Axcan Pharma 40-F 2004 FY Annual report (Canada)

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Exhibit 99.3

U.S. GAAP
CONSOLIDATED FINANCIAL STATEMENTS

Management's Report		48
Auditors' Report		49
Financial Statements
	Consolidated Balance Sheets	50
	Consolidated Operations	51
	Consolidated Shareholders' Equity	52
	Consolidated Cash Flows	53
	Notes to Consolidated Financial Statements	54 to 73

MANAGEMENT'S REPORT

        The consolidated financial statements of Axcan Pharma Inc. and the other financial information included in this annual report are the responsibility of the Company's management.

        These consolidated financial statements and the other financial information have been prepared by management in accordance with accounting principles generally accepted in the United States of America. This responsibility includes the selection of appropriate accounting principles and methods in the circumstances and the use of careful judgement in establishing reasonable accounting estimates.

        Management maintains internal control systems designed among other things, to provide reasonable assurance that the Company's assets are adequately safeguarded and that the accounting records are a reasonable basis to prepare relevant and reliable financial information.

        The Audit Committee is composed solely of external directors. This Committee meets with the external auditors and management to discuss matters relating to the audit, internal control and financial information. The Committee also reviews the consolidated quarterly and annual financial statements.

        These consolidated financial statements have been audited by Raymond Chabot Grant Thornton, LLP, Chartered Accountants, whose report indicating the scope of their audit and their opinion on the consolidated financial statements is presented below.

        The Board of Directors has approved the Company's financial statements on the recommendation of the Audit Committee.

        The Company decided, for the year beginning October 1, 2002, to switch from Canadian generally accepted accounting principles to generally accepted accounting principles in the United States of America as its primary reporting convention. Consolidated financial statements in accordance with Canadian generally accepted accounting principles have also been prepared.

Léon F. Gosselin
President and
Chief Executive Officer
David W. Mims
Executive Vice President
and Chief Operating Officer
Jean Vézina
Vice President, Finance and
Chief Financial Officer

Mont-Saint-Hilaire, Quebec, Canada
November 10, 2004

48            U.S. GAAP

AUDITORS' REPORT

TO THE SHAREHOLDERS OF AXCAN PHARMA INC.

        We have audited the consolidated balance sheets of Axcan Pharma Inc. as at September 30, 2004 and 2003 and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended September 30, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2004 and 2003 and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2004 in accordance with accounting principles generally accepted in the United Sates of America.

        On November 10, 2004, we reported separately to the shareholders of Axcan Pharma Inc., on the consolidated financial statements for the same periods, prepared in accordance with generally accepted accounting principles in Canada.

Chartered Accountants

Montreal, Quebec, Canada
November 10, 2004

U.S. GAAP            49

CONSOLIDATED BALANCE SHEETS

September 30		2004	2003
in thousands of U.S. dollars, except share related data		$	$
Assets
Current assets
	Cash and cash equivalents	21,979	37,773
	Short-term investments available for sale (Note 5)	15,922	133,112
	Accounts receivable (Note 6)	46,585	19,685
	Income taxes receivable	9,196	5,294
	Inventories (Note 7)	37,270	20,163
	Prepaid expenses and deposits	3,494	2,794
	Deferred income taxes (Note 8)	4,586	6,214
Total current assets		139,032	225,035
Investments (Note 9)		—	1,002
Property, plant and equipment, net (Note 10)		31,252	20,331
Intangible assets, net (Note 11)		407,875	265,423
Goodwill, net (Note 12)		27,467	27,550
Deferred debt issue expenses, at amortized cost		3,088	4,233
Deferred income taxes (Note 8)		930	1,775
Total assets		609,644	545,349
Liabilities
Current liabilities
	Accounts payable and accrued liabilities (Note 14)	47,917	43,418
	Income taxes payable	731	4,821
	Instalments on long-term debt	1,778	1,528
	Deferred income taxes (Note 8)	936	494
Total current liabilities		51,362	50,261
Long-term debt (Note 15)		127,916	129,474
Deferred income taxes (Note 8)		38,290	34,603
Total liabilities		217,568	214,338
Commitments and contingencies (Note 22)
Shareholders' Equity
Capital stock (Note 16)
	Series A preferred shares, without par value; shares authorized: 14,175,000; no shares issued	—	—
	Series B preferred shares, without par value; shares authorized: 12,000,000; no shares issued	—	—
	Common shares, without par value; unlimited shares authorized; issued and outstanding: 45,562,336 and 45,004,320 as at September 30, 2004 and 2003, respectively	260,643	255,743
Retained earnings		112,362	63,634
Accumulated other comprehensive income		19,071	11,634
Total shareholders' equity		392,076	331,011
Total liabilities and shareholders' equity		609,644	545,349

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

Léon F. Gosselin
Director
D^r Claude Sauriol
Director

50            U.S. GAAP

CONSOLIDATED OPERATIONS

Years ended September 30		2004		2003		2002
in thousands of U.S. dollars, except share related data		$		$		$
Revenue		243,634		179,084		132,404
Cost of goods sold		54,247		44,459		34,039
Selling and administrative expenses		76,365		63,084		49,392
Research and development expenses		19,866		12,098		8,855
Acquired in-process research		—		12,000		—
Depreciation and amortization		16,359		8,063		7,546
		166,837		139,704		99,832
Operating income		76,797		39,380		32,572
Financial expenses		6,885		4,283		898
Interest income		(756	)	(1,639	)	(912	)
Loss (gain) on foreign currency		(313	)	122		266
Takeover-bid expenses		—		3,697		—
		5,816		6,463		252
Income before income taxes		70,981		32,917		32,320
Income taxes (Note 8)		22,253		12,992		11,132
Net income		48,728		19,925		21,188
Income per common share
	Basic	1.08		0.44		0.51
	Diluted	0.98		0.44		0.50
Weighted average number of common shares
	Basic	45,286,199		44,914,944		41,664,510
	Diluted	52,787,964		45,607,992		42,527,500

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

U.S. GAAP            51

CONSOLIDATED SHAREHOLDERS' EQUITY

Years ended September 30	2004	2003		2002
in thousands of U.S. dollars
Common shares (number)
Balance, beginning of year	45,004,320	44,863,198		38,412,133
Shares issued following public offerings for cash	—	—		5,000,000
Shares issued following private investors' subscription for cash	—	—		208,044
Shares issued following the exercise of the underwriters' option for cash	—	—		750,000
Shares issued pursuant to the stock option plan for cash	558,016	141,122		127,489
Shares issued for the acquisition of assets	—	—		365,532
Balance, end of year	45,562,336	45,004,320		44,863,198
	$	$		$
Common shares
Balance, beginning of year	255,743	254,640		183,193
Shares issued following public offerings for cash	—	—		54,312
Shares issued following private investors' subscription for cash	—	—		3,000
Shares issued following the exercise of the underwriters' option for cash	—	—		8,625
Shares issued pursuant to the stock option plan for cash	4,900	1,103		751
Shares issued for the acquisition of assets	—	—		4,759
Balance, end of year	260,643	255,743		254,640
Retained earnings
Balance, beginning of year	63,634	43,709		22,521
Net income	48,728	19,925		21,188
Balance, end of year	112,362	63,634		43,709
Accumulated other comprehensive income (loss)
Balance, beginning of year	11,634	(3,562	)	(5,283	)
Foreign currency translation adjustments	7,437	15,196		1,721
Balance, end of year	19,071	11,634		(3,562	)
Total shareholders' equity	392,076	331,011		294,787
Comprehensive income
Foreign currency translation adjustments	7,437	15,196		1,721
Net income	48,728	19,925		21,188
Total comprehensive income	56,165	35,121		22,909

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

52            U.S. GAAP

CONSOLIDATED CASH FLOWS

Years ended September 30		2004		2003		2002
in thousands of U.S. dollars		$		$		$
Operations
Net income		48,728		19,925		21,188
Non-cash items
	Non-controlling interest	—		(103	)	(363	)
	Amortization of deferred debt issue expenses	1,144		646		247
	Other depreciation and amortization	16,359		8,063		7,546
	Loss (gain) on disposal of assets	(5	)	1,130		—
	Foreign currency fluctuation	342		305		507
	Deferred income taxes	6,625		1,848		2,378
	Share in net loss of joint ventures	455		106		46
	Changes in working capital items (Note 18)	(50,288	)	19,576		3,782
Cash flows from operating activities		23,360		51,496		35,331
Financing
Long-term debt		2,212		126,064		1,506
Repayment of long-term debt		(3,842	)	(4,687	)	(3,267	)
Deferred debt issue expenses		—		(4,589	)	(537	)
Issue of shares		4,900		1,103		65,039
Cash flows from financing activities		3,270		117,891		62,741
Investment
Acquisition of short-term investments		(20,936	)	(133,112	)	(60,740	)
Disposal of short-term investments		138,074		60,740		—
Acquisition of investments		—		—		(16	)
Disposal of investments		1,876		637		385
Acquisition of property, plant and equipment		(13,409	)	(4,291	)	(2,881	)
Disposal of property, plant and equipment		405		—		—
Acquisition of intangible assets		(149,628	)	(76,093	)	(1,561	)
Disposal of intangible assets		917		—		—
Other		—		—		1,363
Net cash used for business acquisitions (Note 4)		—		—		(31,302	)
Cash flows from investment activities		(42,701	)	(152,119	)	(94,752	)
Foreign exchange gain on cash held in foreign currencies		277		528		142
Net increase (decrease) in cash and cash equivalents		(15,794	)	17,796		3,462
Cash and cash equivalents, beginning of year		37,773		19,977		16,515
Cash and cash equivalents, end of year		21,979		37,773		19,977

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

U.S. GAAP            53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30

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

1.     GOVERNING STATUTES AND NATURE OF OPERATIONS

The Company, incorporated under the Canada Business Corporations Act, is involved in the research, development, production and distribution of pharmaceutical products, mainly in the field of gastroenterology.

2.     CHANGES IN ACCOUNTING POLICIES

a)    Year ended September 30, 2004

Disclosure of information about capital structure

In April 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") to Statement of Financial Accounting Standard ("SFAS") No. 129-1,"Disclosure Requirements under FASB Statement No. 129, Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities" to provide disclosure guidance for contingently convertible securities, including those instruments with contingent conversion requirements that have not been met and otherwise are not required to be included in the computation of diluted earnings per share. The FSP addresses concerns that disclosures relating to contingently convertible securities are inconsistent between companies or may be inadequate. FSP SFAS No. 129-1 states that to comply with the requirements of SFAS No. 129, the significant terms of the conversion features of the contingently convertible security should be disclosed to enable users of financial statements to understand the circumstances of the contingency and the potential impact of conversion. The Company evaluated the impact of this pronouncement and has enhanced its disclosures as required.

Consolidation of variable interest entities

In January 2003, the FASB issued Interpretation ("FIN") No. 46,"Consolidation of Variable Interest Entities, an interpretation for Accounting Research Bulletin No. 51." FIN No. 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after December 15, 2003. The Company currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 did not have an effect on the Company's consolidated balance sheets or statements of operations, shareholders' equity and cash flows.

b)    Year ended September 30, 2003

Basis of presentation

The Company decided, for the year beginning October 1, 2002, to switch from Canadian generally accepted accounting principles ("GAAP") to the United States of America ("U.S.") GAAP as its primary reporting convention. The change in GAAP was influenced by the Company's desire to better meet the needs of its shareholders by applying accounting rules that are consistent with the majority of its customers and peer companies. Consolidated financial statements prepared in U.S. dollars and in accordance with Canadian GAAP are available to shareholders and filed with regulatory authorities.

Guarantor's accounting and disclosure requirements for guarantees

In November 2002, the FASB issued FIN No. 45,"Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. FIN No. 45 also requires guarantors to disclose certain information for guarantees, including product warranties, outstanding at the end of the reporting period. At adoption, FIN No. 45 did not have any impact on the Company's consolidated statements of income or financial position.

Impairment or disposal of long-lived assets

SFAS No. 144,"Accounting for the Impairment or Disposal of Long-lived Assets" provides guidance on how assets are grouped when testing for and measuring impairment and proposes a two-step process for first determining when an impairment loss is recognized and then measuring that loss. The adoption of this new standard had no impact on the consolidated financial statements.

Stock-based compensation

In December 2002, the FASB issued SFAS No. 148,"Accounting for Stock-Based Compensation — Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,"Accounting for Stock-Based Compensation", to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion ("APB") No. 28,"Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25. As allowed by SFAS No. 123, the Company elected to continue to utilize the accounting method prescribed by APB No. 25 and applies the disclosure requirements of SFAS No. 123.

54            U.S. GAAP

c)     Year ended September 30, 2002

Business combinations, goodwill and other intangible assets

In June 2001, the FASB has approved for issuance SFAS No. 141,"Business Combinations," and No. 142,"Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill and intangible assets with indefinite life will cease and instead, their carrying value will be evaluated for impairment on an annual basis. Intangible assets with finite life will continue to be amortized over their useful lives and reviewed for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company has elected to early adopt and, since October 1, 2001, it no longer amortizes its goodwill and trademarks with indefinite life, but however, evaluates goodwill and trademarks with indefinite life for impairment annually. Intangible assets with finite life will continue to be amortized over their estimated useful lives. As required by the standards, the Company completed the impairment tests on October 1, 2001 and did not record any impairments.

d)    Standards applicable for the year 2005

Effect of contingently convertible instruments on diluted earnings per share

During the September 2004 meeting of the Emerging Issues Task Force ("EITF") a consensus was reached on EITF Issue 04-8,"The Effect of Contingently Convertible Debt on Diluted Earnings per Share". The EITF 04-8 requires companies to include certain convertible debt and equity instruments, that were previously excluded, into their calculations of diluted earnings per share. The EITF concluded that Issue 04-8 will be effective for periods ending after December 15, 2004, and must be applied by restating all periods during which time the applicable convertible instruments were outstanding. The 4.25% convertible subordinated notes, issued in 2003, will always be included in the Company's diluted earnings per share calculation. If the Company had applied retroactively the conclusions of the EITF, the diluted income per common share would have been $0.96 and $0.44 respectively for the years ended September 30, 2004 and 2003.

Share-based payment

On March 31, 2004, the FASB issued an Exposure Draft,"Share-Based Payment, an Amendment of FASB Statements No. 123 and 95". The Exposure Draft would require all entities to recognize compensation cost for share-based awards, including options, granted to employees. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB No. 25,"Accounting for Stock Issued to Employees", and generally would require instead that such transactions be accounted for using a fair-value based method. Public companies would be required to measure stock-based compensation classified as equity by valuing the instrument the employee receives at its grant-date fair value. Share-based awards classified as liabilities, would be measured at fair value and remeasured at fair value at each reporting period. Currently such awards are measured at intrinsic value under both APB No. 25 and SFAS 123,"Accounting for Stock-Based Compensation". The Company would apply the proposed Statement for interim and fiscal periods beginning after June 15, 2005 using the modified prospective transition approach.

3.     ACCOUNTING POLICIES

Basis of presentation

The Company has prepared these consolidated financial statements in U.S. dollars and in accordance with U.S. GAAP. Consolidated financial statements prepared in U.S. dollars and in accordance with Canadian GAAP are available to shareholders and filed with various regulatory authorities.

Accounting estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and recognized amounts of revenues and expenses during the year. Significant estimates and assumptions made by management include allowances for accounts receivable and inventories, reserves for product returns, rebates and chargebacks, 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, pending legal settlements, the realizability of deferred tax assets and the allocation of the purchase price of acquired assets and businesses. The estimates are made using the historical information available to management and other expected factors. The Company reviews 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.

Principles of consolidation

These financial statements include the accounts of the Company and its subsidiaries, the most important being Axcan Scandipharm Inc., Axcan Pharma U.S. Inc., and Axcan Pharma S.A. (the result of the merger of Laboratoires Entéris S.A.S. with Laboratoires du Lactéol du Docteur Boucard S.A.). Significant intercompany transactions have been eliminated in consolidation.

U.S. GAAP            55

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. Revenue from product sales is recognized net of sales discounts, allowances, returns, rebates and chargebacks. In certain circumstances, returns or exchange of products are allowed under the Company's policy and provisions are maintained accordingly. Amounts received from customers as prepayments for products to be shipped in the future are reported as deferred revenue.

Cash and cash equivalents

The Company includes in cash and cash equivalents cash and all highly liquid short-term investments with initial maturities of three months or less.

Short-term investments

The Company classifies its short-term investments as available for sale. These investments are recorded at their fair value, unrealized gains or losses are recorded as a component in shareholders' equity. As at September 30, 2004, there is no material unrealized gain or loss.

Accounts receivable

The majority of the Company's accounts receivable are due from companies in the pharmaceutical industry. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debts expenses.

Inventory valuation

Inventories of raw materials and packaging material are valued at the lower of cost and replacement cost. Inventories of work in progress and finished goods are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method.

Research and development

Research and development expenses are charged to operations in the year they are incurred. Acquired in-process research and development having no alternative future use is written off at the time of acquisition. The cost of intangibles that are purchased from others for a particular research and development project that have no alternative future use are written off at the time of acquisition.

Depreciation and amortization

Property, plant and equipment and intangible assets with a finite life are reported at cost, less accumulated depreciation and are depreciated or amortized over their estimated useful lives according to the straight-line method at the following annual rates:

Buildings	4 to 10%
Furniture and equipment	10 to 20%
Computer equipment	20 to 50%
Automotive equipment	20 to 25%
Leasehold and building improvements	10 to 20%
Trademarks, trademark licenses and manufacturing rights	4 to 15%

Depreciation or amortization commences when an asset is substantially completed and becomes available for productive commercial use.

Goodwill and intangible assets with indefinite life are no longer amortized since October 1, 2001.

Management evaluates the value of the unamortized portion of property, plant and equipment, goodwill and intangible assets annually. Should there be a permanent impairment in value, a write-down will be recognized for the current year to reflect the assets at fair value. To date, the Company has not recognized any permanent impairment in value except for an amount of $83,000 of goodwill for the year ended September 30, 2004.

Deferred debt issue expenses are amortized on a straight-line basis over the terms of the debts, until 2008.

Income taxes

Income taxes are calculated based on the liability method. Under this method, deferred income tax assets and liabilities are recognized as estimated taxes for recovery or settlement arising 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. Adjustments to the deferred income tax asset and liability balances are recognized in net income as they occur.

56            U.S. GAAP

Stock-based compensation

Under the provision of SFAS No. 123,"Accounting for Stock Compensation", companies can either measure the compensation cost of equity instruments issued under employee compensation plans using a fair value-based method or can continue to recognize compensation cost using the intrinsic value method under the provisions of APB No. 25,"Accounting for Stock Issued to Employees". However, if the provisions of APB No. 25 are applied, pro-forma disclosure of net income and income per share must be presented in the financial statements as if the fair value method had been applied.

For all periods presented, the Company recognized compensation costs under the provisions of APB No. 25, and the Company has provided the expanded disclosure required by SFAS No. 123. The Company has elected to continue to measure compensation costs related to awards of stock options using the intrinsic value based method of accounting. No stock-based employee compensation cost is reflected in net income.

The following table illustrates the effect on net income and income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.

		2004	2003	2002
		$	$	$
Net income as reported		48,728	19,925	21,188
Total stock-based compensation expenses determined under fair value based method		4,286	3,369	2,489
Pro-forma net income		44,442	16,556	18,699
Basic income per share
	As reported	1.08	0.44	0.51
	Pro-forma	0.98	0.37	0.45
Diluted income per share
	As reported	0.98	0.44	0.50
	Pro-forma	0.90	0.36	0.44

Foreign currency translation

The current rate method of translation of foreign currencies is followed for subsidiaries, or joint ventures considered financially and operationally self-sustaining. Therefore, all gains and losses arising from the translation of the financial statements of subsidiaries or joint ventures are deferred in a cumulative foreign currency translation adjustments account reported as a component of accumulated other comprehensive income in shareholders' equity.

For the operations in Canada and the United States of America, monetary assets and liabilities in currency other than U.S. dollars are translated into U.S. dollars, the functional currency of the Company, at the exchange rates in effect at the balance sheet date whereas other assets and liabilities are translated at exchange rates in effect at transaction dates. Revenue and operating expenses in foreign currency are translated at the average rates in effect during the year, except for depreciation and amortization, translated at historical rates. Gains and losses are included in net income for the year.

Income per share

Basic income per share is calculated using the weighted average number of common shares outstanding during the year. The treasury stock method is to be used for determining the dilution effect of options. The dilutive effect of convertible subordinated notes, balance of purchase price payable in shares and convertible preferred shares is determined using the "if-converted" method.

U.S. GAAP            57

4.     ACQUISITIONS

a)    Business acquisitions

September 30, 2002

On November 7, 2001, the Company acquired all the outstanding shares of Laboratoire Entéris S.A.S., a company specializing in the distribution of gastrointestinal products in France. The acquisition cost, including transaction expenses, amounting to $23,000,840, was paid in cash.

On April 17, 2002, the Company acquired all the outstanding shares of Laboratoires du Lactéol du Docteur Boucard S.A. and certain related assets. This company is specialized in the manufacturing and distribution of gastrointestinal products in France. The acquisition cost, including transaction expenses, amounting to $13,137,613, was paid with the issuance of 365,532 common shares of the Company and $8,378,728 in cash. The price of the common shares issued was determined on the basis of a twenty-day trading average closing price.

These two acquisitions allowed the Company to establish operations in France for the development of markets in all of Western Europe and added two products to the Company's product line.

The following table shows the breakdown of these acquisitions:

		$
Net assets acquired at the attributed values
Assets
	Cash and cash equivalents	77
	Other working capital items	7,323
	Property, plant and equipment	9,433
	Intangible assets with indefinite life	29,175
	Goodwill	9,632
	Deferred income taxes	656
	Other assets	1,363
		57,659
Liabilities
	Accounts payable	8,215
	Long-term debt	6,922
	Deferred income taxes	6,384
		21,521
		36,138
Consideration
	Cash	31,379
	Common shares issued	4,759
		36,138
Net cash used for the acquisitions		31,302

The acquisition cost has been allocated to the assets and liabilities according to their estimated fair value at the acquisition dates. The operating results relating to these acquisitions have been included in the consolidated financial statements from the acquisition dates.

Using the assumption that the effective date of the business acquisitions is October 1, 2001, the consolidated pro-forma results of operations of the Company would have been as follows for the year ended September 30, 2002:

	(unaudited)
	$
Revenue	140,983
Net earnings	20,802
Net earnings per share	0.50

58            U.S. GAAP

b)    Products acquisitions

On November 18, 2003, the Company acquired the rights to a group of products from Aventis Pharma S.A. ("Aventis") for a cash purchase price of $145,000,000. The acquired products are CARAFATE and BENTYL for the U.S. market and SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market.

On August 29, 2003, the Company acquired an exclusive license for North America, the European Union and Latin America, from Abbott Laboratories ("Abbott") to develop, manufacture and market ITAX, a patented gastroprokinitic drug. Under the terms of this license agreement, the Company paid $10,000,000 and assumed $2,000,000 in research contract liability. This product in development had not reached technological feasibility and had no known alternative uses, it was therefore considered to be acquired in-process research and was expensed in the period of acquisition. The agreement also provides for milestone payments upon certain events.

On December 10, 2002, the Company acquired the rights to the Ursodiol 250mg tablets DELURSAN for the French market, for a cash purchase price of 22,300,000 Euros ($22,800,000) from Aventis. On December 3, 2002, the Company acquired the worldwide rights to the PANZYTRAT enzyme product line from Abbott for a cash purchase price of $45,000,000.

During a transition period, the sellers may act as Axcan's agents for the management of sales of some of these products. For the year ended September 30, 2004, a portion of the sales of these products is still managed by the sellers. Axcan includes in its revenue the net sales from such products less corresponding cost of goods sold and other seller related expenses. Consequently, although net sales of such products of the year ended September 30, 2004 were $7,667,940 ($14,255,979 in 2003), the Company only included in its revenue an amount of $4,685,673 ($9,463,645 in 2003) representing the net sales less cost of goods sold and other seller related expenses.

5.     SHORT-TERM INVESTMENTS

As at September 30, 2004, short-term investments include short-term notes, mutual funds and debt securities. One mutual fund represent approximately 64% (four short-term notes for 60% in 2003) of the Company's total short-term investments. Interest rates on most of the short-term investments vary from 0.975% to 3.315% (0.81% to 1.08% in 2003).

6.     ACCOUNTS RECEIVABLE

	2004	2003
	$	$
Trade accounts, net of allowance for doubtful accounts of $876,000 ($613,000 in 2003)(a)	44,320	16,696
Investments receivable within one year	—	1,102
Taxes receivable	1,978	1,479
Other	287	408
	46,585	19,685

The Company believes that there is no unusual exposure associated with the collection of these accounts receivable.

(a)

As at September 30, 2004, the accounts receivable include amounts receivable from three customers which represent approximately 51% (two customers and one agent for 44% in 2003) of the Company's total accounts receivable.

U.S. GAAP            59

7.     INVENTORIES

	2004	2003
	$	$
Raw materials and packaging material	10,311	8,441
Work in progress	1,781	1,466
Finished goods	25,178	10,256
	37,270	20,163

8.     INCOME TAXES

The deferred income tax assets and liabilities result from differences between the tax value and book value of the following items:

		2004	2003
		$	$
Short-term deferred income tax assets
	Inventories	376	2,554
	Prepaid expenses and deposits	167	—
	Accounts payable and accrued liabilities	2,941	2,558
	Pending legal settlements	1,102	1,102
		4,586	6,214
Long-term deferred income tax assets
	Investments	—	16
	Share issue expenses	930	1,746
	Unused operating losses	—	13
		930	1,775
Short-term deferred income tax liabilities
	Accounts receivable	379	318
	Inventories	109	—
	Prepaid expenses and deposits	434	163
	Investments	14	13
		936	494
Long-term deferred income tax liabilities
	Property, plant and equipment	2,484	1,993
	Intangible assets	34,619	31,801
	Goodwill	682	682
	Research and development expenses	505	127
		38,290	34,603

60            U.S. GAAP

Income taxes included in the statement of operations are as follows:

		2004		2003		2002
		$		$		$
Current		15,628		11,144		8,754
Deferred
	Creation and reversal of temporary differences	6,625		2,678		2,234
	Change in promulgated rates	—		(830	)	144
		6,625		1,848		2,378
		22,253		12,992		11,132
Domestic
	Current	(338	)	(1,763	)	2,152
	Deferred	2,756		574		1,704
		2,418		(1,189	)	3,856
Foreign
	Current	15,966		12,907		6,602
	Deferred	3,869		1,274		674
		19,835		14,181		7,276
		22,253		12,992		11,132

The Company's effective income tax rate differs from the combined statutory federal and provincial income tax rate in Canada (31.52% for 2004, 33.59% for 2003 and 35.66% for 2002). This difference arises from the following:

		2004				2003				2002
		%		$		%		$		%		$
Combined basic rate applied to pre-tax income		31.52		22,373		33.59		11,057		35.66		11,525
Increase (decrease) in taxes resulting from:		0.04		29		—		—		—		—
	Large corporations tax	—		—		(2.52	)	(830	)	0.44		144
	Change in promulgated rates	(2.47	)	(1,752	)	4.54		1,495		3.68		1,189
	Difference with foreign tax rates	1.79		1,268		2.90		953		0.79		257
	Non-deductible items	—		—		—		—		(0.71	)	(231	)
	Use of unrecorded prior years' losses	(0.65	)	(460	)	(1.35	)	(445	)	(5.30	)	(1,713	)
	Non-taxable items and other	2.76		1,958		3.80		1,250		2.45		791
	Foreign withholding taxes	(1.64	)	(1,163	)	(1.49	)	(488	)	(2.57	)	(830	)
	Investment tax credits	31.35		22,253		39.47		12,992		34.44		11,132

No provision has been made for income taxes on the undistributed earnings of the Company's foreign subsidiaries as at September 30, 2004 that the Company intends to indefinitely reinvest.

U.S. GAAP            61

9.     INVESTMENTS

	2004	2003
	$	$
Investments in preferred shares of a private company, at estimated net realizable value	—	578
Note receivable, 8.5% beginning on January 1, 2002, maturing on January 1, 2004	—	936
Investments in joint ventures accounted for using equity method	—	227
Other	—	363
	—	2,104
Investments receivable within one year	—	1,102
	—	1,002

10.   PROPERTY, PLANT AND EQUIPMENT

	2004
	Cost	Accumulated depreciation	Net
	$	$	$
Land	1,581	—	1,581
Buildings	20,311	3,413	16,898
Furniture and equipment	15,751	7,975	7,776
Automotive equipment	65	14	51
Computer equipment	7,542	3,126	4,416
Leasehold and building improvements	810	280	530
	46,060	14,808	31,252

	2003
	Cost	Accumulated depreciation	Net
	$	$	$
Land	940	—	940
Buildings	12,431	2,484	9,947
Furniture and equipment	13,761	6,417	7,344
Automotive equipment	54	1	53
Computer equipment	3,822	2,085	1,737
Leasehold and building improvements	522	212	310
	31,530	11,199	20,331

Acquisitions of property, plant and equipment amount to $14,288,431 ($4,291,768 in 2003 and $14,071,633 in 2002).

The cost and accumulated depreciation of equipment under capital leases amount to $5,351,295 and $1,659,955 ($5,019,440 and $891,445 in 2003).

62            U.S. GAAP

11.   INTANGIBLE ASSETS

		2004
		Cost	Accumulated depreciation	Net
		$	$	$
Trademarks, trademark licenses and manufacturing rights with a:
	Finite life	280,034	29,869	250,165
	Indefinite life	170,127	12,417	157,710
		450,161	42,286	407,875

		2003
		Cost	Accumulated depreciation	Net
		$	$	$
Trademarks, trademark licenses and manufacturing rights with a:
	Finite life	111,327	19,998	91,329
	Indefinite life	186,512	12,418	174,094
		297,839	32,416	265,423

The cost of the product TAGAMET has been transferred from intangible assets with an indefinite life to intangible assets with a finite life following changes in the regulatory rules applicable to this product and resulting in the modification of its useful life. The net cost of this product as of October 1, 2003, which amounted to $21,852,859, is therefore amortized over a 15-year period.

Acquisitions of intangible assets amount to $149,627,653 ($76,092,927 in 2003 and $30,036,118 in 2002). The current intangible assets with a finite life have a weighted-average remaining amortization period of approximately 18 years.

The annual amortization expenses without taking into account any future acquisitions expected for the years 2005 through 2009 are as follows:

	$
2005	13,744
2006	13,744
2007	13,744
2008	13,744
2009	13,744

12.   GOODWILL

	2004	2003
	$	$
Cost	31,073	31,161
Accumulated amortization	3,606	3,611
Net	27,467	27,550

U.S. GAAP            63

13.   AUTHORIZED LINE OF CREDIT

The Company has a credit agreement relative to a $125,000,000 ($55,000,000 in 2003) financing. The credit agreement consists of a 364-day extendible revolving facility with a two-year (three-year in 2003) term-out option maturing on September 22, 2007 (October 12, 2007 in 2003). The term-out option provides for quarterly instalments equal to 8.57% (6.81% in 2003) of the amount then outstanding on the facility with a final instalment of 40% (25% in 2003).

The Company's credit facility is secured by a first security interest on all present and future acquired assets of the Company and its material subsidiaries, and provides for the maintenance of certain financial ratios. Cash dividends, repurchase of shares (other than redeemable shares issued in connection with a permitted acquisition) and similar distributions to shareholders are limited to 10% of the Company's net income for the preceding fiscal year.

The interest rate varies depending on the Company's leverage between 25 basis points and 100 (25 and 125 in 2003) basis points over prime rate and between 125 basis points and 200 (125 and 225 in 2003) basis points over the LIBOR rate or bankers acceptances. The line of credit also provides for a stand-by fee of between 25 and 37.5 basis points. The credit facility may be drawn in U.S. dollars or in Canadian dollars equivalent. As at September 30, 2004 and 2003 there was no amount outstanding under the line of credit.

14.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	2004	2003
	$	$
Accounts payable	13,259	9,232
Contract rebates, product returns and accrued chargebacks	8,853	7,248
Accrued interest on subordinated notes	2,530	3,038
Accrued royalty fees	5,340	4,820
Accrued salaries	3,228	3,084
Accrued bonuses	2,804	2,883
Accrued research and development expenses	3,447	1,995
Acquired in-process research payable	—	7,000
Other accrued liabilities	5,556	1,218
Pending legal settlements	2,900	2,900
	47,917	43,418

15.   LONG-TERM DEBT

	2004	2003
	$	$
Convertible subordinated notes, 4.25%, interest payable semi-annually starting October 15, 2003, convertible into 8,924,113 common shares, maturing April 15, 2008.(a)	125,000	125,000
Bank loans, 3.80% (interest rates varying between 4.84% and 7.15% as at September 30, 2003), secured by immovable hypothecs on land and buildings having a net book value of $6,826,494 in 2004, payable in quarterly instalments of $200,000, principal and interest, maturing in 2007.	2,174	2,576
Obligations under capital leases, interest rates varying between 3.81% and 6.2% payable in monthly instalments, principal and interest, maturing on different dates until 2009.	2,520	3,426
	129,694	131,002
Instalments due within one year	1,778	1,528
	127,916	129,474

64            U.S. GAAP

(a)

The $125,000,000 subordinated notes are convertible into 8,924,113 common shares. The noteholders may convert their notes during any quarterly conversion period if the closing price per share for at least 20 consecutive trading days during the 30 consecutive trading-day period ending on the first day of the conversion period exceeds 110% of the conversion price in effect on that thirtieth trading day. The note-holders may also convert their notes during the five business-day period following any 10 consecutive trading-day period in which the daily average of the trading prices for the notes was less than 95% of the average conversion value for the notes during that period. Finally, the noteholders may also convert their notes upon the occurrence of specified corporate transactions or, if the company has called the notes for redemption. On or after April 20, 2006, the Company may at its option, redeem the notes, in whole or in part at redemption prices varying from 101.70% to 100.85% of the principal amount plus any accrued and unpaid interest to the redemption date. The notes also include provisions for the redemption of all the notes for cash at the option of the Company following some changes in tax treatment.

As at September 30, 2004, minimum instalments on long-term debt for the next years are as follows:

	Obligations under capital leases	Other long term loans
	$	$
2005	1,089	792
2006	838	760
2007	483	622
2008	264	125,000
2009	92	—
	2,766
Interest included in the minimum lease payments	246
	2,520

16.   CAPITAL STOCK

Preferred shares

The Company has an unlimited number of authorized preferred shares without par value, issuable in series, rights, privileges and restrictions determined at the creation date.

During the year 2000, the Company created two series of preferred shares as follows:

14,175,000	Series A, non-voting, annual preferential cumulative dividend of 5%, redeemable on or prior to June 8, 2001 at CDN$1.00 per share payable at the option of the Company in cash or by the issuance of common shares or in any combination of cash and common shares.
12,000,000	Series B, non-voting, redeemable on the fifth anniversary of their issuance at CDN$1.00 per share payable in cash or by the issuance of common shares at the option of the Company, convertible into common shares at the holder's option on the basis of one common share for each 15 Series B preferred shares.

Common stock option plan

The common stock option plan is intended for eligible directors, principal senior executives and employees. The number of stock options that can be granted under this plan cannot exceed 4,500,000 as at September 30, 2004, 2003 and 2002. Options are granted at the fair market value of the common stock on the last trading day prior to the granting date. Options may be exercised at a rate of 20% per year and expire ten years after the granting date except for the annual options granted to outside directors which may be exercised one year after the granting date.

U.S. GAAP            65

The changes to the number of stock options outstanding are as follows:

	2004			2003			2002
	Number of options		Weighted average exercise price	Number of options		Weighted average exercise price	Number of options		Weighted average exercise price
			$			$			$
Balance, beginning of year	2,681,840		10.12	2,429,078		9.67	1,956,441		7.75
Granted	738,350		15.44	531,850		11.36	684,050		13.38
Exercised	(558,016	)	8.78	(141,122	)	7.82	(127,489	)	5.89
Cancelled	(261,618	)	11.23	(137,966	)	10.73	(83,924	)	9.58
Balance, end of year	2,600,556		11.86	2,681,840		10.12	2,429,078		9.67
Options exercisable at end of year	954,459		9.93	965,909		9.00	614,716		7.79

Stock options outstanding at September 30, 2004 are as follows:

	Options outstanding
				Options exercisable
		Weighted average remaining contractual life
Exercise price	Number		Weighted average exercise price	Number	Weighted average exercise price
			$		$
$4.06   — $5.00	17,000	5.23	4.06	11,000	4.06
$5.01   — $7.00	23,100	4.87	6.12	20,500	6.03
$7.01   — $10.00	809,586	5.84	8.42	527,549	8.30
$10.01 — $13.00	760,510	7.62	11.70	287,970	11.89
$13.01 — $16.00	707,360	8.40	13.56	107,440	14.00
$16.01 — $19.00	195,500	9.53	18.30	—	—
$19.01 — $19.99	87,500	9.39	19.99	—	—
	2,600,556	7.40	11.86	954,459	9.93

The average weighted fair value of granted stock options was $6.80, $5.41 and $6.96 for the years ended September 30, 2004, 2003 and 2002.

The fair values of all stock options granted during 2004, 2003 and 2002 were estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	2004	2003	2002
Expected option life (years)	6	6	6
Volatility	44%	46%	47%
Risk-free interest rate	4.17%	4.43%	4.93%
Expected dividend	—	—	—

The Black-Scholes model, used by the Company to calculate option values, as well as other currently accepted option valuation models, were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that these models do not necessarily provide a reliable single measure of the fair value of the Company's stock option awards.

66            U.S. GAAP

17.   FINANCIAL INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENT OF OPERATIONS

a)    Financial expenses

	2004	2003	2002
	$	$	$
Interest on long-term debt	5,614	3,340	159
Bank charges	127	297	210
Financing fees	—	—	282
Amortization of deferred debt issue expenses	1,144	646	247
	6,885	4,283	898

b)    Selling and administrative expenses

Selling and administrative expenses include the following:

	2004	2003	2002
	$	$	$
Shipping and handling expenses	4,349	3,477	2,763
Advertising expenses	15,155	10,524	10,501

c)     Other information

	2004		2003		2002
	$		$		$
Non-controlling interest	—		(103	)	(363	)
Rental expenses	1,216		1,228		1,148
Depreciation of property, plant and equipment	3,720		3,467		2,486
Amortization of intangible assets	12,639		4,596		5,060
Share in net loss of joint ventures	(455	)	(106	)	(46	)

The Company incurred professional fees with a law firm, in which a Company's director is a partner, totalling $556,724 for the year ended September 30, 2004 ($385,862 in 2003 and $466,056 in 2002). These transactions were concluded in the normal course of operations, at the exchange amount.

d)    Income per common share

The following table reconciles the numerators and denominators of the basic and diluted income per share computations.

		2004	2003	2002
		$	$	$
Net income available to common shareholders
	Basic	48,728	19,925	21,188
	Financial expenses relating to the convertible subordinated notes	3,169	—	—
	Net income available to common shareholders on a diluted basis	51,897	19,925	21,188
		2004	2003	2002
Weighted average number of common shares
	Weighted average number of common shares outstanding	45,286,199	44,914,944	41,664,510
	Effect of dilutive stock options	820,872	472,599	660,970
	Effect of dilutive purchase price	—	220,449	202,020
	Effect of dilutive convertible subordinated notes	6,680,893	—	—
	Adjusted weighted average number of common shares outstanding	52,787,964	45,607,992	42,527,500
Number of common shares outstanding as at November 9, 2004		45,562,336

U.S. GAAP            67

Options to purchase 283,000 common shares (754,100 for 2003 and 553,350 for 2002) were outstanding but were not included in the computation of diluted income per share as the exercise price of the options was greater than the average market price of the common shares. As of September 30, 2003, the subordinated notes convertible into 8,924,113 common shares had no effect on the diluted income per share. Since the trigger event occurred during the second, third and fourth quarters of the year ended September 30, 2004, the 8,924,113 common shares are included in the weighted average number of common shares outstanding for those periods.

18.   FINANCIAL INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENT OF CASH FLOWS

a)    Changes in working capital items

	2004		2003		2002
	$		$		$
Accounts receivable	(27,795	)	5,569		2,155
Income taxes receivable	(3,773	)	(4,438	)	(406	)
Inventories	(17,157	)	(417	)	(2,546	)
Prepaid expenses and deposits	(703	)	(892	)	(58	)
Accounts payable and accrued liabilities	3,191		16,547		3,814
Income taxes payable	(4,051	)	3,207		823
	(50,288	)	19,576		3,782

b)    Cash flows relating to interest and income taxes of operating activities are as follows:

	2004	2003	2002
	$	$	$
Interest received	1,035	1,427	787
Interest paid	6,122	342	242
Income taxes paid	23,620	12,417	7,672

19.   JOINT VENTURES

The Company's interest in the joint ventures is accounted for by the equity method. During fiscal 2004, the Company wrote off its investment in these joint ventures.

The following accounts represent the share of the Company in the joint ventures:

		2004		2003		2002
		$		$		$
Current assets		122		217		190
Total assets		168		649		606
Current liabilities		312		393		248
Total liabilities		343		422		273
Revenue		906		659		725
Expenses		1,361		765		771
Net loss		(455	)	(106	)	(46	)
Cash flows from:
	Operations	(31	)	92		(8	)
	Financing	2		4		—
	Investment	—		(11	)	10

68            U.S. GAAP

20.   SEGMENTED INFORMATION

The Company considers that it operates in a single field of activity, the pharmaceutical industry, since its other activities do not account for a significant portion of segment assets.

	2004	2003	2002
	%	%	%
Customer A	24.3	15.6	20.2
Customer B	18.4	18.6	18.8
Customer C	13.1	15.4	13.3
	55.8	49.6	52.3

Purchases from one supplier represent approximately 15% of the cost of goods sold for the year ended September 30, 2004 (26% in 2003 and 30% in 2002).

The Company purchases its inventory from third party manufacturers, many of whom are the sole source of products for the Company. The failure of such manufacturers to provide an uninterrupted supply of products could adversely impact the Company's ability to sell such products.

The Company operates in the following geographic segments:

			2004	2003	2002
			$	$	$
Revenue
	Canada
		Domestic sales	28,002	20,555	17,413
		Foreign sales	—	—	—
	United States
		Domestic sales	162,810	113,875	100,088
		Foreign sales	3,921	—	—
	Europe
		Domestic sales	43,830	39,971	13,099
		Foreign sales	4,846	4,531	1,696
	Other		225	152	108
			243,634	179,084	132,404
Property, plant, equipment, intangible assets and goodwill
	Canada		40,401	14,622	13,782
	United States		131,242	133,695	135,839
	Europe		265,417	138,113	54,677
	Other		29,534	26,874	23,423
			466,594	313,304	227,721

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

U.S. GAAP            69

21.   FINANCIAL INSTRUMENTS

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 currency risk.

Fair value of the financial instruments on the balance sheet

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

		2004		2003
		Fair value	Carrying amount	Fair value		Carrying amount
		$	$	$		$
Assets
	Cash and cash equivalents	21,979	21,979	37,773		37,773
	Short-term investments	15,922	15,922	133,112		133,112
	Accounts receivable	44,607	44,607	17,104		17,104
	Investments in a private company	—	—	b	)	578
	Note receivable	—	—	b	)	936
	Other investments	—	—	363		363
Liabilities
	Accounts payable and accrued liabilities	47,917	47,917	43,418		43,418
	Long-term debt	162,674	129,694	154,283		131,002

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

a)    Financial instruments valued at carrying amount

The estimated fair value of certain financial instruments shown on the balance sheet is equivalent to their carrying amount because they are realizable in the short-term or because their carrying amount approximates the fair value. These financial instruments include cash and cash equivalents, short-term investments, accounts receivable, other investments and accounts payable and accrued liabilities.

b)    Investments in a private company and note receivable

The fair value of investments in a private company and note receivable was not readily determinable.

c)     Long-term debt

The fair value of long-term debt has been established by discounting the future cash flows at interest rates corresponding to those the Company would have obtained at that date for loans with similar maturity dates and terms. The fair value of the convertible subordinated notes is equivalent to the trading price at the end of the year.

22.   COMMITMENTS AND CONTINGENCIES

a)    Commitments

The Company has entered into non-cancelable operating leases and service agreements expiring on different dates until September 30, 2009 for the rental of office space, automotive equipment and other equipment and for sales management services. One of the office space leases contains an escalation clause providing for payment of additional rent.

	$
2005	2,725
2006	953
2007	297
2008	263
2009	44
	4,282

70            U.S. GAAP

The Company entered into an agreement with Nordmark Arzneimittel GmbH & Co to create a joint venture to develop patent-protected novel enzyme preparations. Under the terms of this agreement, the Company agreed to contribute up to a cumulative amount of $1,500,000 to the joint venture. As at September 30, 2004, a total amount of $600,000 ($100,000 in 2003) has been contributed.

b)    Contingencies

The subsidiary Axcan Scandipharm has been named as a defendant in several legal proceedings related to the products line it markets under the name ULTRASE. Of the 12 lawsuits to date, Axcan Scandipharm was dismissed from one, nonsuited in another and settled ten. These lawsuits were filed against Axcan Scandipharm and certain other named defendants, including the enzyme manufacturer, stemming from allegations that, among other things, Axcan Scandipharm's enzyme products caused colonic strictures. At this time, it is difficult to predict if there will be other claims or their number and because of the young age of the patients involved, Axcan Scandipharm's product liability exposure for this issue in the United States will remain for a number of years. Axcan Scandipharm's insurance carriers have defended the lawsuits to date and Axcan expects them to continue to defend Axcan Scandipharm (to the extent of its product liability insurance) should other lawsuits be filed in the future.

In addition, the enzyme manufacturer and certain other companies have claimed a right to recover amounts paid defending and settling these claims as well as a declaration that Axcan Scandipharm and another named defendant must provide indemnification against future claims. This lawsuit is based on contractual and indemnity issues and the parties have agreed to settle their dispute through binding arbitration. The arbitration has commenced and the plaintiffs allege that the amount at issue may be in excess of $10,000,000. Axcan Scandipharm denies that such reimbursement is owed and has also responded with counterclaims against the plaintiffs.

As at September 30, 2004 and 2003, the Company has accrued $2,900,000 to cover any future settlements in connection with the indemnification claim and the lawsuits discussed above that may not be covered by, or exceed, applicable insurance proceeds. While the Company believes that the insurance coverage and provisions taken to date are adequate, an adverse determination of present or future claims could exceed insurance coverage and amounts currently accrued.

c)     Milestone payments

The agreements with QLT PhotoTherapeutics Inc. ("QLT") relating to the purchase of PHOTOFRIN provided for milestone payments to be made by Axcan to QLT that could reach a maximum of CDN$20,000,000 upon receipt of certain regulatory approvals for specific or additional indication for PHOTOFRIN or other conditions. Each milestone payment shall be made at the option of the Company either in cash or in Series B preferred shares or in a combination of cash and preferred shares provided that at least one-half of the milestone payable shall be paid in cash. During the years 2004, 2003 and 2000, CDN$5,000,000, CDN$5,000,000 and CDN$5,000,000 (US$3,919,417, US$3,646,973 and US$3,378,378) was paid by Axcan in cash upon receipt of regulatory approvals and was recorded in intangible assets.

The agreement to acquire the exclusive licence for North America, the European Union and Latin America to develop, manufacture and market ITAX provides for milestone payments for an amount of $20,000,000 upon regulatory submission and an amount of $45,000,000 upon regulatory approval. The Company will also pay royalties of 9% of net sales from the date of first commercial sale until the expiration of the patent and 6% for ten years then after.

d)    Royalties

Net sales of certain products of the Company are subject to royalties payable to unrelated third parties.

In particular, the Company must pay a 6% royalty on net sales of ULTRASE and a 5% royalty on the net sales of ADEK's respectively covered under agreements for the exclusive rights to market these products.

Axcan has to pay 5% of worldwide sales of PHOTOFRIN with a maximum of $500,000 per year and a maximum total aggregate of $3,108,245 until December 2007. Until September 30, 2004, an amount of $1,420,419 has been accounted for ($1,032,777 in 2003 and $753,134 in 2002). Axcan also has to pay 5% of net sales of PHOTOFRIN for use in the therapeutic treatment of cancer and 2% of net sales for other uses until December 2009.

Royalties amounting to $3,760,945, $4,387,092 and $3,731,113 respectively for years ended September 30, 2004, 2003 and 2002 were charged to operations.

e)     Licensing

During the year 2000, Axcan entered into a new licensing agreement to market a new generation of pancrelipase minitablets. As at September 30, 2004, the Company paid $3,500,000 in development fees, which is the total amount of development fees the Company agreed to pay. Axcan will pay royalties of 6% on the first $30,000,000 of annual sales and 5% on annual sales in excess of $30,000,000 subject to minimum royalty payments of $750,000, $1,000,000 and $1,500,000 in the first three years of the agreement, respectively. The product was launched in October 2003.

U.S. GAAP            71

Axcan also entered into a licensing agreement with the Children's Hospital Research Foundation for a serie of sulfated derivatives of ursodeoxycholigic acid compounds" ("SUDCA"). Axcan has, until September 30, 2004, paid $814,000 in cash. The Company will also pay milestones for a maximum amount of $200,000 when SUDCA will be validated and a bonus when certain conditions are met; finally, Axcan will pay royalties based on sales.

In May 2002, the Company signed a co-development and licensing agreement with NicOx S.A. ("NicOx") for NCX-1000, a nitric oxide-donating ursodiol derivative, for the treatment of chronic liver diseases including portal hypertension and Hepatitis "C". Under the terms of this agreement, the Company has obtained from NicOx an exclusive license to commercialize NCX-1000 in Canada and Poland as well as an option to acquire the same exclusive rights for the United States market. The Company and NicOx will share the cost of the future development of NCX-1000 jointly through the completion of Phase II clinical studies. The Company will thereafter conduct the required Phase III clinical studies and be responsible for regulatory filings in the exclusively licensed territories. The Company will pay NicOx options or milestone payments totalling up to $17,000,000 at various stages of development. An amount of $2,000,000 has been paid in 2003. The Company also agreed to pay royalties of up to 12% on net sales of the product.

On October 10, 2002, the Company acquired from Gentium S.p.A., an Italian company, exclusive rights to develop and market in North America, a patented 4 gram rectal gel formulation of mesalamine (5-ASA) for the treatment of active distal ulcerative colitis. In return the Company will make milestone payments totalling approximately $1,500,000, the majority of which will be paid upon approval in the United States. An amount of approximately $200,000 has been paid in 2003. The Company will also pay a royalty of 4% on net sales for a ten-year period from product's launch.

On July 22, 2003, the Company acquired from Merz Pharmaceutical GmbH ("Merz") an exclusive licence to use, develop and submit for approval of injectable and oral granule formulations containing L-ornithine and L-aspartate. In consideration of the rights and licenses granted by Merz under this agreement, the Company shall pay a royalty of 6% of net sales or 4% of net sales if the Company develops any patentable invention or improvement and Merz incorporates such invention or improvement into its products.

f)     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 and up to limits set by the U.S. Internal Revenue Service. During the year, the Board of Directors approved and the Company charged to operations a contribution to the Plan totalling $268,757 ($319,871 in 2003 and $224,275 in 2002).

23.   SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES AND IN CANADA

The consolidated financial statements have been prepared in accordance with U.S. GAAP which, in the case of the Company, conform in all material respects with Canadian GAAP, except as set forth below:

		2004		2003		2002
		$		$		$
Earnings adjustments
	Net income in accordance with U.S. GAAP	48,728		19,925		21,188
	Prepaid advertising costs(1)	—		—		(457	)
	Acquired in-process research(2)	—		12,000		—
	Amortization of new product acquisition costs(2)	(54	)	(54	)	(54	)
	Implicit interest on convertible debt(4)	(4,234	)	(2,292	)	—
	Income tax impact of the above adjustments	20		(962	)	191
	Net earnings in accordance with Canadian GAAP	44,460		28,617		20,868
Income per share in accordance with Canadian GAAP
	Basic	0.98		0.64		0.50
	Diluted	0.96		0.63		0.49

72            U.S. GAAP

			2004		2003
			U.S. GAAP	Canadian GAAP	U.S. GAAP	Canadian GAAP
			$	$	$	$
Balance sheet adjustments
	Current assets(6)		139,032	139,054	225,035	225,203
	Investments(6)		—	—	1,002	775
	Property, plant and equipment(6)		31,252	31,265	20,331	20,351
	Intangible assets(2)		407,875	420,235	265,423	277,837
	Goodwill(3)(6)		27,467	28,862	27,550	29,342
	Deferred debt issue expenses		3,088	3,088	4,233	4,233
	Deferred income tax asset		930	930	1,775	1,775
	Current liabilities(6)		51,362	51,430	50,261	50,634
	Long-term debt(4)		127,916	110,203	129,474	107,527
	Deferred income tax liability(2)(3)		38,290	39,376	34,603	35,742
	Shareholders' equity
		Equity component of convertible debt(4)	—	24,239	—	24,239
		Capital stock(5)(7)	260,643	267,288	255,743	262,388
		Retained earnings(2)(3)(4)(5)(7)	112,362	107,671	63,634	63,211
		Accumulated foreign currency translation adjustments(7)	19,071	23,227	11,634	15,775

(1)

Under U.S. GAAP, scientific symposium costs are included in operations in the year when they are incurred. Under Canadian GAAP, these costs were deferred and amortized over a two-year period until September 30, 2002.



(2)

Under U.S. GAAP, acquired in-process research are included in operations as at the date of acquisition as no alternative future use is established. Under Canadian GAAP, the acquired in-process research is deferred and amortized from the date of commencement of commercial production.



(3)

Under U.S. GAAP, some financial expenses were recorded when the minority interest in Axcan Scandipharm was purchased. Under Canadian GAAP, these financial expenses were included in goodwill.



(4)

Under U.S. GAAP, the entire convertible subordinated notes are included in long-term debt. Under Canadian GAAP, the estimated value of the right of conversion is included in the shareholders' equity as equity component of convertible debt and implicite interest is charged to income each year and accounted for in the balance sheet as an accretion to the liability component.



(5)

Under U.S. GAAP, share issuance expenses are deducted from the consideration received. Under Canadian GAAP, these expenses are charged directly to retained earnings.



(6)

Under U.S. GAAP, the investments in joint ventures are accounted for by the equity method. Under Canadian GAAP, these investments are accounted for using the proportionate consolidation method. This difference does not impact operations or shareholders' equity.



(7)

Effective October 1, 1999, the Company changed its measurement and reporting currency from the Canadian dollar to the U.S. dollar. Under U.S. GAAP, comparative figures must be restated as if the change in measurement and reporting currency had been applied retroactively. Under Canadian GAAP, comparative figures are presented using the translation of convenience method. At October 1, 1999, the change in measurement and reporting currency presented in accordance with Canadian GAAP resulted in an increase in cumulative translation adjustment balance of $4,156,000, and a decrease in capital stock balance of $3,584,000 and retained earnings balance of $572,000.



(8)

Under U.S. GAAP, the research and development tax credits are applied against income taxes. Under Canadian GAAP, these tax credits would be applied against research and development expenses. This difference had no impact on the consolidated net income.



(9)

Under U.S. GAAP, securities available for sale are recorded at their fair market value, unrealized gains or losses are recorded separately in shareholders' equity. Under Canadian GAAP, short-term investments are recorded at cost. As at September 30, 2004, there is no material unrealized gain or loss.

U.S. GAAP            73

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Exhibit 99.3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30 Amounts in the tables are stated in thousands of U.S. dollars, except share related data.