Aptalis Pharma Inc - FORM 10-Q

Attached files

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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Aptalis Pharma Inc	ex31_1.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - Aptalis Pharma Inc	ex32_1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Aptalis Pharma Inc	ex31_2.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - Aptalis Pharma Inc	ex32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended December 31, 2009

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________.

Commission File Number 333-153896

AXCAN INTERMEDIATE HOLDINGS INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or organization)

74-3249870

(I.R.S. Employer Identification No.)

22 Inverness Center Parkway

Suite 310

Birmingham, AL

(Address of Principal Executive Offices)

35242

(Zip Code)

(205) 991-8085

(Registrant’s telephone number, including area code)

_______________________

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 No [X] Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No [X] (Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer [X] Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No [X]

As of February 9, 2010, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Axcan MidCo Inc.

AXCAN INTERMEDIATE HOLDINGS INC.

INDEX


PART I. FINANCIAL INFORMATION	4
Item 1. Financial Statements.	4
Consolidated Balance Sheets	4
Consolidated Operations	5
Consolidated Shareholders’ Equity and Comprehensive Income	6
Consolidated Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 3. Quantitative And Qualitative Disclosure About Market Risk	40
Item 4T. Controls and Procedures	40
PART II. OTHER INFORMATION	41
Item 1 A. Risk Factors	41
Item 6. Exhibits.	42
SIGNATURES	43
EXHIBIT INDEX	44

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. federal securities laws. Statements other than statements of historical facts including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans, future industry growth and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “project,” “forecast,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Certain of the important factors that could cause actual results to differ materially from our expectations, or “cautionary statements,” include, but are not limited to, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Quarterly Report, “Risk Factors” in Item 1A of Part II of this Quarterly Report, as well as elsewhere in this Quarterly Report on Form 10-Q.

We caution you not to place undue reliance on any forward-looking statements and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Balance Sheets

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

	December 31, 2009			September 30, 2009
	(unaudited)

Assets	$			$
Current assets
Cash and cash equivalents		132,391			126,435
Accounts receivable, net		71,672			57,124
Accounts receivable from the parent company (Note 14)		306			306
Income taxes receivable		1,486			3,391
Inventories, net (Note 3)		49,377			44,706
Prepaid expenses and deposits		3,122			2,868
Deferred income taxes		15,262			15,852
Total current assets		273,616			250,682
Property, plant and equipment, net (Note 4)		38,470			39,344
Intangible assets, net (Note 5)		405,166			421,290
Goodwill		165,568			165,823
Deferred debt issue expenses, net of accumulated amortization of $10,413 ($9,168 as at September 30, 2009)		24,166			25,411
Deferred income taxes		11,638			12,052
Total assets		918,624			914,602
Liabilities
Current liabilities
Accounts payable and accrued liabilities		107,426			87,684
Income taxes payable (Note 9)		2,215			2,493
Installments on long-term debt (Note 7)		-			30,708
Deferred income taxes		1,167			137
Total current liabilities		110,808			121,022
Long-term debt (Note 7)		592,946			582,586
Other long-term liabilities		9,497			9,448
Deferred income taxes		34,979			37,782
Total liabilities		748,230			750,838
Shareholders’ Equity
Capital Stock (Note 10)
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding as at December 31, 2009, and September 30, 2009		1			1
Deficit		(288,340	)		(297,658	)
9.05% Note receivable from the parent company (Note 14)		(133,154	)		(133,154	)
Additional paid-in capital		619,195			619,053
Accumulated other comprehensive loss		(27,308	)		(24,478	)
Total shareholders’ equity		170,394			163,764
Total liabilities and shareholders’ equity		918,624			914,602

The accompanying notes are an integral part of the consolidated financial statements.

These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements

On behalf of the Board,

Director

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Statements of Operations

(in thousands of U.S. dollars)

(unaudited)

	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008
	$			$
Net product sales		110,132			104,108
Cost of goods sold (a)		26,628			25,454
Selling and administrative expenses (a) (Note 8)		32,239			32,005
Management fees (Note 14)		855			163
Research and development expenses (a)		8,426			7,050
Depreciation and amortization		16,693			14,473
Total operating expenses		84,841			79,145
Operating income		25,291			24,963
Financial expenses (Note 8)		16,197			19,325
Interest income		(148	)		(223	)
Loss (gain) on foreign currencies		(15	)		130
Total other expenses		16,034			19,232
Income before income taxes		9,257			5,731
Income tax expense (benefit)		(189	)		598
Net income		9,446			5,133

(a) Excluding depreciation and amortization

The accompanying notes are an integral part of the consolidated financial statements.

These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Shareholders’ Equity and Comprehensive Income

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

(unaudited)

	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008
Common shares (number)
Balance, beginning and end of period		100			100
		$			$
Common shares
Balance, beginning and end of period		1			1
Deficit
Balance, beginning of period		(297,658	)		(289,264	)
Dividends paid		(128	)		-
Net income		9,446			5,133
Balance, end of period		(288,340	)		(284,131	)
Additional paid-in capital
Balance, beginning of period		619,053			617,255
Stock-based compensation expense		1,476			1,330
Foreign currencies translation adjustments		-			(47	)
Stock-based compensation plans redemption		(271	)		-
Provision on interest receivable from the parent company		(3,037	)		(3,037	)
Interest income from the parent company, net of taxes of $1,063 ($1,062 in 2008)		1,974			1,975
Balance, end of period		619,195			617,476
9.05% Note receivable from the parent company
Balance, beginning and end of period		(133,154	)		(133,154	)
Accumulated other comprehensive loss
Balance, beginning of period		(24,478	)		(29,168	)
Hedging contracts fair value adjustments, net of taxes of $42 ($130 in 2008)		(78	)		(242	)
Foreign currencies translation adjustments		(2,752	)		5,829
Balance, end of period		(27,308	)		(23,581	)
Total shareholders' equity		170,394			176,611
Comprehensive income
Other comprehensive income (loss)		(2,830	)		5,587
Net income		9,446			5,133
Total comprehensive income		6,616			10,720
Accumulated other comprehensive loss
Amounts related to foreign currencies translation adjustments		(27,237	)		(23,634	)
Amounts related to hedging contracts fair value adjustments		(71	)		53
Accumulated other comprehensive loss		(27,308	)		(23,581	)

The accompanying notes are an integral part of the consolidated financial statements.

These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Cash Flows

(in thousands of U.S. dollars)

(unaudited)

	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008
	$			$
Cash flows from operating activities
Net income		9,446			5,133
Non-cash items
Non-cash financial expenses		1,762			1,758
Depreciation and amortization		16,693			14,473
Stock-based compensation expenses		1,476			1,330
Loss on disposal and write-down of assets		25			11
Foreign currencies fluctuations		(479	)		(1,638	)
Change in fair value of derivatives		(516	)		897
Deferred income taxes		(1,370	)		1,325
Changes in working capital items
Accounts receivable		(14,901	)		(9,032	)
Accounts receivable from the parent company		-			(713	)
Income taxes receivable		1,734			9,744
Inventories		(4,868	)		1,875
Prepaid expenses and deposits		(264	)		(2	)
Accounts payable and accrued liabilities		20,114			12,167
Income taxes payable		(338	)		1,653
Net cash provided by operating activities		28,514			38,981
Cash flows from investing activities
Acquisition of property, plant and equipment		(1,129	)		(1,298	)
Acquisition of intangible assets		-			(10	)
Net cash used in investing activities		(1,129	)		(1,308	)
Cash flows from financing activities
Repayment of long-term debt		(20,865	)		(2,188	)
Stock-based compensation plans redemption		(271	)		-
Dividends paid		(128	)		-
Net cash used in financing activities		(21,264	)		(2,188	)
Foreign exchange loss on cash held in foreign currencies		(165	)		(1,109	)
Net increase in cash and cash equivalents		5,956			34,376
Cash and cash equivalents, beginning of period		126,435			56,105
Cash and cash equivalents, end of period		132,391			90,481
Additional information
Interest received		148			249
Interest paid		1,947			3,137
Income taxes received		2,372			16,761
Income taxes paid		1,856			4,401

The accompanying notes are an integral part of the consolidated financial statements.

These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

1. Governing Statutes, Description of Business and Basis Presentation

Axcan Intermediate Holdings Inc., a corporation incorporated on November 28, 2007, under the General Corporation Law of the State of Delaware and its subsidiaries (together the “Company”), commenced active operations with the purchase, through a wholly-owned indirect subsidiary, of all of the outstanding common shares of Axcan Pharma Inc., a company incorporated under the Canada Business Corporation Act. On February 25, 2008, the Company, pursuant to a Plan of Arrangement dated November 29, 2007, and through a wholly-owned indirect subsidiary, completed the acquisition of all common shares of Axcan Pharma Inc. at a price of $23.35 per share. The Company is involved in the research, development, production and distribution of pharmaceutical products mainly in the field of gastroenterology.

The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency and prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the requirements of the Securities and Exchange Commission for reporting on Form 10Q. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended September 30, 2009. When necessary, the financial statements include amounts based on informed estimates and best judgment of management. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operation for the periods shown. Certain prior period amounts have been reclassified to conform to the current period presentation. All intercompany transactions and balances have been eliminated on consolidation. The Company has evaluated significant events through February 10, 2010, the date of issuance of these financial statements.

2. Recently Issued Accounting Standards

In January 2010, the FASB amended the existing authoritative guidance on disclosures on fair value measurements and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The disclosure of the roll forward of activity in Level 3 measurements on a gross basis would be effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the revised guidance on its consolidated financial statements.

In October 2009, the FASB amended the existing guidance on revenue recognition related to accounting for multiple-element arrangements. This amendment addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In August 2009, the FASB amended the existing guidance on fair value measurements and disclosures to provide clarification in measuring the fair value of liabilities in circumstances when a quoted price in an active market for the identical liability is not available. In such circumstances, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets; and/or 2) a valuation technique that is consistent with the principles of fair value measurements (e.g. an income approach or market approach). This guidance is effective for reporting periods including interim periods beginning after August 28, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB amended the existing authoritative guidance on consolidation regarding variable interest entities for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. According to the revised guidance, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The guidance also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. The revised guidance is effective for fiscal years beginning after November 15, 2009, with early adoption prohibited. The Company is currently evaluating the impact of the adoption of the revised guidance on its consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

2. Recently Issued Accounting Standards (continued)

In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The guidance is effective for fiscal years and interim periods ended after June 15, 2009, and will be applied prospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB amended the authoritative guidance on financial instruments to require disclosures about fair value of financial instruments in interim as well as in annual financial statements of publicly traded companies. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on its consolidated financial statements since the Company has provided disclosures about fair value of financial instruments in its interim financial statements prior to the issuance of this guidance.

In April 2009, the FASB issued additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. Guidance on identifying circumstances that indicate a transaction is not orderly was also issued and required additional disclosures. This guidance is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB amended the guidance for investments in debt and equity securities on determining whether impairment for investments in debt securities is other than temporary and requires additional interim and annual disclosure of other-than-temporary impairments in debt and equity securities. Pursuant to the new guidance, an other-than-temporary impairment has occurred if a company does not expect to recover the entire amortized cost basis of the security. In this situation, if the company does not intend to sell the impaired security prior to recovery and it is more likely than not that it will not be required to sell the security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to the credit loss. The remaining portion of the other-than-temporary impairment is then recorded in other comprehensive income. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB amended the guidance on business combinations previously revised in December 2007 to require that an acquirer recognize assets acquired and liabilities assumed in a business combination that arise from contingencies, at fair value at the acquisition date, if fair value can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply guidance on accounting for contingencies to determine whether the contingency should be recognized at the acquisition date or after it. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is after the beginning of the first annual reporting period beginning after December 15, 2008. The Company will apply this guidance for future acquisitions.

In November 2008, the FASB issued guidance that clarifies the accounting for defensive intangible assets acquired in a business combination or an asset acquisition subsequent to their acquisition except for intangible assets that are used in research and development activities. A defensive intangible asset is defined as a separately identifiable intangible asset which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. This guidance requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting and assign a useful life in accordance with the guidance on the determination of useful life of intangible assets. Defensive intangible assets must be recognized at fair value in accordance with the revised guidance on business combinations. This guidance is effective for intangible assets acquired on or after fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset determined in accordance with the guidance on intangible assets and the period of expected cash flows used to measure the fair value of the asset determined in accordance with the amended guidance for business combinations and other authoritative guidance. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

2.	Recently Issued Accounting Standards (continued)

In March 2008, the FASB amended the guidance on disclosure requirements related to derivative instruments and hedging activities. The new guidance requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. Pursuant to the new guidance, enhanced disclosures are required about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements (see Note 12).

In December 2007, the FASB revised the authoritative guidance for business combinations. The new guidance expands the definition of a business combination and requires the acquisition method of accounting to be used for all business combinations and an acquirer to be identified for each business combination. Pursuant to the new guidance, all assets, liabilities, contingent considerations and contingencies of an acquired business are required to be recorded at fair value at the acquisition date. In addition, the guidance establishes requirements in the recognition of acquisition cost, restructuring costs and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties. This guidance is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will apply this guidance for future acquisitions.

In December 2007, the FASB issued guidance related to collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The guidance also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008, and shall be retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB amended the guidance on consolidation to establish new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the new guidance requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. The guidance clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, the guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. The guidance also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, because the Company has wholly-owned subsidiaries.

In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and is effective for fair-value measurements already required or permitted by other guidance for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued guidance, that deferred the effective date of the guidance for fair value measurement for one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued guidance which clarifies the application of the guidance on fair value measurements in determining the fair value of a financial asset when the market for that asset is not active. This guidance was effective upon issuance, including prior periods for which financial statements had not been issued. On October 1, 2008, the Company adopted the guidance on fair value measurements for financial assets and liabilities. The adoption of the guidance on fair value measurements for financial assets and liabilities carried at fair value did not have a material impact on the Company’s consolidated financial statements (see Note 13). On October 1, 2009, the Company adopted the guidance on fair value measurements for non-financial assets and liabilities. The adoption of the guidance on fair value measurements for non-financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

3.	Inventories

	December 31, 2009		September 30, 2009
	$		$
Raw material and packaging material		10,223		8,416
Work in progress		922		886
Finished goods, net of reserve for obsolescence of $3,610 ($4,159 on September 30, 2009)		38,232		35,404
		49,377		44,706

4.	Property, Plant and Equipment

			December 31, 2009
	Cost		Accumulated depreciation		Net
	$		$		$
Land		2,266		-		2,266
Buildings		22,807		3,326		19,481
Furniture and equipment		7,986		2,598		5,388
Computer equipment		16,095		5,875		10,220
Leasehold and building improvements		1,232		117		1,115
		50,386		11,916		38,470

			September 30, 2009
	Cost		Accumulated depreciation		Net
	$		$		$
Land		2,276		-		2,276
Buildings		22,739		2,931		19,808
Furniture and equipment		8,321		2,598		5,723
Computer equipment		15,218		4,805		10,413
Leasehold and building improvements		1,181		57		1,124
		49,735		10,391		39,344

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

5.	Intangible Assets

			December 31, 2009
	Cost		Accumulated amortization		Net
	$		$		$

Trademarks, trademark licenses and manufacturing rights with a finite life		489,728		84,562		405,166

			September 30, 2009
	Cost		Accumulated amortization		Net
	$		$		$

Trademarks, trademark licenses and manufacturing rights with a finite life		491,411		70,121		421,290

6.	Segmented Information

The Company operates in a single field of activity, the pharmaceutical industry.

The Company operates in the following geographic areas:

	For the three-month period ended December 31, 2009		For the three-month period ended December 31, 2008
	$		$
Revenue
United States
Domestic sales		83,776		78,096
Foreign sales		1,378		1,069
Canada
Domestic sales		8,867		8,773
Foreign sales		-		47
European Union
Domestic sales		14,024		13,584
Foreign sales		1,840		2,355
Other		247		184
		110,132		104,108

Revenue is attributed to geographic areas based on the country of origin of the sales.

	December 31, 2009		September 30, 2009
	$		$
Property, plant, equipment and intangible assets
Canada		324,532		333,001
United States		39,572		44,448
European Union		79,532		83,185
		443,636		460,634

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

Segmented Information (continued)

	December 31, 2009		September 30, 2009
	$		$
Goodwill
Canada		61,887		61,887
United States		91,400		91,400
European Union		12,281		12,536
		165,568		165,823

7. Long-term Debt

	December 31, 2009		September 30, 2009
	$		$
Senior notes secured by substantially all of the present and future assets of the Company, bearing interest at 9.25% and maturing in March 2015		225,865		225,764
Term loans of $138,823,000 at December 31, 2009, ($159,688,000 at September 30, 2009), $88,823,000 ($109,688,000 at September 30, 2009) bearing interest at the one-month British Banker Association LIBOR (0.23% as at December 31, 2009, and 0.25% as at September 30, 2009) and $50,000,000 bearing interest at the three-month British Banker Association LIBOR (0.25% as at December 31, 2009, and 0.28% as at September 30, 2009), plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in February 2014, subject to interest rate swap agreements as further disclosed in Note 12		134,244		154,779
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016		232,837		232,751
		592,946		613,294
Installments due within one year		-		30,708
		592,946		582,586

On February 25, 2008, the Company obtained various types of financing in connection with the acquisition of the common shares of Axcan Pharma Inc. The Company issued $228,000,000 aggregate principal amount of its 9.25% Senior Secured Notes due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a 10% yield to March 1, 2015. The Senior Secured Notes rank pari passu with the Credit Facility.

The Company may redeem some or all of the Senior Secured Notes prior to March 1, 2011 at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2011, the Company may redeem some or all of the Senior Secured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Secured Notes to be redeemed) set forth below:

	Senior Secured Notes
	%
2011		106.938
2012		104.625
2013		102.313
2014 and thereafter		100.000

Prior to March 1, 2011, the Company may also redeem up to 35% of the aggregate principal amount of the Senior Secured Notes using the proceeds of one or more equity offerings at a redemption price equal to 109.250% of the aggregate principal amount of the Senior Secured Notes plus accrued and unpaid interest. If there is a change of control as specified in the indenture governing the Senior Secured Notes, the Company must offer to repurchase the Senior Secured Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

7. Long-term Debt (continued)

The Company also obtained a Credit Facility for a total amount of $290,000,000 composed of available term loans totaling $175,000,000 and of a revolving credit facility of $115,000,000 (“Credit Facility”). The Credit Facility bears interest at a variable rate available composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014, with payments on the term loans beginning in fiscal year 2008. As at December 31, 2009, $175,000,000 of term loans had been issued and no amounts had been drawn against the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of 8.75% before the effect of the interest rate swaps as disclosed in Note 12. The Credit Facility requires the Company to meet certain financial covenants, which were met as at December 31, 2009. The credit agreement governing the Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit Facility, (2) commencing with the fiscal year ended September 30, 2009, 50% (which percentage will be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Credit Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestments rights and certain other exceptions. Pursuant to the annual excess cash flow requirements for the fiscal year 2009 defined in the credit agreement, the Company was required to prepay $17,583,000 of outstanding term loans in the first quarter of fiscal year 2010. As allowed by the credit agreement, the prepayment has been applied to the remaining scheduled installments of principal in direct order of maturity.

On February 25, 2008, as part of the acquisition financing, the Company also obtained $235,000,000 in financing under a senior unsecured bridge facility (the “Bridge Financing”) maturing on February 25, 2009. On May 6, 2008, the Bridge Financing was refinanced on a long-term basis, by repaying the bridge facility with the proceeds from the sale by the Company of $235,000,000 aggregate principal amount of its 12.75% senior unsecured notes due March 1, 2016 (the "Senior Unsecured Notes"). The Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior Unsecured Notes are subordinated to the Credit Facility and Senior Secured Notes.

The Company may redeem some or all of the Senior Unsecured Notes prior to March 1, 2012 at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2012, the Company may redeem some or all of the Senior Unsecured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Unsecured Notes to be redeemed) set forth below:

	Senior Unsecured Notes
	%
2012		106.375
2013		103.188
2014 and thereafter		100.000

Prior to March 1, 2011, the Company may also redeem up to 35% of the aggregate principal amount of the Senior Unsecured Notes using the proceeds of one or more equity offerings at a redemption price equal to 112.750% of the aggregate principal amount of the Senior Unsecured Notes plus accrued and unpaid interest. If there is a change of control as specified in the indenture governing the Senior Unsecured Notes, the Company must offer to repurchase the Senior Unsecured Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.

Payments required in each of the next five twelve-month periods to meet the retirement provisions of the long-term debt are as follows:

			$

2010			-
2011			11,948
2012			20,781
2013			80,938
2014			25,156
Thereafter			463,000
			601,823
Unamortized original issuance discount			8,877
			592,946

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

8. Financial Information Included in the Consolidated Operations

a)	Financial expenses

	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008
	$			$

Interest on long-term debt (including amortization of original issuance discount of $516 for 2009 and 2008)		14,811			16,576
Interest and bank charges		102			438
Interest rate swaps		(96	)		897
Financing fees		135			172
Amortization of deferred debt issue expenses		1,245			1,242
		16,197			19,325

b)	Other information

	For the three-month period ended December 31, 2009		For the three-month period ended December 31, 2008
	$		$
Rental expenses		904		626
Shipping and handling expenses		1,616		2,541
Advertizing expenses		3,897		3,632
Depreciation of property, plant and equipment		2,004		1,367
Amortization of intangible assets		14,689		13,106
Stock-based compensation expense		1,476		1,330
Transaction and integration costs		416		1,096

c)	Employee benefit plan

A subsidiary of the Company has a defined contribution plan (the “Plan”) for its U.S. employees. Participation is available to substantially all U.S. employees. Employees may contribute up to 15% of their gross pay or up to limits set by the U.S. Internal Revenue Service. The Company may make matching contributions of a discretionary percentage. During the three-month period ended December 31, 2009, the Company charged to operations contributions to the plan totaling $216,401 ($96,457 for the three-month period ended December 31, 2008).

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

9. Income Taxes

Effective October 1, 2007, the Company adopted the provisions of the guidance issued by the FASB related to accounting for uncertainty in income taxes. The guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of the provisions of this guidance did not have a material impact on the Company’s consolidated financial position and results of operations and a cumulative effect adjustment to the opening balance of retained earnings was not necessary. As at December 31, 2009, the Company had unrecognized tax benefits of $10,896,000 ($10,409,000 as at September 30, 2009) of which $9,515,000 would be treated as a reduction of Goodwill and $1,381,000 would favorably impact the Company’s effective tax rate if subsequently recognized.

The following table presents a summary of the changes to unrecognized tax benefits:

	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008
	$			$
Balance, beginning of period		10,409			10,446
Additions based on tax positions related to the current year		7			8
Additions for tax positions of prior years		506			394
Reductions for tax positions of prior years		(26	)		(1,285	)
Balance, end of period		10,896			9,563

The Company has historically recognized interest relating to income tax matters as a component of financial expenses and penalties related to income tax matters as a component of income tax expense. As at September 30, 2009, the Company had accrued $648,868 for interest relating to income tax matters. As at December 31, 2009, the company had accrued $768,507 for interest relating to income tax matters. There were no amounts recorded for penalties as at December 31, 2009.

The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various states, local and foreign jurisdictions including Canada and France. In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is subject to federal and state income tax examination by U.S. tax authorities for fiscal years 2005 through 2009. The Company is subject to Canadian and provincial income tax examination for fiscal years 2005 through 2009. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant. The Company is currently being audited by Canada Revenue Agency for fiscal year 2005 to fiscal year 2008.

The Company and its U.S. subsidiaries file as members of a U.S. Federal consolidated Income tax return, of which Axcan Holdings Inc. is the parent. The consolidated income tax liability is allocated among the members of the group in accordance with a tax allocation agreement. The tax allocation agreement provides that each member of the group is allocated its share of the consolidated tax provision determined generally on a separate income tax return method.

As at December 31, 2009, and September 30, 2009, the Company had a provision of $2,097,000 for income taxes on the undistributed earnings of the Company’s foreign subsidiaries that the Company does not intend to indefinitely reinvest.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

10. Stock Incentive Plans

Management equity incentive plan

In April 2008, the Company’s indirect parent company adopted a Management Equity Incentive Plan (the “MEIP Plan”), pursuant to which the indirect parent company will grant options to selected employees and directors of the Company. The MEIP Plan provides that a maximum of 3,833,307 shares of common stock of the indirect parent company are issuable pursuant to the exercise of options. The per share purchase price cannot be less than the fair value of the share of common stock of the indirect parent company at the grant date and the option expires no later than ten years from the date of grant. Vesting of these stock options is split into 3 categories: 1) time-based options: 50% of option grants generally vest ratably over 5 years and feature a fixed exercise price equal to the fair value of common stock of the indirect parent company on grant date; 2) premium options: 25% of stock option grants with an exercise price initially equal to the fair value of common stock on grant date that will increase by 10% each year and generally vesting ratably over 5 years; and 3) performance-based options: 25% of stock option grants with a fixed exercise price equal to the fair value of common stock on grant date which vest upon the occurrence of a liquidity event (as defined under the terms of the MEIP Plan) based on the achievement of return targets calculated based on the return received by majority shareholders from the liquidity event. While the time-based options and the premium options are expensed over the requisite service period, the performance-based options will not be expensed until the occurrence of the liquidity event.

Special equity grant

In April 2008, the indirect parent company approved the Restricted Stock Unit grant agreement and the penny option grant agreement (collectively “Equity Grant Agreements”) pursuant to which a one-time grant of equity-based awards of either restricted stock units (“RSUs”) or options to purchase shares of common stock of the indirect parent company for a penny (“Penny Options”) was made to certain employees of the Company. A maximum of 1,343,348 shares of common stock of the indirect parent company are issuable with respect to the special grants. As a result of the option to allow the recipients to elect to have an amount withheld that is in excess of the required minimum withholding under the current tax law, the special grants will be accounted for as liability awards. As a liability award, the fair value on which the expense is based is remeasured each period based on the estimated fair value and the final expense will be based on the fair value of the shares on the date the award is settled. The RSUs and Penny Options expire no later than four years and ten years from the date of grant. One third of the granted RSUs and Penny Options vested immediately on date of grant; one third vested on August 25, 2009, and the remainder shall vest on August 25, 2010.

The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the indirect parent company. The RSUs and Penny Options entitle the holders to receive common shares of the indirect parent company at the end of a vesting period. The total number of RSUs and Penny Options granted were 1,343,348 with an initial fair value of $10 each, equal to the share price at the date of grant. As at December 31, 2009, there were 1,228,343 outstanding RSUs and Penny Options (1,275,220 as at September 30, 2009) of which 820,342 (851,490 as at September 30, 2009) were vested.

Annual grant

In June 2008, the Company’s indirect parent company adopted a Long Term Incentive Plan (the “LTIP”), pursuant to which the indirect parent company is expected to grant annual awards to certain employees of the Company (the “participants”). The value of an award is initially based on the participant’s pay grade and base salary and is subsequently adjusted based on the outcome of certain performance conditions relating to the fiscal year. Each award that vests is ultimately settleable, at the option of the participant, in cash or in parent company common stock of equivalent value. The awards vest (i) upon the occurrence of a liquidity event (as defined under the terms of the LTIP) and (ii) in varying percentages based on the level of return realized by majority shareholders as a result of the liquidity event.

The awards granted under this LTIP are classified as liabilities in accordance with the FSAB issued guidance on distinguishing liabilities from equity, since the award is for a fixed amount of value that can be settled, at the option of the participant, in (i) cash, or (ii) a variable number of parent company common stock of equivalent value.

The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event was probable as of December 31, 2009, the value of the awards to be expensed by the Company would range between $5,625,000 and $6,750,000 depending on the level of return expected to be realized by the majority shareholders.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

11. Financial Instruments

Interest rate risk

The Company is exposed to interest rate risk on its variable interest bearing term loans. The term loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 12, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.

Currencies risk

The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company does not use derivative instruments to reduce its exposure to foreign currencies risk. As at December 31, 2009, the financial assets totaling $203,708,000 ($183,252,000 as at September 30, 2009) include cash and cash equivalents and accounts receivable for CAN$4,817,000, 18,539,000 Euros and 1,500,000 Swiss francs respectively (CAN$3,525,000, 19,014,000 Euros and 2,000,000 Swiss francs as at September 30, 2009). As at December 31, 2009, the financial liabilities totaling $700,372,000 ($700,978,000 as at September 30, 2009) include accounts payable and accrued liabilities and long-term debt of CAN$7,242,000 and 8,136,000 Euros respectively (CAN$11,432,000 and 8,044,000 Euros as at September 30, 2009).

Credit risk

As at December 31, 2009, the Company had $98,533,000 ($98,630,000 as at September 30, 2009) of cash with one financial institution.

Fair value of the financial instruments on the balance sheet

The estimated fair value of the financial instruments is as follows:

	December 31, 2009				September 30, 2009
	Fair value		Carrying amount		Fair value		Carrying amount
	$		$		$		$
Assets
Cash and cash equivalents		132,391		132,391		126,435		126,435
Accounts receivable from the parent company		306		306		306		306
Accounts receivable, net		71,011		71,011		56,511		56,511
Liabilities
Accounts payable and accrued liabilities		107,426		107,426		87,684		87,684
Long-term debt		636,169		592,946		649,689		613,294

The following methods and assumptions were used to calculate the estimated fair value of the financial instruments on the balance sheet.

a)	Financial instruments for which fair value is deemed equivalent to carrying amount

The estimated fair value of certain financial instruments shown on the consolidated balance sheet is equivalent to their carrying amount. These financial instruments include cash and cash equivalents, accounts receivable, net, accounts receivable from the parent company, accounts payable and accrued liabilities.

b)	Long-term debt

The fair value of the long-term debt bearing interest at fixed rates has been established according to market prices obtained from a large U.S. financial institution. The fair value of the term loan is estimated to be equal to book value mainly due to the variable nature of its interest rate.

12.	Derivates and Hedging Activities

Risk management objective of using derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources, conditions and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known

and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

12.	Derivates and Hedging Activities (continued)

Cash flow hedges of interest rate risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three-month period ended December 31, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Effective March 3, 2008, the Company entered into two pay-fixed, receive-floating interest rate swap agreements, effectively converting $115,000,000 of variable-rate debt under its secured senior credit facilities to fixed-rate debt. Through the first two quarters of 2008, the Company’s two interest rate swaps were designated as effective hedges of cash flows. For the quarter ended September 30, 2008, due to the increased volatility in short-term interest rates and a realignment of the Company’s LIBOR rate election on its debt capital repayment schedule, hedge accounting was discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge accounting. On December 1, 2008, the Company redesignated its $50,000,000 notional interest rate swap that matures in February 2010 anew as a cash flow hedge using an improved method of assessing the effectiveness of the hedging relationship. The Company’s $65,000,000 notional interest rate swap matured in February 2009. Effective March 2009, the Company entered into a pay-fixed, receive-floating interest rate swap of a notional amount of $52,000,000 amortizing to $13,000,000 through February 2010. As of December 31, 2009, the Company had two interest rate swaps with a combined notional amount of $63,000,000 that were designated as cash flow hedges of interest rate risk. The weighted average fixed interest rate on these swaps was 1.91%.

Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the twelve-month period ending December 31, 2010, the Company estimates that an additional $109,000 of amounts presently classified in Accumulated Other Comprehensive Income will be reclassified as an increase to interest expense.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of December 31, 2009, and September 30, 2009.

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Operations as at December 31, 2009.

Tabular disclosure of fair values of derivative instruments

		Liability Derivatives
		December 31, 2009		September 30, 2009
	Balance sheet location	Fair value		Fair value
Derivatives designated as hedging instruments				$
Interest rate swaps	Other long-term liabilities		214		610
Total derivatives designated as hedging instruments			214		610

Tabular disclosure of the effect of derivative instruments for the three-month period ended December 31, 2009

	Location in the Consolidated Financial Statements	For the three-month period ended December 31, 2009
Interest rate swaps in cash flow hedging relationships		$
Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $165	OCI		(306	)
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)	Financial expenses		(351	)

Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Financial expenses		447
Interest rate swaps not designated as hedging instruments
Loss recognized in income on derivatives	Financial expenses		-

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)

(unaudited)

13.	Fair Value Measurements

Effective October 1, 2008, the Company adopted the authoritative guidance for fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Inputs that are unobservable and significant to the overall fair value measurement.

If the inputs used to measure the financial assets and liabilities fall within the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities measured at fair value on a recurring basis as at December 31, 2009, and September 30, 2009 are summarized below:

	Quoted prices in active markets for identical assets and liabilities (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at December 31, 2009
	$		$		$		$
Liabilities
Derivative financial instruments		-		214		-		214

	Quoted prices in active markets for identical assets and liabilities (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at September 30, 2009
	$		$		$		$
Liabilities
Derivative financial instruments		-		610		-		610

Derivative financial instruments consist of interest rate swap agreements as more fully described in Note 12 and are measured at fair value based on observable market interest rate curves as of the measurement date.

14.	Related Party Transactions

As at December 31, 2009, and September 30, 2009, the Company had a note receivable from its parent company amounting to $133,154,000. During the three-month period ended December 31, 2009, the Company earned interest income on the note amounting to $1,974,000 net of taxes amounting to $1,063,000 ($1,975,000 net of taxes amounting to $1,063,000 during the three-month period ended December 31, 2008) The accumulated related interest on the note receivable from the parent company amounting to $18,115,000 as at December 31, 2009, ($15,078,000 as at September 30, 2009) has been recorded in the Shareholder’s equity section of the consolidated balance sheet. As at December 31, 2009, the Company also recorded an account receivable from the parent company amounting to $306,000 ($306,000 as at September 30, 2009).

During the three-month period ended December 31, 2009, the Company recorded management fees from a controlling shareholding company amounting to $855,000 ($163,000 during the three-month period ended December 31, 2008). As at December 31, 2009, the Company accrued fees payable to a shareholding company amounting to $802,000 ($436,000 as at September 30, 2009).

During the three-month period ended December 31, 2009, the Company paid a dividend to its parent company amounting to $128,000.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)

(unaudited)

15.	Condensed Consolidating Financial Information

As of December 31, 2009, the Company had outstanding $228,000,000 aggregate principal amount of the Senior Secured Notes. The Secured Notes are fully and unconditionally guaranteed, jointly and severally by certain of the Company’s wholly-owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors and non-guarantors as at December 31, 2009, and September 30, 2009, the condensed consolidating statements of operations for the three-month period ended December 31, 2009, and three-month period ended December 31, 2008, and the condensed consolidating statement of cash flows for the three-month period ended December 31, 2009, and the three-month period ended December 31, 2008.

Condensed Consolidating Balance Sheet as at December 31, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		62			101,497			30,282			-			132,391
Accounts receivable, net		25			55,878			15,769			-			71,672
Accounts receivable from the parent company		42			264			-			-			306
Short-term intercompany receivables		18,415			1,135			21			(19,571	)		-
Income taxes receivable		(1,966	)		3,452			-			-			1,486
Inventories, net		-			41,447			7,930			-			49,377
Prepaid expenses and deposits		-			2,518			604			-			3,122
Deferred income taxes		-			14,202			1,060			-			15,262
Total current assets		16,578			220,393			56,216			(19,571	)		273,616
Property, plant and equipment, net		-			29,619			8,851			-			38,470
Intangible assets		-			334,485			70,681			-			405,166
Investment in subsidiaries		(216,217	)		799,349			78,175			(661,307	)		-
Intercompany advances		868,274			105,914			664,349			(1,638,537	)		-
Goodwill		-			153,287			12,281			-			165,568
Deferred debt issue expense, net		22,282			1,884			-			-			24,166
Deferred income taxes		3,093			5,321			3,224			-			11,638
Total assets		694,010			1,650,252			893,777			(2,319,415	)		918,624
Liabilities
Current liabilities
Accounts payable and accrued liabilities		18,064			77,767			11,595			-			107,426
Income taxes payable		1,480			(584	)		1,319			-			2,215
Short-term intercompany payables		-			18,512			1,059			(19,571	)		-
Deferred income taxes		-			1,170			(3	)		-			1,167
Total current liabilities		19,544			96,865			13,970			(19,571	)		110,808
Long-term debt		515,231			77,715			-			-			592,946
Intercompany advances		10,061			1,545,089			83,387			(1,638,537	)		-
Other long-term liabilities		1,129			8,368			-			-			9,497
Deferred income taxes		(22,349	)		60,257			(2,929	)		-			34,979
Total liabilities		523,616			1,788,294			94,428			(1,658,108	)		748,230
Shareholders’ Equity
Capital stock
Common shares		1			21,020			744,331			(765,351	)		1
Preferred shares		-			78,175			-			(78,175	)		-
Retained earnings (deficit)		(288,340	)		(225,412	)		56,285			169,127			(288,340	)
9.05% Note receivable from the parent company		(133,154	)		-			-			-			(133,154	)
Additional paid-in capital		619,195			15,483			687			(16,170	)		619,195
Accumulated other comprehensive loss		(27,308	)		(27,308	)		(1,954	)		29,262			(27,308	)
Total shareholders’ equity		170,394			(138,042	)		799,349			(661,307	)		170,394
Total liabilities and shareholders’ equity		694,010			1,650,252			893,777			(2,319,415	)		918,624

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)

(unaudited)

15.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Balance Sheet as at September 30, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		702			41,859			83,874			-			126,435
Accounts receivable, net		-			41,151			15,973			-			57,124
Accounts receivable from the parent company		42			264			-			-			306
Short-term intercompany receivables		5,857			5,803			364			(12,024	)		-
Income taxes receivable		-			3,383			8			-			3,391
Inventories, net		-			39,162			5,688			(144	)		44,706
Prepaid expenses and deposits		-			2,289			579			-			2,868
Deferred income taxes		588			14,960			304			-			15,852
Total current assets		7,189			148,871			106,790			(12,168	)		250,682
Property, plant and equipment, net		-			29,846			9,498			-			39,344
Intangible assets, net		-			347,604			73,686			-			421,290
Investments in subsidiaries		(231,940	)		782,206			-			(550,266	)		-
Intercompany advances		898,272			128,793			669,195			(1,696,260	)		-
Goodwill		-			153,287			12,536			-			165,823
Deferred debt issue expense, net		23,371			2,040			-			-			25,411
Deferred income taxes		3,962			4,653			3,437			-			12,052
Total assets		700,854			1,597,300			875,142			(2,258,694	)		914,602
Liabilities
Current liabilities
Accounts payable and accrued liabilities		5,091			71,305			11,432			(144	)		87,684
Income taxes payable		3,425			(940	)		8			-			2,493
Installments on long-term debt		12,939			17,769			-			-			30,708
Short-term intercompany payables		4,795			6,206			1,023			(12,024	)		-
Deferred income taxes		588			257			(708	)		-			137
Total current liabilities		26,838			94,597			11,755			(12,168	)		121,022
Long-term debt		510,755			71,831			-			-			582,586
Intercompany advances		19,224			1,593,115			83,921			(1,696,260	)		-
Other long-term liabilities		262			9,186			-			-			9,448
Deferred income taxes		(19,989	)		60,511			(2,740	)		-			37,782
Total liabilities		537,090			1,829,240			92,936			(1,708,428	)		750,838
Shareholders’ Equity
Capital stock
Common shares		1			21,034			745,398			(766,432	)		1
Retained earnings (deficit)		(297,658	)		(242,700	)		37,332			205,368			(297,658	)
9.05% Note receivable from the parent company		(133,154	)		-			-			-			(133,154	)
Additional paid-in capital		619,053			14,204			611			(14,815	)		619,053
Accumulated other comprehensive loss		(24,478	)		(24,478	)		(1,135	)		25,613			(24,478	)
Total shareholders’ equity		163,764			(231,940	)		782,206			(550,266	)		163,764
Total liabilities and shareholders’ equity		700,854			1,597,300			875,142			(2,258,694	)		914,602

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)

(unaudited)

15.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Operations for the three-month period ended December 31, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$

Net product sales		-			95,023			16,106			(997	)		110,132
Cost of goods sold		-			22,549			5,076			(997	)		26,628
Selling and administrative expenses		343			24,401			7,495			-			32,239
Management fees		855			-			-			-			855
Research and development expenses		-			7,707			719			-			8,426
Depreciation and amortization		-			14,611			2,082			-			16,693
Total operating expenses		1,198			69,268			15,372			(997	)		84,841
Operating income (loss)		(1,198	)		25,755			734			-			25,291
Financial expenses		14,957			28,661			1,960			(29,381	)		16,197
Interest expense (income)		(12,469	)		(1,995	)		(15,065	)		29,381			(148	)
Loss (gain) on foreign currencies		6,717			(4,664	)		(139	)		(1,929	)		(15	)
Total other expenses (income)		9,205			22,002			(13,244	)		(1,929	)		16,034
Income (loss) before income taxes		(10,403	)		3,753			13,978			1,929			9,257
Income taxes expense (benefit)		(3,641	)		3,841			(389	)		-			(189	)
Equity in earnings in subsidiaries		16,208			16,296			-			(32,504	)		-
Net income		9,446			16,208			14,367			(30,575	)		9,446

Condensed Consolidating Operations for the three-month period ended December 31, 2008

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Revenue		-			87,984			17,450			(1,326	)		104,108
Cost of goods sold		-			17,929			8,599			(1,074	)		25,454
Selling and administrative expenses		1,299			23,238			7,468			-			32,005
Management fees		163			-			-			-			163
Research and development expenses		-			6,868			182			-			7,050
Depreciation and amortization		-			12,943			1,530			-			14,473
		1,462			60,978			17,779			(1,074	)		79,145
Operating income (loss)		(1,462	)		27,006			(329	)		(252	)		24,963
Financial expenses		16,136			32,770			1,682			(31,263	)		19,325
Interest income		(16,810	)		(155	)		(14,521	)		31,263			(223	)
Loss on foreign currencies		-			29			101			-			130
		(674	)		32,644			(12,738	)		-			19,232
Income (loss) before income taxes		(788	)		(5,638	)		12,409			(252	)		5,731
Income taxes (benefit)		(29,122	)		31,806			(2,086	)		-			598
Equity in earnings (loss) in subsidiaries		(23,201	)		14,243			-			8,958			-
Net income (loss)		5,133			(23,201	)		14,495			8,706			5,133

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)

(unaudited)

15.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Cash Flows for the three-month period ended December 31, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(12,285	)		19,713			21,086			-			28,514
Cash flows from investing activities
Acquisition of property, plant and equipment		-			(1,100	)		(29	)		-			(1,129	)
Intercompany advances		29,998			22,879			(5,328	)		(47,549	)		-
Investments in subsidiaries		-			-			(68,000	)		68,000			-
Net cash provided by (used in) investing activities		29,998			21,779			(73,357	)		20,451			(1,129	)
Cash flows from financing activities
Repayment of long-term debt		(8,791	)		(12,074	)		-			-			(20,865	)
Stock-based compensation plans redemption		(271	)		-			-			-			(271	)
Intercompany advances		(9,163	)		(37,852	)		(534	)		47,549			-
Dividends paid		(128	)		-			-			-			(128	)
Issue of shares		-			68,000			-			(68,000	)		-
Net cash provided by (used in) financing activities		(18,353	)		18,074			(534	)		(20,451	)		(21,264	)
Foreign exchange gain (loss) on cash held in foreign currencies		-			72			(237	)		-			(165	)
Net increase (decrease) in cash and cash equivalents		(640	)		59,638			(53,042	)		-			5,956
Cash and cash equivalents, beginning of period		702			41,859			83,874			-			126,435
Cash and cash equivalents, end of period		62			101,497			30,832			-			132,391

Condensed Consolidating Cash Flows for the three-month period ended December 31, 2008

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(8,814	)		155,816			(108,021	)		-			38,981
Cash flows from investing activities
Acquisition of property, plant and equipment		-			(1,097	)		(201	)		-			(1,298	)
Acquisition of intangible assets		-			-			(10	)		-			(10	)
Intercompany advances		2,058			(46,050	)		16,784			27,208			-
Net cash provided by (used in) investing activities		2,058			(47,147	)		16,573			27,208			(1,308	)
Cash flows from financing activities
Repayment of long-term debt		(1,111	)		(1,077	)		-			-			(2,188	)
Intercompany advances		8,379			(56,800	)		75,629			(27,208	)		-
Net cash provided by (used in) financing activities		7,268			(57,877	)		75,629			(27,208	)		(2,188	)
Foreign exchange loss on cash held in foreign currencies		-			(271	)		(838	)		-			(1,109	)
Net increase (decrease) in cash and cash equivalents		512			50,521			(16,657	)		-			34,376
Cash and cash equivalents, beginning of period		21			26,181			29,903			-			56,105
Cash and cash equivalents, end of period		533			76,702			13,246			-			90,481

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)

(unaudited)

16. Subsequent Event

In June 2007, the Company initiated a lawsuit under the U.S. Lanham Act against a number of defendants alleging they falsely advertised their products to be similar or equivalent to ULTRASE. On January 5, 2010, a settlement arrangement was entered into with certain of these defendants pursuant to which an amount of $5,750,000 was paid to the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with the Consolidated Financial Statements and the related notes that appear in Part I, Item 1 of this Quarterly Report. The results of operations for the three-month periods ended December 31, 2009, and December 31, 2008, reflect the results of operations for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

Unless the context otherwise requires, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the terms "Axcan", "Company", "we", "us" and "our" refer to Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in Part 2, Item 1A of this Quaterly Report and “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009,. Actual results may differ materially from those contained in any forward-looking statements.

Overview

Our Business

We are a specialty pharmaceutical company focused on marketing and selling pharmaceutical products used in the treatment of a variety of gastrointestinal, or GI, diseases and disorders. Our mission is to improve the quality of care and health of patients suffering from gastrointestinal diseases and disorders by providing effective therapies for patients and caregivers.

Our main product lines include ULTRASE, PANZYTRAT and VIOKASE, which are pancreatic enzyme products for the treatment of exocrine pancreatic insufficiency; URSO / URSO 250, URSO FORTE / URSO DS, and DELURSAN, which are ursodiol products for the treatment of certain cholestatic liver diseases; SALOFALK and CANASA, which are mesalamine-based products for the treatment of certain inflammatory bowel diseases; CARAFATE and SULCRATE, which are sucralfate products for the treatment of gastric and duodenal ulcers; and PYLERA, a product for the eradication of Helicobacter pylori in patients with duodenal ulcer disease.

In addition to our marketing activities, we carry out research and development activities on products at various stages of development. These activities are carried out primarily with respect to products we currently market in connection with lifecycle management initiatives, as well as product candidates acquired or licensed from third parties. By combining our marketing capabilities with our research and development experience, we distinguish ourselves from other specialty pharmaceutical companies that focus solely on product distribution and we offer licensors the prospect of rapidly expanding the potential market for their products on a multinational basis. As a result, we are presented with opportunities to acquire or in-license products that have been advanced to the later stages of development by other companies. Our focus on products in late-stage development enables us to reduce risks and expenses typically associated with new drug development.

We intend to enhance our position as the leading specialty pharmaceutical company concentrating in the field of gastroenterology by pursuing the following strategic initiatives: 1) growing sales of existing products; 2) launching new products; 3) selectively acquiring or in-licensing complementary products; 4) pursuing growth opportunities through development pipeline; and 5) expanding internationally.

Business Environment

While the ultimate end users of our products are the individual patients to whom our products are prescribed by physicians, our direct customers include a number of large pharmaceutical wholesale distributors and large pharmacy chains. The pharmaceutical wholesale distributors that comprise a significant portion of our customer base sell our products primarily to retail pharmacies, which ultimately dispense our products to the end consumers.

Increasingly, in North America, third-party payors, such as private insurance companies and drug plan benefit managers, aim to rationalize the use of pharmaceutical products and medical treatments, in order to ensure that prescribed products are necessary for the patients’ disorders. Moreover, large drug store chains now account for an increasing portion of retail sales of prescription medicines. The pharmacists and managers of such retail outlets are under pressure to reduce the number of items in inventory in order to reduce costs.

We use a “pull-through” marketing approach that is typical of pharmaceutical companies. Under this approach, our sales representatives actively promote our portfolio by demonstrating the features and benefits of our products to physicians and, in particular, gastroenterologists who may prescribe our products for their patients. The patients, in turn, take the prescriptions to pharmacies to be filled. The pharmacies then place orders, directly or through buying groups, with the wholesalers, to whom we sell our products.

Our expenses are comprised primarily of selling and administrative expenses (including marketing expenses), cost of goods sold (including royalty payments to those companies from which we license some of our commercialized products), research and development expenses, financial expenses as well as depreciation and amortization.

Since 2005, some U.S. wholesalers have changed their business model from one depending on drug price inflation to a fee-for-service arrangement, whereby manufacturers pay wholesalers a fee for inventory management and other services. These fees typically are a percentage of the wholesaler’s purchases from the manufacturer or a fixed charge per item or per unit. The fee-for-service approach results in wholesalers’ compensation being more stable and volume-based as opposed to price-increase based. As a result of the move to a fee-for-service business model, many wholesalers are no longer investing in inventory ahead of anticipated price increases and have reduced their inventories from their historical levels. As a consequence of the new model, manufacturers now realize the benefit of price increases more rapidly in return for paying wholesalers for the services they provide, on a fee-for-service basis. Fees resulting from distribution services agreements, or DSAs, are deducted from gross sales. We have DSAs in place with our three largest U.S. wholesalers since the first quarter of fiscal year 2009.

FINANCIAL OVERVIEW FOR THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2009

This discussion and analysis is based on our audited annual consolidated financial statements and the related notes thereto reported under U.S. generally accepted accounting principles (“GAAP”). For a description of our products, see the section entitled “Business Products” in Item 1, Part I in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, filed with the Securities and Exchange Commission.

For the three-month period ended December 31, 2009, net product sales was $110.1 million ($104.1 million in three-month period ended December 31, 2008), operating income was $25.3 million ($24.9 million in three-month period ended December 31, 2008) and net income was $9.4 million ($5.1 million in three-month period ended December 31, 2008). Net product sales in the United States were $85.2 million (77.4 % of net product sales) for the three-month period ended December 31, 2009, compared to $79.2 million (76.1% of net product sales) for the corresponding period of the preceding fiscal year. In Canada, net product sales were $8.9 million (8.1% of net product sales) for the three-month period ended December 31, 2009, compared to $8.8 million (8.5% of net product sales) for the corresponding period of the preceding fiscal year. In the European Union, net product sales were $15.8 million (14.4% of net product sales) for the three-month period ended December 31, 2009, compared to $15.9 million (15.3% of net product sales) for the corresponding period of the preceding fiscal year.

Financial highlights

(in millions of U.S. dollars)	December 31, 2009		September 30, 2009
	$		$
Total assets		918.6		914.6
Long-term debt (a)		592.9		613.3
Shareholders’ equity		170.4		163.8

(a)	Including the current portion

(in millions of U.S. dollars)	For the three-month period ended December 31, 2009		For the three-month period ended December 31, 2008
	$		$
Net product sales		110.1		104.1
EBITDA (1)		42.0		39.3
Adjusted EBITDA (1)		46.2		41.9
Net income		9.4		5.1

(1) A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA to Adjusted EBITDA (a non-U.S. GAAP measure) for the three-month periods ended December 31, 2009, and 2008 is as follows:

(in millions of U.S. dollars)	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008
	$			$
Net income		9.4			5.1
Financial expenses		16.2			19.3
Interest income		(0.1	)		(0.2	)
Income taxes expense (benefit)		(0.2	)		0.6
Depreciation and amortization		16.7			14.5
EBITDA d)		42.0			39.3
Transaction, integration, refinancing costs and nonrecurring payments to third parties a)		1.8			1.1
Management fees b)		0.9			0.2
Stock-based compensation expense c)		1.5			1.3
Adjusted EBITDA d)		46.2			41.9

a)	Represents integration and refinancing costs related to non recurring transactions, payments to third parties in respect of research and development milestones and other progress payments as defined within our credit agreement.

b)	Represents management fees and other charges associated with the Management Services Agreement with TPG.

c)	Represents stock-based employee compensation expense under the provisions of FASB guidance.

EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are presented in this report because our management considers them important supplemental measures of our performance and believes that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income before financial expenses, interest income, income taxes and depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. We believe that EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items and other adjustments set forth below. Adjusted EBITDA is calculated in the same manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indentures governing our notes and credit facility further described in the section “Liquidity and Capital Resources—Long-term Debt and New Senior Secured Credit Facility”. We believe that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in our indentures and credit facility. Adjusted EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and they should not be considered in isolation, or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures, or contractual commitments;

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;

EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

Adjusted EBITDA reflects additional adjustments as provided in the indentures governing our secured and unsecured notes and new senior secured credit facilities; and

Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in our business. Our management compensates for these limitations by relying primarily on the U.S. GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.

Overview of results of operations

(in millions of U.S. dollars)	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008			Change
	$			$			$			%
Net product sales		110.1			104.1			6.0			5.8
Cost of goods sold (a)		26.6			25.5			1.1			4.3
Selling and administration expenses(a)		32.2			32.0			0.2			0.6
Management fees		0.9			0.2			0.7			350.0
Research and development expenses (a)		8.4			7.0			1.4			20.0
Depreciation and amortization		16.7			14.5			2.2			15.2
		84.8			79.2			5.6			7.1
Operating income		25.3			24.9			0.4			1.6
Financial expenses		16.2			19.3			(3.1	)		(16.1	)
Interest income		(0.1	)		(0.2	)		0.1			50.0
Loss on foreign currency		-			0.1			(0.1	)		(100.0	)
		16.1			19.2			(3.1	)		(16.1	)
Income before income taxes		9.2			5.7			3.5			61.4
Income taxes expenses (benefits)		(0.2	)		0.6			(0.8	)		(133.3	)
Net income		9.4			5.1			4.3			84.3

(a)	Exclusive of depreciation and amortization

Net product sales

For the three-month period ended December 31, 2009, net product sales were $110.1 million compared to $104.1 million for the corresponding period of the preceding year, an increase of 5.8%.

This increase was primarily derived from higher sales in the United States, which amounted to $85.2 million for the three-month period ended December 31, 2009, compared to $79.2 million for the corresponding period of the preceding fiscal year, an increase of 7.6%. The increase in sales in the United States is mainly due to the combined effect of price increases on our products announced during the previous fiscal year, a change in prescription rates for these products compared to the previous year and a slight increase in the wholesaler inventory level. This increase was partially offset by increases in sales deductions as well as the decrease in sale of certain of our URSO branded products resulting from the entry on the U.S. market of a generic versions of URSO 250 and URSO FORTE following their approval by the Office of Generic Drugs on May 13, 2009. Net product sales also included the revenue earned on sales of our authorized generic ursodiol product. On July 2, 2009, Axcan and Prasco Laboratories announced that they had entered into an agreement under which Prasco would market and sell an authorized generic of URSO 250 and URSO FORTE in the U.S. market. At the time, we also announced a price increase for our URSO products in the United States. Despite measures taken to defend our URSO franchise in this market, we expect future sales to continue to decline.

Net product sales in the European Union decreased 0.6%, from $15.9 million for the corresponding period of the preceding fiscal year, to $15.8 million for the three-month period ended December 31, 2009. The decline in sales resulted principally from a decrease in sales of our LACTEOL products as a result of seasonal fluctuations in the infant diarrheal market offset by the positive impact of currency fluctuations compared to the preceding year as the value of the Euro improved against the U.S. dollar by 11.3%.

Net product sales in Canada increased 1.1%, from $8.8 million for the corresponding period of the preceding fiscal year, to $8.9 million for the three-month period ended December 31, 2009. The increase in sales resulted mostly from the positive impact of currency fluctuations compared to the corresponding period of the preceding year as the value of the Canadian dollar improved against the U.S. dollar by 8.7%. This increase was partially offset by a decrease in sales of our SALOFALK products.

Net product sales are stated net of deductions for product returns, chargebacks, contract rebates, DSA fees, discounts and other allowances. The following table summarizes our gross-to-net product sales adjustments for each significant category:

(in millions of U.S. dollars)	For the three-month period ended December 31, 2009		For the three-month period ended December 31, 2008		Change
	$		$		$		%
Gross product sales		145.3		122.4		22.9		18.7
Gross-to-net product sales adjustments
Product returns		1.3		1.1		0.2		18.2
Chargebacks		14.8		5.3		9.5		179.2
Contract rebates		14.6		8.6		6.0		69.8
DSA fees		1.8		0.9		0.9		100.0
Discounts and other allowances		2.7		2.4		0.3		12.5
Total gross-to-net product sales adjustments		35.2		18.3		16.9		92.3
Total net product sales		110.1		104.1		6.0		5.8

Product returns, chargebacks, contract rebates, DSA fees, discounts and other allowances totalled $35.2 million (24.2% of gross product sales) for the three-month period ended December 31, 2009, and $18.3 million (15.0% of gross product sales) for the corresponding period of the preceding fiscal year. The increase in total deductions as a percentage of gross product sales was partly due to an increase of 5.9% in chargebacks and 3.0% in contract rebates. The increase in chargebacks and contract rebates is primarily due to the fact that we have fixed price contracts with certain third-party payors which, as a result of price increases announced during the preceding fiscal year, result in a greater rebate as a percentage of sales being awarded under those contracts. Additionaly, during the three-month period ended December 31, 2009, we recorded an additional reserve of $3.9 million for chargebacks and rebates related liabilities related to our URSO franchise to reflect the estimated impact of updated pricing and contracting activities. Estimated chargebacks and rebates are recorded at the time revenue is recognized and are based on the latest information available at that time, including estimated inventory levels in the distribution channel.

In addition, in May 2009, the Company entered into an agreement with the Department of Defense, or DOD, to remain eligible for inclusion on the DOD’s formulary and pursuant to which the Company agreed to pay rebates under the TRICARE retail pharmacy program. The Company began accounting for these rebates in the third quarter of fiscal year 2009. Under the contracting process it initiated in 2009, the DOD further sought to claim rebates from a large number of pharmaceutical manufacturers, including the Company, on all prescriptions of covered drugs filled under TRICARE for prior periods, starting as and from January 28, 2008. The DOD’s right to claim rebates for these periods prior its rulemaking and contracting initiative was challenged in a lawsuit instituted on behalf of pharmaceutical manufacturers. During the three-month period ended December 31, 2009, an additional provision of $1.6 million was recorded to account for the potential unfavourable judicial decision in this lawsuit.

Deductions also increased due to increases in DSA fees resulting from new DSA agreements signed with two additional U.S. wholesalers during the previous fiscal year.

Cost of goods sold

Cost of goods sold consists principally of the costs of raw materials, royalties and manufacturing costs. We outsource most of our manufacturing requirements. For the three-month period ended December 31, 2009, cost of goods sold increased $1.1 million (4.3%) to $26.6 million from $25.5 million for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the three-month period ended December 31, 2009, decreased as compared to the three-month period ended December 31, 2008, from 24.5% to 24.2% due to product mix.

Selling and administrative expenses

Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other costs associated with our sales force and marketing activities. For the three-month period ended December 31, 2009, selling and administrative expenses increased $0.2 million (0.6%) to $32.2 million from $32.0 million for the corresponding period of the preceding fiscal year. This increase in selling and administrative expenses is mainly due to an increase in our supporting programs as well as in the sales force headcount which was increased in May 2009. This increase was partially offset by a decrease in distribution costs.

Management fees

Management fees consist of fees and other charges associated with the management services agreement between TPG and Axcan Holdings Inc., the indirect parent company of Axcan Intermediate Holdings Inc. For the three-month period ended December 31, 2009, management fees increased $0.7 million to $0.9 million from $0.2 million for the corresponding period of the preceding fiscal year as these fees were previously not allocated to the subsidiaries of Axcan Holdings Inc.

Research and development expenses

Research and development expenses consist principally of fees paid to outside parties that we use to conduct clinical studies and to submit governmental approval applications on our behalf, as well as the salaries and benefits paid to personnel involved in research and development projects. For the three-month period ended December 31, 2009, research and development expenses increased $1.4 million (20.0%) to $8.4 million, from $7.0 million for the corresponding period of the preceding fiscal year. This increase is mainly due to the development work on pancreatic enzyme products.

Depreciation and amortization

Depreciation and amortization consists principally of the amortization of intangible assets with a finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For the three-month period ended December 31, 2009, depreciation and amortization increased $2.2 million (15.2%) to $16.7 million from $14.5 million for the corresponding period of the preceding fiscal year. The increase for the period is due to the reduction of the remaining amortizable life of some intangible assets to periods ranging from 6 months to 14 years, in the third quarter of fiscal year 2009.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed for acquisitions. For the three-month period ended December 31, 2009, financial expenses decreased $3.1 million (16.1%) to $16.2 million from $19.3 million for the corresponding period of the preceding fiscal year. The decrease in financial expenses is mainly due to the change in the fair value of derivatives of $0.9 million and a reduction of the interest on long-term debt of $1.8 million.

Interest income

For the three-month period ended December 31, 2009, total interest income decreased to $0.1 million from $0.2 million for the corresponding period of the preceding fiscal year due to lower interest rates in spite of increase in the cash and cash equivalents.

Income taxes

For the three-month period ended December 31, 2009, income taxes benefits amounted to $0.2 million, compared to income taxes expenses of $0.6 million for the corresponding period of the preceding fiscal year. The effective tax rate was minus 2.04% for the three-month period ended December 31, 2009, compared to 10.44% for the three-month period ended December 31, 2008. The effective tax rate for the three-month period ended December 31, 2009, is affected by a number of elements, the most important being the tax benefit arising from a financing structure. The difference between our effective income tax rate and the statutory income tax rate is summarized as follows:

(in thousands of U.S. dollars)	For the three-month period ended December 31 2009						For the three-month period ended December 31 2008
	%			$			%			$
Combined statutory rate applied to pre-tax income (loss)		35.00			3.2			35.00			2.0
Increase (decrease) in taxes resulting from:
Change in promulgated rates		0.79			0.1			-			-
Difference with foreign tax rates		(7.98	)		(0.7	)		(11.93	)		(0.7	)
Tax benefit arising from a financing structure		(39.70	)		(3.7	)		(64.02	)		(3.7	)
Non-deductible items		4.96			0.5			7.58			0.4
Non-taxable items		(5.97	)		(0.6	)		(2.03	)		(0.1	)
Investment tax credits		(2.61	)		(0.2	)		(4.49	)		(0.3	)
State taxes		3.37			0.3			9.53			0.5
Other		10.10			0.9			40.80			2.3
		(2.04	)		(0.2	)		10.44			0.6

Net income

For the three-month period ended December 31, 2009, net income was $9.4 million compared to $5.1 million for the corresponding period of the preceding fiscal year. The increase of $4.3 million (84.3%) resulted mainly from a $3.1 million decrease in financial expenses, a $0.8 million increase in income taxes benefits and a $0.4 million increase in operating income.

Balance sheets as at December 31, 2009, and September 30, 2009

The following table summarizes balance sheet information as at December 31, 2009, compared to September 30, 2009.

	December 31,		September 30,
(in millions of U.S. dollars)	2009		2009		Change
	$		$		$			%
Cash and cash equivalents		132.4		126.4		6.0			4.7
Current assets		273.6		250.7		22.9			9.1
Total assets		918.6		914.6		4.0			0.4
Current liabilities		110.8		121.0		(10.2	)		(8.4	)
Long-term debt		592.9		582.6		10.3			1.8
Total liabilities		748.2		750.8		(2.6	)		(0.3	)
Shareholders’ equity		170.4		163.8		6.6			4.0
Working capital		162.8		129.7		33.1			25.5

Our cash and cash equivalents increased by $6.0 million (4.7%) to $132.4 million as at December 31, 2009, from $126.4 million at September 30, 2009. As at December 31, 2009, working capital was $162.8 million, compared to $129.7 million at September 30, 2009, an increase of $33.1 million (25.5%). This increase was mainly due to the reduction in instalments on long-term debt of $30.7 million, an increase in accounts receivable of $14.6 million and an increase in inventory of $4.7 million, partially offset by an increase in accounts payable of $19.7 million. Pursuant to the annual excess cash flow requirements for the fiscal year 2009 defined in the credit agreement, we were required to prepay $17.6 million of outstanding term loans in the first quarter of fiscal year 2010. The prepayment was paid in December 2009. In addition, as allowed by the credit agreement, the prepayment has been applied to the remaining scheduled installments of principal in direct order of maturity. The current portion of long-term debt has been reduced accordingly.

Total assets increased $4.0 million (0.4%) to $918.6 million as at December 31, 2009, from $914.6 million as at September 30, 2009. Long-term debt increased $10.3 million (1.8%) to $592.9 million as at December 31, 2009, from $582.6 million as at September 30, 2009, mostly due to the reclassification of $13.1 million from short-term debt to long-term debt pursuant the allocation of the prepayment made in December 2009 to the remaining scheduled installments of principal in direct order of maturity.

Liquidity and Capital Resources

Cash Requirements

We maintain a sufficient level of working capital, which was approximately $162.8 at December 31, 2009, and $129.7 at September, 2008. In 2010 and future periods, we expect cash generated by operations together with existing cash and cash equivalents to be sufficient to cover cash needs for working capital, capital expenditures, milestone payments and debt services. We regularly review product and other acquisition opportunities and may therefore require additional debt or equity financing. We cannot be certain that such additional financing, if required, will be available on acceptable terms, or at all.

Contractual Obligations and Other Commitments

The following table summarizes our significant contractual obligations as at December 31, 2009, and the effect such obligations are expected to have on our liquidity and cash flows in future years. This table excludes the payment of amounts already recorded on the balance sheet as current liabilities at December 31, 2009, and certain other purchase obligations as discussed below:

	For the twelve-month periods ending December 31,
(in millions of U.S. dollars)	2010		2011		2012		2013		2014 and thereafter
	$		$		$		$		$
Long-term debt		-		11.9		20.8		80.9		488.2
Operating leases		2.6		1.7		1.2		1.1		0.3
Other commitments		17.2		2.0		-		-		-
Interest on long-term debt		57.9		57.7		56.9		55.1		89.7
		77.7		73.3		78.9		137.1		578.2

Purchase orders for raw materials, finished goods and other goods and services are not included in the above table. Management is not able to accurately determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table, contractual obligations for purchase of goods or services are only included in other commitments where there exist agreements that are legally binding and enforceable on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or

variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current needs and are fulfilled by our vendors within relatively short timetables. We do not have significant agreements for the purchase of raw materials or finished goods specifying minimum quantities or set prices that exceed our short-term expected requirements. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. As milestone payments are primarily contingent upon successfully achieving clinical milestones or on receiving regulatory approval for products under development, they do not have defined maturities and therefore are not included in the above table.

The expected timing of payment of the obligations discussed above is estimated based on current information. The timing of payments and actual amounts paid may differ depending on the timing of receipt of goods or services, or, for some obligations, changes to agreed-upon amounts.

As more fully described in Note 9 to the Consolidated Financial Statements, effective October 1, 2007, we adopted the provisions of the guidance issued by the FASB related to accounting for uncertainty in income taxes. As at December 31, 2009, we had unrecognized tax benefits of $10.9 million ($10.4 million as at September 30, 2009) of which $9.5 million would be treated as a reduction of goodwill and $1.4 million would favourably impact our effective tax rate if subsequently recognized. Due to the nature and timing of the ultimate outcome of these uncertain tax positions, we can not make a reasonably reliable estimate of the amount and period of related future payments. Therefore, our unrecognized tax benefits with respect to our uncertain tax positions has been excluded from the above contractual obligations table.

Long-term debt and credit facility

On November 29, 2007, we entered into an Arrangement Agreement with Axcan Pharma Inc., pursuant to which we agreed to, through an indirect wholly-owned subsidiary, acquire all of the common stock of Axcan Pharma Inc. and enter into various other transactions in accordance with the Plan of Arrangement (the “Arrangement”). On February 25, 2008, we obtained various types of financing in connection with the Arrangement. We issued $228.0 million aggregate principal amount of Senior Secured Notes. The Senior Secured Notes were priced at $0.98737 with a yield to March 1, 2015, of 10%. The Senior Secured Notes rank pari passu with our credit facility.

We may redeem some or all of the Senior Secured Notes prior to March 1, 2011 at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2011, we may redeem some or all of the Senior Secured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Secured Notes to be redeemed) set forth below:

Year	%
2011		106.938
2012		104.625
2013		102.313
2014 and thereafter		100.000

Prior to March 1, 2011, we may also redeem up to 35% of the aggregate principal amount of the Senior Secured Notes using the proceeds of one or more equity offerings at a redemption price equal to 109.250% of the aggregate principal amount of the Senior Secured Notes plus accrued and unpaid interest. If there is a change of control as specified in the indenture governing the senior notes, we must offer to repurchase the Senior Secured Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.

We also obtained a Credit Facility for a total of $290.0 million composed of term loans totalling $175.0 million and a revolving credit facility of $115.0 million (“Credit Facility”). The Credit Facility bears interest at a variable rate composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at our option, plus the applicable rate based on our consolidated total leverage ratio and certain of our subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014, with quarterly payments on the term. As at September 30, 2009, $175.0 million of term loans had been issued and no amounts had been drawn against the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of 8.75% before the effect of the interest rate swaps as further disclosed in our Consolidated Financial Statements. The Credit Facility requires us to meet certain financial covenants, which were met as at December 31, 2009. The credit agreement governing the Credit Facility requires us to prepay outstanding term loans contingent upon the occurrence of these events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit Facility, (2) commencing with the year ending September 30, 2009, 50% (which percentage will be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Credit Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by us or by our subsidiaries, subject to reinvestments rights and certain other exceptions. Based on these requirements, for the fiscal year 2009, we were required to prepay $17.6 million of outstanding term loans in the first quarter of fiscal year 2010.

On February 25, 2008, as part of the Arrangement financing, we also obtained $235.0 million in financing under our senior unsecured

bridge facility maturing on February 25, 2009. On May 6, 2008, our senior unsecured bridge facility was refinanced on a long-term basis, by repaying the bridge facility with the proceeds from our sale of $235.0 million aggregate principal amount of the senior unsecured notes. The senior notes were priced at $0.9884 with a yield to March 1, 2016 of 13.16%. The Senior Unsecured Notes are subordinate to the new senior secured credit facility and secured notes.

We may redeem some or all of the senior notes prior to March 1, 2012 at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2012, we may redeem some or all of the Senior Unsecured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Unsecured Notes to be redeemed) set forth below:

Year	%
2012		106.375
2013		103.188
2014 and thereafter		100.000

Prior to March 1, 2011, we may also redeem up to 35% of the aggregate principal amount of the Senior Secured Notes using the proceeds of one or more equity offerings at a redemption price equal to 112.750% of the aggregate principal amount of the Senior Unsecured Notes plus accrued and unpaid interest. If there is a change of control as specified in the indenture governing the senior notes, we must offer to repurchase the senior notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.

Certain of our subsidiaries have been designated as guarantors with respect to the credit facility, the Senior Secured Notes and the senior unsecured notes. Our obligations under, and each of the guarantors’ obligations under its guarantee of, the credit facility and the Senior Secured Notes are secured by a first priority security interest in our assets and of such guarantor subsidiaries, respectively.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Operating leases

We have various long-term operating lease agreements for office space, automotive equipment and other equipment. The latest expiry date for these agreements is in 2014.

Other commitments

Other operating commitments consist primarily of amounts relating to administrative services, clinical studies and other research and development services.

Related party transactions

As at December 31, 2009, and September 30, 2009, we had a note receivable from our parent company amounting to $133.2 million. During the three-month period ended December 31, 2009, we have earned interest income amounting to $2.0 million, net of taxes amounting to $1.1 million ($2.0 million net of taxes amounting to $1.1 million during the three-month period ended December 31, 2008). We have also recorded a related interest on the note receivable from our parent company amounting to $18.1 million as at December 31, 2009, ($15.1 million as at September 30, 2009), which has been recorded in the shareholder’s equity section of the consolidated balance sheet. As at December 31, 2009, we also recorded an account receivable from our parent company amounting to $0.3 million ($0.3 million as at September 30, 2009).

During the there-month period ended December 31, 2009, we recorded management fees from a controlling shareholding company amounting to $0.9 million ($0.2 million in three-month period ended December 31, 2008). As at December 31, 2009, we accrued fees payable to a shareholding company amounting to $0.8 million ($0.4 as at September 30, 2009).

During the three-month period ended December 31, 2009, we paid a dividend to our parent company amounting to $0.1 million to allow for the payment of certain group expenses.

Balance sheet arrangements

We do not have any transactions, arrangements and other relationships with unconsolidated entities that are likely to affect our operating results, our liquidity or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, and do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial statements.

Cash flows

Our cash flows from operating, investing and financing activities for the three-month periods ended December 31, 2009, and 2008 as reflected in the consolidated statements of cash flows, are summarized in the following table:

(in millions of U.S. dollars)	For the three-month period ended December 31, 2009			For the three-month period ended December 31, 2008			Change
	$			$			$
Net cash provided by operating activities		28.5			39.0			(10.5	)
Net cash used by investing activities		(1.1	)		(1.3	)		0.2
Net cash used by financing activities		(21.3	)		(2.2	)		(19.1	)

Cash flows provided by operating activities decreased $10.5 million from $39.0 million for the three-month period ended December 31, 2008, to $28.5 million for the three-month period ended December 31, 2009. The decrease in net cash provided by operating activities is due to the decrease in the changes in working capital. The decrease was partially offset by the operating activities in three-month period year ended December 30, 2009, compared the corresponding period of the preceding fiscal year.

Cash flows used by investing activities decreased by $0.2 million from $1.3 million of cash used in the three-month period ended December 31, 2008, to $1.1 million of cash used in the three-month period ended December 31, 2009.

Cash flows used by financing activities increased $19.1 million from $2.2 million of cash used in the three-month period ended December 31, 2008, to $21.3 million of cash used in the three-month period ended December 31, 2009. The increase in cash used by financing activities is mainly due to the prepayment in the three-month period ended December 31, 2009, of $17.6 million of outstanding term-loans, based on the annual excess cash flow requirements for the fiscal year 2009, as defined in the credit agreement.

Significant Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, applied on a consistent basis. Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Therefore, a change in the facts and circumstances of an underlying transaction could significantly change the application of our accounting policies to that transaction, which could have an effect on our financial statements. The policies that management believes are critical and require the use of complex judgment in their application are discussed below.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and also affect the recognized amounts of revenues and expenses during the year. Significant estimates and assumptions made by management include the allocation of the purchase price of acquired assets and businesses, allowances for accounts receivable and inventories, reserves for product returns, rebates, chargebacks and DSA fees, the classification of intangible assets between finite life and indefinite life, the useful lives of long-lived assets, the expected cash flows used in evaluating long-lived assets, goodwill and investments for impairment, stock based compensation costs, pending legal settlements and the establishment of provisions for income taxes including the realizability of deferred tax assets. The estimates are made using the historical information and various other relevant factors available to management. We review all significant estimates affecting the financial statements on a recurring basis and records the effect of any adjustments when necessary. Actual results could differ from those estimates based upon future events, which could include, among other risks, changes in regulations governing the manner in which we sell our products, changes in the health care environment, foreign exchange and managed care consumption patterns.

Revenue Recognition

Revenue is recognized when the product is shipped to our customers, provided we have not retained any significant risks of ownership or future obligations with respect to the product shipped. Provisions for sales discounts and estimates for chargebacks, managed care and Medicaid rebates, product returns and DSA fees are established as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by us at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such reserves. In certain circumstances, product returns are allowed under our policy and provisions are maintained accordingly. These revenue reductions are generally reflected as an addition to accrued liabilities. Amounts received from customers as prepayments for products to be shipped in the future are reported as deferred revenue.

The following table summarizes the activity in the accounts related to revenue reductions:

(in millions of U.S. dollars)	Product returns			Contract rebates			Charge- backs			DSA fees			Discounts and other			Total
	$			$			$			$			$			$
Balance as at September 30, 2009		17.2			9.8			9.0			1.0			0.7			37.7
Provisions		1.3			14.6			14.8			1.8			2.7			35.2
Settlements		(1.3	)		(8.8	)		(12.1	)		(1.0	)		(2.5	)		(25.7	)
Balance as at December 31, 2009		17.2			15.6			11.7			1.8			0.9			47.2

Product returns

We do not provide any form of price protection to our wholesale customers and we generally permit product returns only if the product is returned in the 6 months prior to and 12 months following its expiration date. Under our policy, credit for returns is issued to the original purchaser at current wholesale acquisition cost less 10%.

We estimate the proportion of recorded revenue that will result in a return by considering relevant factors, including:

past product returns activity;

the duration of time taken for products to be returned;

the estimated level of inventory in the distribution channels;

product recalls and discontinuances;

the shelf life of products;

the launch of new drugs or new formulations; and

the loss of patent protection or new competition.

Our estimate of the level of inventory in the distribution channels is based on inventory data provided by wholesalers, third-party prescription data and, for some product return provisions, estimated retail pharmacy information.

Returns for new products are more difficult to estimate than for established products. For shipments made to support the commercial launch of a new product under standard terms, our estimate of sales return accruals are primarily based on the historical sales returns experience of similar products. Once sufficient historical data on actual returns of the product are available, the returns provision is based on this data and any other relevant factors as noted above.

The accrual estimation process for product returns involves in each case a number of interrelating assumptions, which vary for each combination of product and customer. Accordingly, it would not be meaningful to quantify the sensitivity to change for any individual assumption or uncertainty. However, we do not believe that the effect of uncertainties, as a whole, significantly impacts our financial condition or results of operations.

The accrued liabilities include reserves of $17.2 million as at December 31, 2009, and September 30, 2009, for estimated product returns.

Rebates, Chargebacks and other sales deductions

In the United States, we establish and maintain reserves for amounts payable to managed care organizations, state Medicaid and other government programs for the reimbursement of portions of the retail price of prescriptions filled that are covered by these programs. We also establish and maintain reserves for amounts payable to wholesale distributors for the difference between their regular sale price and the contract price for the products sold to our contract customers.

The amounts are recognized as revenue reductions at the time of sale based on our best estimate of the product’s utilization by these managed care and state Medicaid patients and sales to our contract customers, using historical experience, the timing of payments, the level of reimbursement claims, changes in prices (both normal selling prices and statutory or negotiated prices), changes in prescription demand patterns, and the levels of inventory in the distribution channel.

Amounts payable to managed care organizations and state Medicaid programs are based on statutory or negotiated discounts to the selling price. Medicaid rebates generally increase as a percentage of the selling price over the life of the product. As it can take up to six months for information to reach the Company on actual usage of the Company’s products in managed care and Medicaid programs and on the total discounts to be reimbursed, the Company maintains reserves for amounts payable under these programs relating to sold products. We estimate the level of inventory in the distribution channels based on inventory data provided by wholesalers and third-party prescription data.

Revisions or clarification of guidelines related to state Medicaid and other government program reimbursement practices which are meant to apply to prior periods, or retrospectively, can result in changes to management’s estimates of the rebates reported in prior periods. However, since the prices of the Company’s products are fixed at the time of sale and the quantum of rebates is therefore reasonably determinable at the outset of each transaction, these factors would not impact the recording of revenues in accordance with U.S.GAAP.

The accrual estimation process for managed care organizations, state Medicaid and other government programs rebates involves in each case a number of interrelating assumptions, which vary for each combination of products and programs. Accordingly, it would not be meaningful to quantify the sensitivity to change for any individual assumption or uncertainty. However, we do not believe that the effect of uncertainties, as a whole, significantly impacts the Company’s financial condition or results of operations.

Accrued liabilities include reserves of $15.6 million and $11.7 million as at December 31, 2009, and $9.8 million and $9.0 million as at September 30, 2009, respectively, for estimated contract rebates and chargebacks.

If the levels of chargebacks, fees pursuant to DSAs, managed care, Medicaid and other government rebates, product returns and discounts fluctuate significantly and/or if our estimates do not adequately reserve for these reductions of net product revenues, our reported revenue could be negatively affected.

Intangible Assets and Goodwill

Intangible assets with a finite life are amortized over their estimated useful lives according to the straight-line method over periods varying from 5 to 20 years. The straight-line method of amortization is used because it reflects, in the opinion of management, the pattern in which the intangible assets with a finite life are used. In determining the useful life of intangible assets, we consider many factors including the intention of management to support the asset on a long-term basis by maintaining the level of expenditure necessary to support the asset, the use of the asset, the existence and expiration date of a patent, the existence of a generic version of, or competitor to, the product and any legal or regulatory provisions that could limit the use of the asset.

The following table summarizes the changes to the carrying value of the intangible assets and goodwill from September 30, 2009, to December 31, 2009:

	Intangible assets			Goodwill
	$			$
Balance as at September 30, 2009		421.3			165.8
Depreciation and amortization		(14.4	)		-
Foreign exchange translation adjustment		(1.7	)		(0.2	)
Balance as at December 31, 2009		405.2			165.6

Research and Development Expenses

Research and development expenses are charged to operations in the period they are incurred. The cost of intangibles that are purchased from others for a particular research and development project that have no alternative future use are expensed at the time of acquisition.

Income taxes

Income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are recognized to account for the estimated taxes that will result from the recovery or settlement of assets and liabilities recorded at their financial statement carrying amounts. Deferred income tax assets and liabilities are measured based on enacted tax rates and laws at the

date of the financial statements for the years in which the temporary differences are expected to reverse. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to remain unrealized. Adjustments to the deferred income tax asset and liability balances are recognized in net income as they occur.

We conduct business in various countries throughout the world and are subject to tax in numerous jurisdictions. As a result of our business activities, we file a significant number of tax returns that are subject to examination by various federal, state, and local tax authorities. Tax examinations are often complex as tax authorities may disagree with the treatment of items reported by us and this may require several years to resolve.

Changes in Accounting Standards

See Note 2 to our Consolidated Financial Statements in Item 1 of part 1 for a description of recently issued accounting standards, including our expected adoption dates and estimated effects, if any, on our results of operations, financial condition and cash flows.

Subsequent Event

In June 2007, we initiated a lawsuit under the U.S. Lanham Act against a number of defendants alleging they falsely advertised their products to be similar or equivalent to ULTRASE. On January 5, 2010 a settlement arrangement was entered into with certain of these defendants pursuant to which an amount of $5,750,000 was paid to us.

Item 3.

Quantitative And Qualitative Disclosure About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, which is incorporated herein by reference. As of December 31, 2009, our exposure to market risk has not changed materially since September 30, 2009.

Item 4T.

Controls and Procedures

Evaluation of disclosure controls and procedures.

We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of March 31, 2009, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. During the period covered by the Quarterly Report on Form 10-Q, in the ordinary course of business, we replaced our existing information system used to perform the consolidation our financial statements with a new system. Other that the above noted accounting system change, no change occurred in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors

Except for the updated risk factors related to the pancreatic enzyme products (PEPs), there have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 aside from those disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2009 and disclosed below. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may, in the future, materially adversely affect our business, financial condition or results.

RISKS RELATED TO OUR PANCREATIC ENZYME PRODUCTS (PEPs)

Our revenues from ULTRASE and VIOKASE are subject to regulatory risk.

Existing products to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there are currently marketed PEPs that have not been approved by the FDA, including ULTRASE and VIOKASE. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for exocrine pancreatic insufficiency drug products until April 28, 2010 for those companies that were (a) marketing unapproved pancreatic enzyme products as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval.

We reported net sales of $75.9 million, $58.6 million and $47.5 million for ULTRASE in fiscal 2009, 2008, and 2007, respectively, and $23.7 million for the three-month period ended December 31, 2009. We completed the submission of our NDA for ULTRASE MT and, in the fourth quarter of fiscal 2008, received a first complete response letter (formerly known as an ‘’approvable letter’’ prior to recent amendments of the Food Drug and Cosmetics Act, or FDCA) citing only certain chemistry, manufacturing and control data, or CMC, work requirements to which we responded. Further to the filing of our response, we received a second complete response letter in the fourth quarter of fiscal 2009, again citing certain CMC work the FDA requested we complete in order to obtain approval. This request was addressed in a complete response letter we prepared in collaboration with our manufacturing partners and filed with the FDA. We reported net sales of $22.7 million, $15.1 million and $11.2 million for VIOKASE in fiscal 2009, 2008, and 2007, respectively, and $8.6 million for the three-month period ended December 31, 2009. The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal 2010. At the time we completed this submission we requested a priority review and the FDA recently advised us in the second quarter of fiscal 2010 that it would not grant a priority review of this NDA.

We and the manufacturer of the active pharmaceutical ingredient of ULTRASE MT and VIOKASE are in ongoing discussions with the FDA to address the remaining open issues identified by the FDA.

Although the FDA may determine not to pursue immediate regulatory action against companies that do not obtain regulatory approval of their PEPs prior to April 28, 2010, if we are unable to obtain FDA approval to market ULTRASE or VIOKASE prior to such date,

we may be subject to FDA regulatory action to remove these products from the market,

certain wholesalers and other clients may refuse to purchase or distribute these products, and

governmental and other third-party payors may no longer agree to reimburse or pay for the cost of these drugs.

As a result, our market for ULTRASE and VIOKASE may be significantly adversely affected, or we may no longer be able to sell ULTRASE or VIOKASE in the U.S., which would impair our results of operations and liquidity.

Competition in the PEP market could be more intense than expected.

We face competition from PEPs which have been FDA-approved and the FDA may not remove existing unapproved PEPs from the market in April 2010, even if they have not been FDA-approved. The level of competition facing our ULTRASE and VIOKASE products in the U.S. will depend on the number of manufacturers of PEP products on the market. Two products have received NDA approval since the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products must file an NDA and receive approval for their products. CREON®, which is marketed by Solvay Pharmaceuticals, was approved by the FDA in May 2009 and the approved product was recently launched. ZENPEP™, marketed by Eurand, was approved by the FDA in August 2009 and was recently launched. Other manufacturers are believed to be actively seeking FDA NDA approval for their product, including PANCREASE®, marketed by Ortho-McNeil Pharmaceuticals, Inc., and PANCRECARB®, marketed by Digestive Care, Inc. Accordingly, our ULTRASE and VIOKASE products face competition from products which have already received FDA approval under an NDA, and competition from approved products may further increase if other products for which manufacturers are seeking approval obtain FDA approval before ULTRASE MT or VIOKASE. Patient and physician acceptance of our products may be adversely affected by the fact that they are not yet approved while other approved products are available, which could also have a material adverse effect on our business and our financial results.

Further, despite the FDA’s announcement, its position is non-binding, and the agency may determine not to pursue regulatory action against companies that fail to meet any applicable deadline. If the FDA does not enforce its stated positions by the applicable deadline, the level of competition that ULTRASE and VIOKASE will face may be greater than we anticipate, as some non-approved PEP products might remain on the market. In addition, the FDA could change its position or suspend enforcement again as it did in October 2007.

Item 6.

Exhibit No.	Exhibits. Exhibit
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AXCAN INTERMEDIATE HOLDINGS INC.

Date: February 10, 2010	BY:
		Steve Gannon
		Senior Vice President, Finance, Chief Financial Officer and Treasurer

EXHIBIT INDEX

Exhibit No.	Exhibit
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Attached files

Aptalis Pharma Inc Reports

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