of Ste-Anne-de-Bellevue close to major highway access and within ten kilometers (six miles) of the main DRAXIS production facility in Kirkland, just outside Montréal.

As of December 31, 2007, we have no third-party debt outstanding other than as provided for in Note 16 of the Consolidated Financial Statements.

Item 4A  Unresolved Staff Comments

There are no unresolved written comments that were received from the Securities and Exchange Commission’s staff 180 days or more before the end of the Company’s fiscal year to which this Annual Report relates.

Item 5.    Operating and Financial Review and Prospects

The following management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of DRAXIS Health Inc. (“DRAXIS” or the “Company”) is based on the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2007 and should be read in conjunction therewith.

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 this MD&A 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 79 hereof).

This MD&A is dated February 29, 2008.

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.

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Termination of Amortization of Anipryl® Deferred Revenues

As indicated in prior disclosures, substantially all 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, contributing 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 affects year-over-year comparisons of operating results beginning with the first quarter of 2007 (see “Corporate and Other”).

Consolidated Results of Operations

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

The following provides a high-level overview of the consolidated results of the Company.  Please see “Segment Reporting” for more detailed explanations.

Comparison of Years Ended December 31, 2007 and 2006

Consolidated revenues for the year ended December 31, 2007 decreased 11% compared to the year ended December 31, 2006 due to lower volumes in contract manufacturing and the loss of the non-cash Anipryl ^® deferred revenue amortization. These factors were partially offset by one-time contingent milestone payments from Shire BioChem Inc. (“Shire”) which were earned in the first quarter of 2007.

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Consolidated product sales decreased 9% to $76.1 million for 2007 compared with the same period in 2006.  Contract manufacturing product sales decreased 15% in 2007 compared to the same period of 2006. The decrease was related to lower sterile volumes mainly due to lower demand for Hectorol ^® and lower sterile volumes under the GSK contract relative to 2006. Radiopharmaceutical product sales increased 8% over the same period of 2006. The increase was due to the inclusion of a chargeback for freight services beginning on April 1, 2007.  In addition, the Company suspended production of a private label radioactive product for one customer that historically contributed $350,000 in quarterly product sales.

During the course of 2007, two separate shortages for the supply of radioactive isotopes occurred which impacted the financial performance of the radiopharmaceutical segment. The first shortage resulted in the Company obtaining the approval of a secondary source of supply for the U.S. market. The second shortage created an industry-wide decrease in demand in late 2007 for radioactive procedures due to a short supply in the marketplace of radioisotopes, being the key ingredient.

Product gross margin percentages for 2007 decreased to 35% as compared with 44% for the same period in 2006. The decline is attributable to reduced margins in the contract manufacturing segment resulting from lower sterile volumes, principally volumes of Hectorol ^® .

The increase in royalty and licensing revenue for the year ended December 31, 2007 compared to 2006 reflects the receipt of $0.8 million of contingent milestone payments from Shire in the first quarter of 2007.

As a percentage of product sales, selling, general and administrative (“SG&A”) expenses were 25% for 2007 compared to 23% for 2006.  SG&A expenses decreased for 2007 compared to 2006 due to an overall decrease in incentive plan accruals which more than offset total severance costs of $2.3 million during 2007.

Overall R&D expenditures were similar for 2007 compared to 2006.  R&D resources in 2007 were largely focused on the DRAXIMAGE ^® Sestamibi and MOLY-FILL™ Technetium Generator projects.

Depreciation and amortization expense for all of 2007 increased compared to 2006 due to the completion of the Company’s IT and SAP upgrade activities in 2007, including the implementation of a new warehouse management system.

The majority of the Company’s operating costs 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 negatively affected during periods where the Canadian dollar appreciates in value.

Foreign exchange had a significant impact in 2007 compared with 2006 due to the continued rapid strengthening of the Canadian dollar beginning in April 2007, which resulted in a foreign exchange loss of $1.7 million for 2007. The Company is subject to a foreign exchange loss as a result of the negative impact of the strengthening of the Canadian dollar on U.S. dollar-denominated monetary assets held by the Company. The Company expects to partially mitigate its currency related risk over the next 12 to 15 months by an increase in its U.S. dollar-denominated customer financing related to activities expected to be carried out in connection with the new non-sterile manufacturing contract with JJC.

The effective tax rate is lower than the statutory rate due primarily to the amount of R&D tax credits earned in the year. The Company’s effective tax rate will vary from the statutory tax rate

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depending on the mix of net income combined with the statutory rates in the respective jurisdictions in which the Company operates.

The basic weighted-average number of common shares outstanding during 2007 was 41,955,989 and has increased from 41,592,507 in 2006, primarily as the result of the exercise of stock options, offset by shares purchased for cancellation under the Company’s Normal Course Issuer Bid initiated in December 2006.  As at the date hereof, the Company has 42,062,538 common shares outstanding and also has outstanding 2,135,828 options to acquire common shares.

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 business.  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. marketplace 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.

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 DRAXIMAGE ^® Sestamibi and the MOLY-FILL Ô 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.

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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.

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.

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