UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

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

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 o No þ 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 o No o (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.

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

Yes o No þ

As of February 14, 2011, 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

Forward-Looking Statements			3
PART I. FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Operations			5
Condensed Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss)			6
Condensed Consolidated Cash Flows			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			26
Item 3. Quantitative And Qualitative Disclosure About Market Risk			43
Item 4T. Controls and Procedures			43
PART II. OTHER INFORMATION			44
Item 1A. Risk Factors			44
Item 6. Exhibits			66
SIGNATURES			67
EXHIBIT INDEX			68
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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.

Condensed Consolidated Balance Sheets

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

		December 31,				September 30,
		2010				2010
		(unaudited)				(audited)
		$				$
Assets
Current assets
Cash and cash equivalents			150,736				161,503
Accounts receivable, net			44,756				32,379
Accounts receivable from the parent company (Note 14)			525				487
Income taxes receivable			4,877				2,906
Inventories, net (Note 4)			22,636				23,866
Prepaid expenses and deposits			2,699				3,277
Deferred income taxes, net (Note 10)			3,023				2,331
Total current assets			229,252				226,749
Property, plant and equipment, net (Note 5)			34,018				35,777
Intangible assets, net (Note 6)			335,562				347,962
Goodwill, net			73,361				73,540
Deferred debt issue expenses, net of accumulated amortization of $15,379 ($14,136 as at September 30, 2010)			19,200				20,443
Deferred income taxes, net (Note 10)			8,175				8,706
Total assets			699,568				713,177
Liabilities
Current liabilities
Accounts payable and accrued liabilities			92,037				94,673
Income taxes payable (Note 10)			6,839				3,446
Installments on long-term debt (Note 8)			—				13,163
Deferred income taxes (Note 10)			42				47
Total current liabilities			98,918				111,329
Long-term debt (Note 8)			581,823				581,312
Other long-term liabilities			9,695				10,028
Deferred income taxes (Note 10)			31,368				31,540
Total liabilities			721,804				734,209
Shareholders’ Deficiency
Capital Stock (Note 11)
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding as at December 31, 2010, and September 30, 2010			1				1
Deficit			(466,706	)			(468,152	)
9.05% Note receivable from the parent company (Note 14)			(133,154	)			(133,154	)
Additional paid-in capital			613,492				614,113
Accumulated other comprehensive loss			(35,869	)			(33,840	)
Total shareholders’ deficiency			(22,236	)			(21,032	)
Total liabilities and shareholders’ deficiency			699,568				713,177

The accompanying notes are an integral part of the condensed consolidated financial statements.
These interim financial statements should be read in conjunction with the annual consolidated financial statements.

On behalf of the Board,

Director		Director

AXCAN INTERMEDIATE HOLDINGS INC.

Condensed Consolidated Statements of Operations

(in thousands of U.S. dollars)
(unaudited)

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
		$				$
Net product sales			85,938				110,132
Cost of goods sold (a)			17,423				26,628
Selling and administrative expenses (a) (Note 9)			28,219				32,239
Management fees (Note 14)			838				855
Research and development expenses (a)			6,955				8,426
Depreciation and amortization			13,573				16,693
Total operating expenses			67,008				84,841
Operating income			18,930				25,291
Financial expenses (Note 9)			16,229				16,197
Interest income			(192	)			(148	)
Loss (gain) on foreign currencies			243				(15	)
Total other expenses			16,280				16,034
Income before income taxes			2,650				9,257
Income taxes expense (benefit) (Note 10)			1,204				(189	)
Net income			1,446				9,446

The accompanying notes are an integral part of the condensed consolidated financial statements.
These interim financial statements should be read in conjunction with the annual consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Condensed Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss)

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

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
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			(468,152	)			(297,658	)
Dividends paid			—				(128	)
Net income			1,446				9,446
Balance, end of period			(466,706	)			(288,340	)
Additional paid-in capital
Balance, beginning of period			614,113				619,053
Stock-based compensation expense			491				1,476
Stock-based compensation plan redemptions			(49	)			(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 ($1,063 in 2009)			1,974				1,974
Balance, end of period			613,492				619,195
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			(33,840	)			(24,478	)
Hedging contracts fair value adjustments, net of taxes of $0 ($42 in 2009)			—				(78	)
Foreign currency translation adjustments			(2,029	)			(2,752	)
Balance, end of period			(35,869	)			(27,308	)
Total shareholders’ equity (deficiency)			(22,236	)			170,394
Comprehensive income (loss)
Other comprehensive loss			(2,029	)			(2,830	)
Net income			1,446				9,446
Total comprehensive income (loss)			(583	)			6,616
Accumulated other comprehensive loss
Amounts related to foreign currency translation adjustments			(35,869	)			(27,237	)
Amounts related to hedging contracts fair value adjustments			—				(71	)
Accumulated other comprehensive loss			(35,869	)			(27,308	)

The accompanying notes are an integral part of the condensed consolidated financial statements.
These interim financial statements should be read in conjunction with the annual consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Condensed Consolidated Cash Flows

(in thousands of U.S. dollars)
(unaudited)

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
		$				$
Cash flows from operating activities
Net income			1,446				9,446
Adjustments to reconcile net income to cash flows from operating activities
Non-cash financial expenses			1,754				1,762
Depreciation and amortization			13,573				16,693
Stock-based compensation expense (Note 9)			491				1,476
Loss on disposal and write-down of assets			30				25
Non-cash loss (gain) on foreign exchange			39				(479	)
Change in fair value of derivatives			—				(516	)
Deferred income taxes			(1,601	)			(1,370	)
Changes in working capital items
Accounts receivable			(12,608	)			(14,901	)
Accounts receivable from the parent company			(38	)			—
Income taxes receivable			(1,937	)			1,734
Inventories			1,127				(4,868	)
Prepaid expenses and deposits			568				(264	)
Accounts payable and accrued liabilities			(1,914	)			20,114
Income taxes payable			2,766				(338	)
Net cash provided by operating activities			3,696				28,514
Cash flows from investing activities
Acquisition of property, plant and equipment			(1,135	)			(1,129	)
Net cash used in investing activities			(1,135	)			(1,129	)
Cash flows from financing activities
Repayment of long-term debt			(13,163	)			(20,865	)
Stock-based compensation plan redemptions			(49	)			(271	)
Dividends paid			—				(128	)
Net cash used in financing activities			(13,212	)			(21,264	)
Foreign exchange loss on cash held in foreign currencies			(116	)			(165	)
Net increase (decrease) in cash and cash equivalents			(10,767	)			5,956
Cash and cash equivalents, beginning of period			161,503				126,435
Cash and cash equivalents, end of period			150,736				132,391
Additional information
Interest received			192				148
Interest paid			1,334				1,947
Income taxes received			—				2,372
Income taxes paid			2,285				1,856

The accompanying notes are an integral part of the condensed consolidated financial statements.
These interim financial statements should be read in conjunction with the annual consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Condensed 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 of 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 on February 25, 2008, of all of the outstanding common shares of Axcan Pharma Inc. at a price of $23.35 per share (“the Acquisition”), a company incorporated under the Canada Business Corporation Act. 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 U.S. 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, 2010. 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 the Management’s 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.

2. Significant Accounting Policies

The following policies are interim updates to those discussed in Note 2 to the Company’s audited financial statements for the fiscal year ended September 30, 2010.

Revenue recognition

Revenue is recognized when the product is shipped to the Company’s customers, provided the Company has 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 distribution service agreement fees are recorded as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by the Company at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such reserves. In certain circumstances, returns of products are allowed under the Company’s 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 Company presents, on a net basis, taxes collected from customers and remitted to governmental authorities; that is, they are excluded from revenues.

ULTRASE and VIOKASE, the Company’s pancreatic enzyme products (“PEPs”) have historically accounted for approximately a 19% of the Company’s net sales in the three years ended September 30, 2009. Prior to April 28, 2010, products that were marketed in the U.S. to treat exocrine pancreatic insufficiency had been available before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there were marketed PEPs that had not been approved under the NDA process by the FDA. 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 to April 28, 2010, for those companies that were (a) marketing unapproved pancreatic enzyme products as at April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval. The FDA has required all manufacturers with unapproved NDAs to cease distribution of unapproved products after April 28, 2010, until such time that NDA approval is granted. After this date, the unapproved products may still be available on pharmacy shelves for a short time until stock is depleted. The FDA has stated that it will continue to review NDAs that have been submitted by manufacturers of unapproved PEPs, and will approve additional PEPs even after the April 28, 2010 deadline has passed, if they meet the required safety, effectiveness and product quality standards. The Company completed the submission for ULTRASE MT in the fourth quarter of fiscal year 2008. The submission of the Company’s rolling NDA for VIOKASE was completed in the first quarter of fiscal year 2010.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

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

ULTRASE MT and VIOKASE did not receive NDA approval by the April 28, 2010 deadline and the Company has ceased distributing the two products after that date, in compliance with the FDA guideline. The Company recorded an additional $23,453,000 sales deductions reserve in its fiscal year ended September 30, 2010. This reserve is for product returns and other sales deductions as an estimate of Company’s liability for ULTRASE MT and VIOKASE that may be returned by the original purchaser under the Company DSAs or applicable return policies. The cease distribution order issued by the FDA was not considered as a product recall. As at December 31, 2010, the remaining reserve was $11,046,000 and was based on management estimates of ULTRASE MT and VIOKASE inventory in the distribution channel, assumptions on related expiration dates of this inventory as well as estimated erosion of ULTRASE MT and VIOKASE demand, based on competition from approved PEPs and the resulting estimated sell-through of ULTRASE MT and VIOKASE, actual return activity and other factors. In future periods, the Company will monitor and review the estimates and will prospectively record changes to the reserve.

On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE MT and VIOKASE be addressed before approval can be granted. The letters also require that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs can be approved. The Company is in ongoing discussions with the FDA and continues to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible.

3. Recently Issued Accounting Standards

In December 2010, the FASB amended guidance on disclosure of supplementary pro forma information for business combinations and clarifies that when presenting comparative financial statements, a public entity should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for business combinations entered into in fiscal years beginning on or after December 15, 2010, with early adoption permitted. The Company will apply this guidance for future acquisitions on its condensed consolidated financial statements.

In December 2010, the FASB issued guidance that modifies the Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.

In December 2010, the FASB issued guidance that clarified the recognition and classification of annual fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act in the income statements of pharmaceutical manufacturers. The guidance requires that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The annual fee shall be presented as an operating expense. This guidance is effective for calendar years beginning after December 31, 2010, when the fee initially becomes effective. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In March 2010, the FASB issued guidance related to revenue recognition that applies to arrangements with milestones relating to research or development deliverables. This guidance provides criteria that must be met to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. This guidance is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2010, the FASB amended the existing guidance on stock compensation to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.The adoption of this guidance is not expected to have a material impact on the Company’s condensed 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 adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

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

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 condensed consolidated financial statements.

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 condensed consolidated financial statements.

4. Inventories

		December 31,				September 30,
		2010				2010
		$				$
Raw material and packaging material, net of reserve for obsolescence of $89			9,391				10,316
Work in progress, net of reserve for obsolescence of $429			109				595
Finished goods, net of reserve for obsolescence of $636 ($758 as at September 30, 2010)			13,136				12,955
			22,636				23,866

As disclosed in Note 2, the Company’s PEPs did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA. As a result, a charge of $44,883,000 was recorded during the fiscal year ended September 30, 2010, to cost of goods sold to reduce inventories to their net realizable value and for estimated loss for purchase and other materials and supply commitments related to ULTRASE MT and VIOKASE products.

5. Property, Plant and Equipment

		December 31, 2010
						Accumulated
		Cost				depreciation				Net
		$				$				$
Land			2,232				—				2,232
Buildings			23,245				4,914				18,331
Furniture and equipment			8,711				3,851				4,860
Automotive equipment			30				—				30
Computer equipment and software			18,595				10,920				7,675
Leasehold and building improvements			1,190				300				890
			54,003				19,985				34,018

		September 30, 2010
						Accumulated
		Cost				depreciation				Net
		$				$				$
Land			2,240				—				2,240
Buildings			23,252				4,490				18,762
Furniture and equipment			8,534				3,515				5,019
Computer equipment and software			18,419				9,588				8,831
Leasehold and building improvements			1,220				295				925
			53,665				17,888				35,777

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

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

6. Intangibles Assets

Trademarks, trademark licenses and manufacturing rights with a finite life

		December 31, 2010
						Accumulated
		Cost				amortization				Net
		$				$				$
Balance, beginning of period			459,207				111,245				347,962
Amortization			—				11,455				(11,455	)
Foreign exchange			(1,186	)			(241	)			(945	)
Balance, end of period			458,021				122,459				335,562

7. Segmented Information

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

The Company operates in the following geographic areas:

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
		$				$
Total Revenue
United States
Domestic sales			57,949				83,776
Foreign sales			270				1,378
Canada
Domestic sales			10,046				8,867
Foreign sales			136				—
European Union
Domestic sales			14,850				14,024
Foreign sales			2,687				1,840
Other			—				247
			85,938				110,132

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

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

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

		December 31,				September 30,
		2010				2010
		$				$
Property, plant, equipment and intangible assets
Canada			289,807				299,180
United States			11,725				13,906
European Union			68,048				70,653
			369,580				383,739

		December 31,				September 30,
		2010				2010
		$				$
Goodwill
Canada			61,887				61,887
European Union			11,474				11,653
			73,361				73,540

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

8. Long-term Debt

		December 31,				September 30,
		2010				2010
		$				$
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			226,274				226,171
Term loans of $125,660 as at December 31, 2010, ($138,823 as at September 30, 2010), bearing interest at the one-month British Banker Association LIBOR (0.26% as at December 31, 2010, and 0.26% as at September 30, 2010), 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			122,368				135,210
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016			233,181				233,094
			581,823				594,475
Installments due within one year			—				13,163
			581,823				581,312

On February 25, 2008, the Company obtained various types of financing in connection with the Acquisition. The Company issued $228,000,000 aggregate principal amount of its 9.25% senior secured notes (the “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 Condensed Consolidated Financial Statements

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

The Company has 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, 2010, $175,000,000 of term loans had been issued and no amounts had been drawn during the quarter against the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of 8.75%. The Credit Facility requires the Company to meet certain financial covenants, which were met as at December 31, 2010. 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 defined in the credit agreement, the Company was required to prepay $13,163,000 of outstanding term loans in the first quarter of fiscal year 2011 ($17,583,000 for the fiscal year 2009 which was paid 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 May 6, 2008, the Company issued $235,000,000 of 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:

		$
2011			—
2012			19,567
2013			80,938
2014			25,156
2015			228,000
Thereafter			235,000
			588,661
Unamortized original issuance discount			6,838
			581,823

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

9. Financial Information Included in the Consolidated Operations

a) Financial expenses

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
		$				$
Interest on long-term debt (including amortization of original issuance discount of $511 ($516 in 2009)			14,606				14,811
Interest and bank charges			245				102
Interest rate swaps (Note 13)			—				(96	)
Financing fees			135				135
Amortization of deferred debt issue expenses			1,243				1,245
			16,229				16,197

b) Other information

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
		$				$
Rental expenses			884				904
Shipping and handling expenses			1,338				1,616
Advertizing expenses			1,527				3,897
Depreciation of property, plant and equipment			2,118				2,004
Amortization of intangible assets			11,455				14,689
Stock-based compensation expense			491				1,476
Transaction and integration costs			2,927				416

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. The Company charged to operations contributions to the plan totaling $167,000 for the three-month period ended December 31, 2010, ($216,000 for the three-month period ended December 31, 2009).

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

10. Income Taxes

The Company establishes a valuation allowance against deferred tax assets in accordance with U.S. GAAP. As at December 31, 2010, the Company has a valuation allowance of $62,290,000 against the Company’s net deferred tax assets generated in the U.S. reporting unit and of $1,038,000 against the deferred tax assets generated in its France reporting unit. In future periods, if the deferred tax assets are determined by management to be more likely than not to be realized, the tax benefits relating to the reversal of the valuation allowance will be recorded.

The Company’s effective tax rates for the three-month period ended December 31, 2010, was 45.43%, as compared to minus 2.04% in the prior year’s period. The effective tax rate for the three-month period ended December 31, 2010, is affected by a number of elements, the most important being the establishment of the valuation allowance of $5,048,000 against the Company’s net deferred tax assets mostly attributable to the U.S. reporting unit.

As at December 31, 2010, the Company had unrecognized tax benefits of $10,834,000 ($10,896,000 as at December 31, 2009).

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

		For the				For the
		three-month				three-month
		period ended				period ended
		December 31,				December 31,
		2010				2009
		$				$
Balance, beginning of period			11,485				10,409
Additions based on tax positions related to the current year			8				7
Additions for tax positions of prior years			433				506
Settlements			(1,063	)			—
Reductions for tax positions of prior years			(29	)			(26	)
Balance, end of period			10,834				10,896

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 December 31, 2010, the Company had accrued $1,090,000 ($1,075,000 as at September 30, 2010) for interest relating to income tax matters. There were no amounts recorded for penalties as at December 31, 2010.

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 2010. The Company is subject to Canadian and provincial income tax examination for fiscal years 2005 through 2010. 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, 2010, and September 30, 2010, no provision has been made for income taxes on the undistributed earnings of the Company’s foreign subsidiaries that the Company intends to indefinitely reinvest.

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

11. 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 grants 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 respectively 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 vested 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, equal to the share price at the date of grant. As at December 31, 2010, there were 1,157,986 outstanding RSUs and Penny Options (1,172,396 as at September 30, 2010) of which 1,154,652 (1,167,396 as at September 30, 2010) 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 FASB 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, 2010, the value of the awards to be expensed by the Company would range between $6,175,000 and $7,410,000 depending on the level of return expected to be realized by the majority shareholders.

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

12. 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 13, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.

Currency 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, 2010, the financial assets totaling $195,644,000 ($194,005,000 as at September 30, 2010) include cash and cash equivalents and accounts receivable for CAN $5,294,000, 18,159,000 Euros and 1,385,000 Swiss francs respectively (CAN$4,073,000, 18,658,000 Euros and 1,820,000 Swiss francs as at September 30, 2010). As at December 31, 2010, the financial liabilities totaling $673,860,000 ($689,148,000 as at September 30, 2010) include accounts payable and accrued liabilities and long-term debt of CAN$7,363,000 and 6,554,000 Euros respectively (CAN$10,234,000 and 8,158,000 Euros as at September 30, 2010).

Credit risk

As at December 31, 2010, the Company had $129,578,000 ($134,299,000 as at September 30, 2010) of cash with one financial institution. At times, such deposits may exceed the amount insured by the Federal Deposit Insurance Corporation.

Fair value of the financial instruments on the balance sheet

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

		December 31, 2010								September 30, 2010
		Fair				Carrying				Fair				Carrying
		value				amount				value				amount
		$				$				$				$
Assets
Cash and cash equivalents			150,736				150,736				161,503				161,503
Accounts receivable from the parent company			525				525				487				487
Accounts receivable, net			44,383				44,383				32,015				32,015
Liabilities
Accounts payable and accrued liabilities			92,037				92,037				94,673				94,673
Long-term debt			597,966				581,823				608,535				594,475

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 variable interest bearing term loan has been established based on broker-dealer quotes.

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

13. 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, if any, 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.

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.

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.

In 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. The Company’s two interest rate swaps with a combined notional amount of $63,000,000 that were designated as cash flow hedges of interest rate risk matured during the quarter ended March 31, 2010, and the Company has not entered into new derivative agreements.

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

The table below presents the effect of the Company’s derivative financial instruments on the consolidated operations as at December 31, 2010, and December 31, 2009.

Tabular disclosure of the effect of derivative instruments for the three-month periods ended December 31, 2010, and December 31, 2009.

Location in the

For the

For the

Condensed

three-month

three-month

Consolidated

period ended

period ended

Financial

December 31,

December 31,

Statements

2010

2009

$

$

Interest rate swaps in cash flow hedging relationships

Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $165 in 2009

OCI

—

(306

)

Loss  reclassified from accumulated comprehensive income into income (effective portion)

Financial expenses

—

(351

)

Gain 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

—

—

14. Related Party Transactions

As at December 31, 2010, and September 30, 2010, the Company had a note receivable from its parent company amounting to $133,154,000. During the three-month periods ended December 31, 2010, and December 31, 2009, the Company earned interest income on the note amounting to $1,974,000 net of taxes amounting to $1,063,000 and the related interest receivable from the parent company amounting to $30,167,000 as at December 31, 2010 ($27,130,000 as at September 30, 2010) has been recorded in the shareholders’ equity section of the consolidated balance sheet. This amount was subject to a full provision which was also recorded in the statement of shareholders’ equity. As at December 31, 2010, the Company has an account receivable from the parent company amounting to $525,000 ($487,000 as at September 30, 2010).

During the three-month period ended December 31, 2010, the Company recorded charges pursuant to the terms of a management fee arrangement with a controlling shareholding company amounting to $838,000 ($855,000 during the three-month period ended December 31, 2009). As at December 31, 2010, the Company accrued fees payable to a controlling shareholding company amounting to $859,000 ($1,574,000 as at September 30, 2010).

During the three-month period ended December 31, 2009, the Company paid a dividend to its parent company amounting to $128,000 to allow for the payment of certain group expenses.

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed 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, 2010, 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, 2010, and September 30, 2010, the condensed consolidating statements of operations for the three-month period ended December 31, 2010, and the three-month period ended December 31, 2009, and the condensed consolidating statement of cash flows for the three-month period ended December 31, 2010, and the three-month period ended December 31, 2009.

Condensed consolidating balance sheet as at December 31, 2010

		Axcan								Subsidiary
		Intermediate				Subsidiary				non-
		Holdings Inc.				guarantors				guarantors				Eliminations				Consolidated
		$				$				$				$				$
Assets
Current assets
Cash and cash equivalents			68				87,681				62,987				—				150,736
Accounts receivable, net			—				29,503				15,253				—				44,756
Accounts receivable from the parent company			51				474				—				—				525
Intercompany receivables			24,302				1,782				4,182				(30,266	)			—
Income taxes receivable			—				4,877				—				—				4,877
Inventories, net			—				16,620				6,402				(386	)			22,636
Prepaid expenses and deposits			19				1,978				702				—				2,699
Deferred income taxes, net			—				2,092				820				111				3,023
Total current assets			24,440				145,007				90,346				(30,541	)			229,252
Property, plant and equipment, net			—				25,859				8,159				—				34,018
Intangible assets, net			—				275,674				59,888				—				335,562
Investments in subsidiaries			(343,465	)			846,055				78,175				(580,765	)			—
Intercompany advances			822,753				98,425				685,017				(1,606,195	)			—
Goodwill, net			—				61,887				11,474				—				73,361
Deferred debt issue expenses, net			16,931				2,269				—				—				19,200
Deferred income taxes, net			—				—				8,175				—				8,175
Total assets			520,659				1,455,176				941,234				(2,217,501	)			699,568
Liabilities
Current liabilities
Accounts payable and accrued liabilities			21,884				61,398				8,755				—				92,037
Income taxes payable			—				5,259				1,580				—				6,839
Intercompany payables			1,247				28,479				540				(30,266	)			—
Deferred income taxes			—				42				—				—				42
Total current liabilities			23,131				95,178				10,875				(30,266	)			98,918
Long-term debt			510,989				70,834				—				—				581,823
Intercompany advances			8,775				1,514,043				83,377				(1,606,195	)			—
Other long-term liabilities			—				9,695				—				—				9,695
Deferred income taxes			—				30,716				652				—				31,368
Total liabilities			542,895				1,720,466				94,904				(1,636,461	)			721,804
Shareholders’ Equity (Deficiency)
Capital stock
Common shares			1				21,020				735,742				(756,762	)			1
Preferred shares			—				78,175				—				(78,175	)			—
Retained earnings (deficit)			(466,706	)			(341,795	)			114,443				227,352				(466,706	)
9.05% Note receivable from the parent company			(133,154	)			—				—				—				(133,154	)
Additional paid-in capital			613,492				13,179				730				(13,909	)			613,492
Accumulated other comprehensive loss			(35,869	)			(35,869	)			(4,585	)			40,454				(35,869	)
Total shareholders’ equity (deficiency)			(22,236	)			(265,290	)			846,330				(581,040	)			(22,236	)
Total liabilities and shareholders’ equity (deficiency)			520,659				1,455,176				941,234				(2,217,501	)			699,568

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

Condensed consolidating balance sheet as at September 30, 2010

		Axcan								Subsidiary
		Intermediate				Subsidiary				non-
		Holdings Inc.				guarantors				guarantors				Eliminations				Consolidated
		$				$				$				$				$
Assets
Current assets
Cash and cash equivalents			864				104,608				56,031				—				161,503
Accounts receivable, net			—				19,262				13,117				—				32,379
Accounts receivable from the parent company			50				437				—				—				487
Intercompany receivables			11,092				1,618				4,265				(16,975	)			—
Income taxes receivable			—				2,906				—				—				2,906
Inventories, net			—				17,697				6,563				(394	)			23,866
Prepaid expenses and deposits			48				2,385				844				—				3,277
Deferred income taxes, net			—				1,355				857				119				2,331
Total current assets			12,054				150,268				81,677				(17,250	)			226,749
Property, plant and equipment, net			—				27,383				8,394				—				35,777
Intangible assets, net			—				285,703				62,259				—				347,962
Investments in subsidiaries			(354,104	)			830,813				78,175				(554,884	)			—
Intercompany advances			826,431				91,811				679,391				(1,597,633	)			—
Goodwill, net			—				61,887				11,653				—				73,540
Deferred debt issue expenses, net			18,021				2,422				—				—				20,443
Deferred income taxes, net			—				—				8,706				—				8,706
Total assets			502,402				1,450,287				930,255				(2,169,767	)			713,177
Liabilities
Current liabilities
Accounts payable and accrued liabilities			5,975				77,887				10,811				—				94,673
Income taxes payable			—				1,938				1,508				—				3,446
Intercompany payables			449				15,340				1,186				(16,975	)			—
Installments on long-term debt			5,546				7,617				—				—				13,163
Deferred income taxes			—				47				—				—				47
Total current liabilities			11,970				102,829				13,505				(16,975	)			111,329
Long-term debt			510,663				70,649				—				—				581,312
Intercompany advances			801				1,512,092				84,740				(1,597,633	)			—
Other long-term liabilities			—				10,028				—				—				10,028
Deferred income taxes			—				30,618				922				—				31,540
Total liabilities			523,434				1,726,216				99,167				(1,614,608	)			734,209
Shareholders’ Equity (Deficiency)
Capital stock
Common shares			1				21,020				735,742				(756,762	)			1
Preferred shares			—				78,175				—				(78,175	)			—
Retained earnings (deficit)			(468,152	)			(354,020	)			98,657				255,363				(468,152	)
9.05% Note receivable from the parent company			(133,154	)			—				—				—				(133,154	)
Additional paid-in capital			614,113				12,736				689				(13,425	)			614,113
Accumulated other comprehensive loss			(33,840	)			(33,840	)			(4,000	)			37,840				(33,840	)
Total shareholders’ equity (deficiency)			(21,032	)			(275,929	)			831,088				(555,159	)			(21,032	)
Total liabilities and shareholders’ equity			502,402				1,450,287				930,255				(2,169,767	)			713,177

AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements

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

Condensed consolidating operations for the three-month period ended December 31, 2010

		Axcan								Subsidiary
		Intermediate				Subsidiary				non-
		Holdings Inc.				guarantors				guarantors				Eliminations				Consolidated
		$				$				$				$				$
Net product sales			—				68,512				17,538				(112	)			85,938
Cost of goods sold			3				10,956				6,585				(121	)			17,423
Selling and administrative expenses			4,523				16,700				6,996				—				28,219
Management fees			838				—				—				—				838
Research and development expenses			—				6,806				149				—				6,955
Depreciation and amortization			—				11,721				1,852				—				13,573
Total operating expenses			5,364				46,183				15,582				(121	)			67,008
Operating income (loss)			(5,364	)			22,329				1,956				9				18,930
Financial expenses			14,924				28,800				1,788				(29,283	)			16,229
Interest income			(12,243	)			(1,911	)			(15,321	)			29,283				(192	)
Dividend income			—				—				(242	)			242				—
Loss (gain) on foreign currencies			3,797				(2,035	)			(157	)			(1,362	)			243
Total other expenses (income)			6,478				24,854				(13,932	)			(1,120	)			16,280
Income (loss) before income taxes			(11,842	)			(2,525	)			15,888				1,129				2,650
Income taxes expense (benefit)			(1,063	)			2,160				99				8				1,204
Equity in earnings in subsidiaries			12,225				16,910				—				(29,135	)			—
Net income			1,446				12,225				15,789				(28,014	)			1,446