Exhibit 99.1
AXCAN PHARMA INC.
597, boul. Laurier
Mont-Saint-Hilaire (Québec)
Canada J3H 6C4
Tél. : (450) 467-5138
1 800 565-3255
Fax : (450) 464-9979
www.axcan.com
SOURCE: | AXCAN PHARMA INC. |
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TSX SYMBOL (Toronto Stock Exchange): | AXP |
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NASDAQ SYMBOL (NASDAQ National Market): | AXCA | |||
DATE: | November 10, 2005 |
Press Release for immediate distribution
AXCAN REPORTS FOURTH QUARTER AND YEAR-END 2005 FINANCIAL RESULTS
COMPANY GENERATES RECORD REVENUES OF $67.0 MILLION FOR THE QUARTER
MONT-SAINT-HILAIRE, QUEBEC - Axcan Pharma Inc. (NASDAQ: AXCA) (TSX: AXP), a leading gastroenterology specialty pharmaceutical company, today announced its operating results for the fourth quarter and fiscal year ended September 30, 2005. All amounts are stated in U.S. dollars.
Sales for the fourth quarter are the highest quarterly sales ever recorded in the history of Axcan. Total revenues for the three months ended September 30, 2005 were $67.0 million, compared with $60.9 million for the fourth quarter of 2004, an increase of 10.0%. Total revenues for the 12-month period ended September 30, 2005, were $251.3 million, compared with $243.6 million for 2004, an increase of 3.2%.
Fourth-quarter 2005 net income was $9.1 million, compared with net income of $13.3 million for the corresponding 2004 period. Net income for the year ended September 30, 2005 totaled $26.4 million, compared with net income of $48.7 million in 2004. Diluted earnings per share (EPS) for the fourth quarter of 2005 were $0.19, versus diluted earnings per share of $0.26 for the same period in 2004. Diluted EPS for the fiscal year 2005 were $0.56, compared with diluted earnings per share of $0.96 the prior year.
“Axcan’s record fourth quarter and full year revenues reflect the strength of our current product portfolio. We are pleased to report that, for fiscal 2005, the products that we promote for which prescription data is available, showed overall prescription growth of approximately 8%,” said Dr. Frank Verwiel, President and Chief Executive Officer of Axcan. “Based on our best estimate, at September 30, 2005, the overall wholesaler inventory levels were within our target range and relatively stable during the fourth quarter. Our models indicate that the total impact of changes in wholesaler inventories resulted in increased revenues of less than $1 million during the quarter. Going forward, we will continue to work on enhanced monitoring of wholesaler inventory levels. At the same time, our sales and marketing teams are committed to increasing prescriptions of our current products, both in North America and Europe,” he added.
“Our ITAX development is currently on track with our previously disclosed, revised timeline and we are happy to report that randomization for the International Phase III trial has been completed with more than 500 patients randomized. We are taking all steps necessary to achieve our objective of submitting the New Drug Application with the U.S. Food and Drug Administration in the summer of 2006. In order to enhance our ability to meet this important milestone we have amongst others increased the number of sites in the North American trial by 50%. These sites are currently finalizing administrative procedures, and the first of these new sites have started screening and randomizing patients, while the remaining few are completing the final steps of their administrative procedures. To date, more than 400 patients have been randomized in the North American Phase III trial. We expect to release the overall outcome of the International Phase III trial during the first half of calendar 2006, followed shortly afterwards by that of the North American Phase III trial. Detailed results of the studies will most likely be subsequently presented at a major gastroenterology conference,” Dr. Verwiel concluded.
PRODUCT DEVELOPMENT PIPELINE UPDATE
Axcan’s product development efforts will remain focused on compounds and products that meet medical needs in the field of gastroenterology, have a competitive advantage and allow Axcan to leverage its infrastructure or build infrastructure in certain markets.
Management recently conducted an exhaustive review of Axcan’s product pipeline in order to reprioritize projects and focus resources on highest value opportunities.
An update on Axcan’s major projects follows:
ITAX
In addition to the milestones that have been reached in the Phase III trials, all patients required for the supplementary 6-month and 1-year safety studies have been enrolled. Furthermore, the clinical work on most of the additional Phase I studies to complement the New Drug Application to be submitted to the FDA is now complete. Data are currently being analyzed.
HELIZIDE
The Company has successfully qualified a manufacturer of biskalcitrate potassium (bismuth salt), a component of the HELIZIDE combination therapy for the eradication of the Helicobacter pylori bacterium. Final results of stability tests on the bismuth salt should be available shortly, which should allow Axcan to file an amendment to the New Drug Application during the second quarter of fiscal 2006.
SALOFALK 750 MG TABLETS
Axcan applied for a Supplemental New Drug Submission to the Therapeutic Products Directorate of Health Canada for a new 750-milligram mesalamine (5-ASA) tablet for the oral treatment of ulcerative colitis in Canada. The Company received, and responded to, questions in a non-approvable letter from Health Canada during the third quarter of fiscal 2005. Axcan anticipates a response in the first half of fiscal 2006.
CANASA / SALOFALK rectal gel
Axcan recently completed Phase III studies to confirm the efficacy and safety of a new mesalamine rectal gel in the treatment of distal ulcerative colitis. Data is currently being analyzed. The Company plans to submit regulatory filings for approvals in the United States and Canada in the first half of calendar 2006.
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NCX-1000
Axcan and its partner, NicOx S.A., are developing NCX-1000, a patented, nitric oxide donating derivative of ursodiol, for the treatment of portal hypertension, a late-stage complication of chronic, advanced liver disease. The Phase I clinical development program, which is designed to demonstrate the tolerability and safety of NCX-1000, has been completed and the Company is pleased to report that results confirmed the safety profile of this drug. The protocol of a pilot, therapeutic proof-of-concept Phase IIa study was recently approved by the relevant Ethical Review Board. The center where the study will be conducted has started the identification of potential patients. This study should be completed by the end of fiscal 2006.
URSODIOL DISULFATE
Axcan completed a proof-of-concept study in rats to evaluate the effect of ursodiol disulfate on the development of colonic tumors. The Company initiated animal toxicity studies in the fourth quarter of fiscal 2004. Both acute and subchronic toxicity studies have been completed. The Company is pleased to announce that, based on the currently available data, the compound is safe and has no toxicity effect. Clinical Phase I studies should be initiated in the first half of fiscal 2006.
NMK 150
Axcan and Nordmark GmbH, a German pharmaceutical firm, are collaborating in the development of NMK 150, a new high protease pancrelipase preparation developed for the relief of pain in small duct chronic pancreatitis. It is expected that NMK 150 will enter dose-ranging preclinical studies in the first quarter of fiscal 2006 to confirm the absence of mucosal irritation associated with the use of high doses of the drug. Phase I clinical trials will begin in the second quarter of fiscal 2006.
REVENUE GUIDANCE FOR 2006
The following 2006 revenue guidance consists of projections, based upon various assumptions, all of which are subject to uncertainties and risks. Our assumptions include, but are not limited to: wholesaler inventory levels in fiscal 2006 remaining in the range of eight to twelve weeks; the absence of any changes to GAAP applicable to revenue recognition; foreign currency rates remaining stable throughout the year; reimbursement amounts and policies, related to our products, in all markets not changing materially during the year; the absence of any material change in the regulatory status of the Company’s current products and the absence of new competitive products and generics entries.
Based on its best estimates, Axcan believes overall revenue for fiscal 2006 will be in the range of $260 to $270 million, which would represent growth of approximately 4% to 8% relative to fiscal 2005. Axcan’s fiscal 2006 guidance does not include any potential new product launches, licensing or acquisitions; nor does it provide for revenue from completion of any potential partnering agreement for ITAX.
BOARD MEMBERSHIP
Mr. Daniel Labrecque, President and CEO of Rothschild Canada, has resigned his position on Axcan’s Board of Directors, effective November 9, 2005. In order to maintain Axcan’s corporate governance objectives of director independence, Mr. Labrecque decided to resign further to his firm being granted an advisory mandate by the Company, which would no longer allow him to qualify as an independent director under applicable rules and Company guidelines. Axcan is grateful for his contribution to its success during his tenure.
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INTERIM FINANCIAL REPORT
This release includes, by reference, the fourth quarter interim financial report incorporating the financial statements in accordance with both U.S. and Canadian GAAP as well as the full Management Discussion & Analysis (MD&A) including the reconciliation to Canadian GAAP of the U.S. GAAP presentation. This interim report, including the MD&A and financial statements, will be filed with applicable U.S. and Canadian regulatory authorities.
The audited financial statements and MD&A for fiscal 2005 to be included in the Company’s annual report, will be in accordance with U.S. GAAP and will include a reconciliation to Canadian GAAP of the U.S. GAAP presentation.
CONFERENCE CALL
Axcan will host a conference call at 8:30 A.M. EST, on November 11, 2005. Interested parties may also access the conference call by way of a webcast at www.axcan.com. The webcast will be archived for 90 days. The telephone numbers to access the conference call are (866) 250-4910 (Canada and United States) or 416-640-4127 (international). A replay of the call will be available until November 18, 2005. The telephone number to access the replay of the call is (416) 640-1917 code: 21159496.
ABOUT AXCAN PHARMA
Axcan is a leading specialty pharmaceutical company specialized in the field of gastroenterology. Axcan markets a broad line of prescription products sold for the treatment of symptoms in a number of gastrointestinal diseases and disorders such as inflammatory bowel disease, irritable bowel syndrome, cholestatic liver diseases and complications related to cystic fibrosis. Axcan’s products are marketed by its own sales force in North America and Europe. Its common shares are listed on the Toronto Stock Exchange under the symbol “AXP” and on the NASDAQ National Market under the symbol “AXCA”.
“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995.
This release contains forward-looking statements, which reflect the Company’s current expectations regarding future events. To the extent any statements made in this release contain information that is not historical, these statements are essentially forward-looking and are often identified by words such as “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan” and “believe.” Forward-looking statements are subject to risks and uncertainties, including the difficulty of predicting FDA and other regulatory approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, new product development and launch, reliance on key strategic alliances, availability of raw materials, the regulatory environment, fluctuations in operating results, the protection of our intellectual property and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission and the Canadian Multijurisdictional Disclosure System.
The names CANASA, CARAFATE, DELURSAN, HELIZIDE, ITAX, LACTEOL, PANZYTRAT, SALOFALK, SULCRATE, ULTRASE and URSO appearing in this press release are trademarks of Axcan Pharma Inc. and its subsidiaries.
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Management Discussion and Analysis (MD&A), Financial Statements and Notes Attached
INFORMATION: | Isabelle Adjahi |
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| Director, Investor Relations |
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| Axcan Pharma Inc. |
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| Tel: (450) 467-2600 ext. 2000 | |||||
| www.axcan.com |
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AXCAN PHARMA INC.
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KEY PRODUCT INFORMATION FOR FISCAL 2005
| Sales ($US M) | Sales Growth1 | Rx2 Growth1 |
NORTH AMERICA | |||
CANASA | 28.7 | - 25.5% | 8.7% |
SALOFALK | 14.5 | 22.9% | 5.9% |
ULTRASE | 36.0 | 0.3% | 0% |
URSO 250/FORTE/DS | 47.1 | 4.0% | 14.3% |
CARAFATE/SULCRATE | 38.5 | 12.2% | 3.0% |
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EUROPE | |||
LACTEOL | 20.3 | 24.5% | n/a |
PANZYTRAT | 14.8 | 9.6% | n/a |
DELURSAN | 13.1 | 21.3% | n/a |
1Compared with fiscal 2004
2IMS Prescription Data
PRODUCTS IN NORTH AMERICA
CANASA
U.S. prescriptions for fiscal 2005 were up 8.7% compared to the same period in 2004. The increase was largely due to the impact of the 1000 mg dosage form launched in the second quarter of fiscal 2005.
Sales for fiscal 2005 declined 25.5%, compared to the same period in 2004 mainly due to the impact of wholesaler reductions in inventory levels during the year.
SALOFALK
Canadian prescriptions for fiscal 2005 were up 5.9% compared with the same period in 2004.
ULTRASE
U.S. prescriptions for ULTRASE for fiscal 2005 were flat, in line with the pancreatic enzyme market that increased 1%. The Company expects prescriptions to increase going forward, as ULTRASE was listed as a single source product in June 2005, which makes it less likely to be substituted by generics.
URSO 250/URSO FORTE
Total prescriptions in North America were up 14.3% compared with fiscal 2004. In the U.S. alone, prescriptions for fiscal 2005 were up 16.1% compared with the same period in
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2004. During fiscal 2005, Axcan launched URSO Forte, a 500-mg dosage form of Ursodiol, which contributed to overall prescription growth.
In the U.S. alone, sales for fiscal 2005 were up 7.3% compared with the same period in 2004. The impact of wholesaler inventory reductions resulted in less than anticipated sales during the year.
CARAFATE/SULCRATE
U.S. prescriptions for fiscal 2005 were up 3% compared with fiscal 2004. This limited growth was due primarily to limited promotion of this line of products during the year. The Company recently launched a marketing campaign for CARAFATE suspension in the U.S. market.
Sales growth was 12.2%, due mainly to the impact of a price increase in March 2005.
PRODUCTS IN EUROPE
LACTÉOL
Sales of LACTÉOL increased 24.5% compared to the prior year. In local currency, the increase was 18.4%.
PANZYTRAT
Sales of PANZYTRAT increased 9.6% compared to the prior year In local currency, the increase was 5.1%.
DELURSAN
Sales of DELURSAN increased 21.3% compared to the prior year. In local currency, the increase was 15.1%.
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Management's discussion and analysis of financial condition and results
of operations
This discussion should be read in conjunction with the information contained
in Axcan's consolidated financial statements and the related notes thereto.
All amounts are in U.S. dollars.
Overview
Axcan is a leading speciality pharmaceutical company concentrating in the
field of gastroenterology, with operations in North America and Europe. Axcan
markets and sells pharmaceutical products used in the treatment of a variety of
gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO 250, URSO FORTE and
DELURSAN for the treatment of certain cholestatic liver diseases; SALOFALK and
CANASA for the treatment of certain inflammatory bowel diseases; and PHOTOFRIN
for the treatment of certain types of gastrointestinal cancers and other
conditions. Axcan has a number of pharmaceutical projects in all phases of
development including ITAX for the treatment of functional dyspepsia. In the
first quarter of fiscal 2004, Axcan filed a supplemental New Drug Submission for
a new 750-milligram Mesalamine (5-ASA) tablet for the oral treatment of
ulcerative colitis. On March 24, 2005, Axcan received a non-approval letter from
the Therapeutic Products Directorate of Health Canada containing a list of
questions and comments for both the clinical and Chemistry, Manufacturing and
Controls aspects of the original New Drug Submission. Axcan responded to all
questions in the non-approvable letter during the third quarter of fiscal 2005
and expects to obtain a final response in the first half of fiscal 2006.
Axcan reported revenue of $67.0 million, operating income of $13.9 million
and net income of $9.1 million for the three-month period ended September 30,
2005. For the year ended September 30, 2005, revenue was $251.3 million,
operating income was $40.4 million and net income was $26.4 million. Revenue
from sales of Axcan's products in the United States was $159.7 million (63.5% of
total revenue) for the year ended September 30, 2005, compared to $166.7 million
(68.4% of total revenue) for fiscal 2004. In Canada, revenue was $34.4 million
(13.7% of total revenue) for the year ended September 30, 2005, compared to
$28.0 million (11.5% of total revenue) for fiscal 2004. In Europe, revenue was
$57.1 million (22.7% of total revenue) for the year ended September 30, 2005,
compared to $48.7 million (20.0% of total revenue) for fiscal 2004.
Axcan's revenue historically has been and continues to be principally
derived from sales of pharmaceutical products to large pharmaceutical
wholesalers and large chain pharmacies. Axcan utilizes a "pull-through"
marketing approach that is typical of pharmaceutical companies. Under this
approach, Axcan's sales representatives demonstrate the features and benefits of
its products to gastroenterologists who may write their patients prescriptions
for Axcan's products. The patients, in turn, take the prescriptions to
pharmacies to be filled. The pharmacies then place orders with the wholesalers
or, in the case of large chain pharmacies, their distribution centers, to whom
Axcan sells its products.
Axcan's expenses are comprised primarily of selling and administrative
expenses (including marketing expenses), cost of goods sold (including royalty
payments to those companies from whom Axcan licenses some of its products),
research and development expenses as well as depreciation and amortization.
AXCAN PHARMA INC.
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Axcan's annual and quarterly operating results are primarily affected by
three factors: the level of acceptance of Axcan's products by
gastroenterologists and their patients; the extent of Axcan's control over the
marketing of its products and wholesaler buying patterns. Wholesaler buying
patterns, including a tendency to increase inventory levels prior to an
anticipated or announced price increase, affect Axcan's operating results by
shifting revenue between quarters. To maintain good relations with wholesalers,
Axcan typically gives prior notice of price increases. The level of patient and
physician acceptance of Axcan's products, as well as the availability of similar
therapies, which may be less effective but also less expensive than some of
Axcan's products, impact Axcan's revenues by driving the level and timing of
prescriptions for its products.
Critical Accounting Policies
Axcan's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("U.S.
GAAP"), applied on a consistent basis. Axcan's critical accounting policies
include the use of estimates, revenue recognition, the recording of research and
development expenses and the determination of the useful lives or fair value of
goodwill and intangible assets. Some of our critical accounting policies require
the use of judgment in their application or require estimates of inherently
uncertain matters. Although our accounting policies are in compliance with U.S.
GAAP, a change in the facts and circumstances of an underlying transaction could
significantly change the application of our accounting policies to that
transaction, which could have an effect on our financial statements. Discussed
below are those policies that we believe are critical and require the use of
complex judgment in their application.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of financial statements and the disclosure of
recognized amounts of revenues and expenses during the year. Significant
estimates and assumptions made by management include the allowance for accounts
receivable and inventories, reserves for product returns, rebates and
chargebacks, the classification of intangible assets between finite and
indefinite life, useful lives of long-lived assets, the expected cash flows used
in evaluating long-lived assets, goodwill and investments for impairment,
contingency provisions and other accrued charges. These estimates were made
using the historical information and various other factors related to each
circumstance available to management. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and record the
effect of any adjustments when necessary. Actual results could differ from those
estimates based upon future events, which could include, among other risks,
changes in regulations governing the manner in which we sell our products,
changes in health care environment and managed care consumption patterns.
Revenue Recognition
Revenue is recognized when the product is shipped to the Company's customer,
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 and
products returns are established as a reduction of product sales revenues at the
time such revenues are recognized. These revenue reductions are established by
us as our best estimate at the time of sale
AXCAN PHARMA INC.
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based on historical experience adjusted to reflect known changes in the factors
that impact such reserves. These revenue reductions are generally reflected as
an addition to accrued expenses.
We do not provide any forms of price protection to our wholesale customers
and permit product returns only if the product is returned within 12 months of
expiration. Credit for returns is issued to the original purchaser at current
net pricing less 10 %. Accrued liabilities include reserves of $7.5 million and
$6.1 million as of September 30, 2005 and September 30, 2004 respectively for
estimated products returns.
In the United States, we establish and maintain reserves for amounts payable
by us to managed care organizations and state Medicaid programs for the
reimbursement of portions of the retail price of prescriptions filled that are
covered by the respective programs. We also establish and maintain reserves for
amounts payable by us to wholesale distributors for the difference between their
regular sale price and the contract price for the products sold to our contract
customers. The amounts estimated to be paid relating to products sold are
recognized as revenue reductions and as additions to accrued expenses at the
time of sale based on our best estimate of the products utilization by these
managed care and state Medicaid patients and sales to our contract customers,
using historical experience adjusted to reflect known changes in the factors
that impact such reserves. Accrued liabilities include reserves of $4.8 million
and $2.8 million as of September 30, 2005 and September 30, 2004, respectively
for estimated rebates and chargebacks.
If the levels of chargebacks, managed care and Medicaid rebates, product
returns and discounts fluctuate significantly and/or if our estimates do not
adequately reserve for these reductions of net product revenues, our reported
revenue could be negatively affected.
Goodwill and Intangible Assets
We have in the past made acquisition of products and businesses that include
goodwill, trademarks, licence agreements and other identifiable intangible
assets. Axcan's goodwill and intangible assets are stated at cost, less
accumulated amortization. Since October 1, 2001, the Company does not amortize
goodwill and intangible assets with an indefinite life. However, management
assess the impairment of goodwill and intangible assets at least annually and
whenever events or changes in circumstances indicate that the carrying amounts
of these assets may not be recoverable, by comparing the carrying value of the
unamortized portion of goodwill and intangible assets to the future benefits of
the Company's activities or expected sales of pharmaceutical products. Should
there be a permanent impairment in value or if the unamortized balance exceeds
recoverable amounts, a write-down will be recognized, for the current year. To
date, Axcan has not recognized any significant impairment in value.
Intangible assets with finite life are amortized over their estimated useful
lives according to the straight-line method at annual rates varying from 4 to 15
%. The straight-line method of amortization is used because it reflects, in the
opinion of management, the pattern in which the intangible assets with finite
life are used. In determining the useful life of intangible assets, the Company
considers many factors including the intention of management to support the
asset on a long term basis by maintaining the level of expenditure necessary,
the use of the asset, the existence and expiration date of a patent, the
existence of a generic or competitor and any legal or regulatory provisions that
could limit the use of the asset.
As a result of our acquisitions, we included $27.5 million of goodwill on
our consolidated balance sheets as of September 30, 2005 and September 30, 2004.
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As a result of our acquisitions of products rights and other identifiable
intangible assets, we included $388.9 million and $407.9 million as net
intangible assets on our consolidated balance sheets as of September 30, 2005
and September 30, 2004. Estimated annual amortization expenses for intangible
assets with a finite life, which have a weighted-average remaining amortization
period of approximately 17 years, for the next five fiscal years is
approximately $16.6 million.
Research and Development Expenses
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 acquired from others for a particular research and development project,
with no alternative use, are written off at the time of acquisition.
Acquisition of Products
On November 18, 2003, the Company acquired the rights to a group of products
from Aventis Pharma S.A. ("Aventis"). The $145.0 million purchase price was paid
out of Axcan's cash on hand. These products are CARAFATE and BENTYL for the U.S.
market and SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market
(collectively, "AVAX" product line).
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 gastroprokinetic
drug. Under the terms of this license agreement, the Company paid $10.0 million
in cash and assumed $2.0 million in research contract liability.
On December 10, 2002, the Company acquired the rights to the Ursodiol 250 mg
tablets DELURSAN for the French market from Aventis, for a cash purchase price
of $22.8 million.
On December 3, 2002, the Company acquired the worldwide rights to the
PANZYTRAT enzyme product line from Abbott for a cash purchase price of $45.0
million.
During a transition period, the seller in certain of these acquisition
transactions acts as selling agent for the management of these products. For the
year ended September 30, 2005 sales of some of these products were still managed
in part 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 for the year ended
September 30, 2005 were $2,431,789 ($7,667,940 in 2004), the Company only
included in its revenue an amount of $949,866 ($4,685,673 in 2004) representing
the net sales less cost of goods sold and other seller related expenses.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of
revenue represented by items in Axcan's consolidated statements of operations:
//
For the three-month For the years
periods ended ended
September 30, September 30,
------------------------ -----------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
% % % %
Revenue 100.0 100.0 100.0 100.0
-------------------------------------------------------------------------
Cost of goods sold 27.3 18.2 28.5 22.2
Selling and administrative
expenses 31.5 30.2 34.2 31.4
Research and development
expenses 12.2 11.1 12.7 8.2
Depreciation and
amortization 8.2 6.8 8.6 6.7
-------------------------------------------------------------------------
79.2 66.3 84.0 68.5
-------------------------------------------------------------------------
Operating income 20.8 33.7 16.0 31.5
-------------------------------------------------------------------------
Financial expenses 2.8 3.0 2.8 2.8
Interest income (1.0) (0.6) (0.5) (0.3)
Loss (gain) on foreign
exchange 0.2 (0.3) (0.1) (0.1)
-------------------------------------------------------------------------
2.0 2.1 2.2 2.4
-------------------------------------------------------------------------
Income before income
taxes 18.8 31.6 13.8 29.1
Income taxes 5.1 9.7 3.3 9.1
-------------------------------------------------------------------------
Net income 13.7 21.9 10.5 20.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Periods ended September 30, 2005 compared to periods ended
September 30, 2004
Revenue
For the three-month period ended September 30, 2005, revenue was $67.0
million compared to $60.9 million for the corresponding quarter of the preceding
fiscal year, an increase of 10.0% primarily resulting from increased sales in
Canada and Europe. For the year ended September 30, 2005, revenue was $251.3
million compared to $243.6 million for the preceding fiscal year , an increase
of 3.2%. This increase in revenue primarily resulted from higher sales in Canada
and Europe partly offset by lower sales in the United States following an
announced intention from major wholesalers to reduce their
AXCAN PHARMA INC.
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inventory level. The end-customer prescription demand continues to show positive
growth for most of our products sold in the United States which leads us to
believe that this reduction in revenue is only temporary and that sales should
increase when our major wholesalers reach their targeted inventory level.
Revenue is stated net of deductions for products returns, chargebacks,
contract rebates, discounts and other allowances of $39.4 million (13.6% of
gross revenue) in 2005, and $28.8 million (10.6 % of gross revenue) in 2004.This
increase of total deductions as a percentage of gross revenue is primarily due
to the increase in returns and chargebacks during fiscal 2005.
Cost of goods sold
Cost of goods sold consists principally of costs of raw materials, royalties
and manufacturing costs. Axcan outsources most of its manufacturing
requirements. Cost of goods sold increased $7.2 million (64.9%) to $18.3 million
for the three-month period ended September 30, 2005 from $11.1 million for the
corresponding quarter of the preceding fiscal year. As a percentage of revenue,
cost of goods sold for the quarter ended September 30, 2005 increased as
compared to the corresponding quarter of the preceding fiscal year from 18.2% to
27.3%. This increase in cost of goods sold as a percentage of revenue was due
mainly to an increase in sales of products with a lower margin and a reduction
in sales of products with a higher margin. For the year ended September 30,
2005, cost of goods sold increased $17.3 million (31.9%) to $71.5 million from
$54.2 million for the preceding fiscal year. As a percentage of revenue, cost of
goods sold for the year ended September 30, 2005 increased as compared to the
preceding fiscal year from 22.2% to 28.5%. This increase in the cost of goods
sold as a percentage of revenue was due mainly to the write-down of inventory of
finished goods with less than twelve months of shelf life, an increase in sales
of products with a lower margin and a reduction in sales of products with a
higher margin. Cost of goods sold includes $4.7 million for the year ended
September 30, 2005 related to the write-down of inventory of finished goods for
one product line sold in the United States.
Selling and administrative expenses
Selling and administrative expenses consist principally of salaries and
other costs associated with Axcan's sales force and marketing activities.
Selling and administrative expenses increased $2.7 million (14.7%) to $21.1
million for the three-month period ended September 30, 2005 from $18.4 million
for the corresponding quarter of the preceding fiscal year. For the year ended
September 30, 2005, selling and administrative expenses increased $9.6 million
(12.6%) to $86.0 million from $76.4 million for the preceding fiscal year. This
increase is mainly due to an increase in our sales force in preparation for
additional products to be marketed, including ITAX, additional marketing efforts
on our current products, increased distribution cost following the new agreement
with a major wholesaler and consulting fees for IT implementation and regulatory
compliance.
Research and development expenses
Research and development expenses consist principally of fees paid to
outside parties that Axcan uses to conduct clinical studies and to submit
governmental approval applications on its behalf as well as the salaries and
benefits paid to its personnel involved in research and development projects.
Research and development expenses increased $1.4 million (20.6%) to $8.2 million
for the quarter ended September 30, 2005 from $6.8 million for the corresponding
quarter of the preceding fiscal year. For the year ended
AXCAN PHARMA INC.
Page 12
September 30, 2005, research and development expenses increased $12.0 million
(60.3%) to $31.9 million from $19.9 million for the preceding fiscal year. This
increase is mainly due to the phase III development of ITAX, acquired in August
2003, for the treatment of functional dyspepsia. The phase III is the most
expensive part of clinical development.
Depreciation and amortization
Depreciation and amortization consists principally of the amortization of
intangible assets with a finite life. Intangible assets include trademarks,
trademark licenses and manufacturing rights. Depreciation and amortization
increased $1.3 million (31.0%) to $5.5 million for the quarter ended September
30, 2005 from $4.2 million for the corresponding quarter of the preceding fiscal
year. For the year ended September 30, 2005, depreciation and amortization
increased $5.1 million (31.1%) to $21.5 million from $16.4 million for the
preceding fiscal year. The increase is mainly due to the amortization of the
AVAX product line acquired from Aventis on November 18, 2003 and of PANZYTRAT
which was reclassified from intangible assets with an indefinite life to
intangible assets with a finite life on October 1, 2004.
Financial expenses
Financial expenses consist principally of interest and fees paid in
connection with money borrowed for acquisitions. Financial expenses remained
stable at $1.8 million for the quarter ended September 30, 2005 compared to the
corresponding quarter of the preceding fiscal year. For the year ended September
30, 2005, financial expenses increased $0.2 million (2.9%) to $7.1 million from
$6.9 million for the preceding fiscal year.
Income Taxes
Income taxes amounted to $3.4 million for the quarter ended September 30,
2005, compared to $5.9 million for the quarter ended September 30, 2004. The
effective tax rates were 27.2% for the quarter ended September 30, 2005 and
30.7% for the quarter ended September 30, 2004. The decrease in effective tax
rate is mainly due to the research and development tax credits, deducted from
the income taxes expense, of $0.8 million for the quarter ended September 30,
2005 compared to $0.5 million for the corresponding quarter of the preceding
fiscal year. For the year ended September 30, 2005, income taxes amounted to
$8.4 million compared to $22.3 million for the preceding fiscal year. The
effective tax rates were 24.1% for the year ended September 30, 2005 and 31.4%
for the year ended September 30, 2004. The decrease in effective tax rate is
mainly due to the research and development tax credits, deducted from the income
taxes expense, of $2.6 million for the year ended September 30, 2005 compared to
$1.2 million for the preceding fiscal year.
AXCAN PHARMA INC.
Page 13
The income taxes expense and corresponding tax rate are summarized in the
following tables:
Income taxes expense For the three-month For the years
periods ended ended
September 30 September 30
------------------------ -----------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Income taxes 4,191 6,423 11,032 23,416
Research and development
tax credits (768) (519) (2,619) (1,163)
-------------------------------------------------------------------------
Income taxes expense 3,423 5,904 8,413 22,253
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes rate For the three-month For the years
periods ended ended
September 30, September 30,
------------------------ -----------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
% % % %
Income taxes 33.3 33.4 31.7 33.0
Research and development
tax credits (6.1) (2.7) (7.6) (1.6)
-------------------------------------------------------------------------
Effective taxes rate 27.2 30.7 24.1 31.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income
Net income was $9.1 million or $0.20 of basic income per share and $0.19 and
diluted income per share, for the quarter ended September 30, 2005, compared to
$13.3 million or $0.29 of basic income per share and $0.26 of diluted income per
share for the corresponding quarter of the preceding year. The reduction in net
income for the quarter resulted mainly from an increase in revenue of $6.1
million, an increase in operating expenses totalling $12.7 million and a
decrease in income taxes of $2.5 million. The weighted average number of common
shares outstanding used to establish the basic per share amounts increased from
45.6 million for the quarter ended September 30, 2004 to 45.7 million for the
quarter ended September 30, 2005, following the exercise of options previously
granted pursuant to Axcan's stock option plan. The weighted average number of
common shares used to establish the diluted per share amounts decreased from
55.2 million for the quarter ended September 30, 2004 to 55.0 million for the
quarter ended September 30, 2005.
Net income was $26.4 million or $0.58 of basic income per share and $0.56 of
diluted income per share, for the year ended September 30, 2005, compared to
$48.7 million or $1.08 of basic income per share and $0.96 of diluted income per
share for the preceding year. The reduction in net income for the year ended
September 30, 2005 resulted mainly from an increase in revenue of $7.7 million,
an increase in operating expenses totaling $44.1 million and a decrease in
income taxes of $13.8 million.
AXCAN PHARMA INC.
Page 14
Canadian GAAP
The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affect net income for the periods ended September 30, 2005 and 2004 are
summarized in the following table:
For the three-month For the years
periods ended ended
September 30, September 30,
------------------------ -----------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Net income in accordance
with U.S. GAAP 9,149 13,320 26,425 48,728
Implicit interest on
convertible debt (1,205) (1,103) (4,631) (4,234)
Stock-based compensation
expense (1,062) - (4,589) -
Amortization of net
product acquisition
costs (14) (14) (54) (54)
Income tax impact of
the above adjustments 6 5 337 20
-------------------------------------------------------------------------
Net earnings in accordance
with Canadian GAAP 6,874 12,208 17,488 44,460
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On March 5, 2003, the Company closed an offering of $125.0 million aggregate
principal amount of 4.25% convertible subordinated notes due April 15, 2008. As
a result of the terms of the notes, under Canadian GAAP, an amount of
$24,238,899 was included in shareholders' equity as equity component of the
convertible debt and an amount of $100,761,101 was included in long- term debt,
as the liability component of the convertible notes. For the year ended
September 30, 2005, implicit interest in the amount of $4,630,987 ($4,233,768 in
2004) was accounted for and added to the liability component.
Since October 1, 2004, under Canadian GAAP, the effect of stock-based
compensation has to be accounted for using the fair value method.
Under Canadian GAAP, research and development expenses are stated net of
related tax credits which generally constitute between 5% and 10% of the
aggregate amount of such expenses. Under U.S. GAAP, these tax credits are
applied against income taxes.
Liquidity and capital resources
Axcan's cash, cash equivalents and short-term investments increased $59.7
million (157.5%) to $97.6 million at September 30, 2005 from $37.9 million at
September 30, 2004. As of September 30, 2005, working capital was $132.0
million, compared to $87.7 million at September 30, 2004. These increases are
mainly due to the cash flows from operating activities of the year ended
September 30, 2005.
Total assets increased $31.8 million (5.2%) to $641.4 million as of
AXCAN PHARMA INC.
Page 15
September 30, 2005 from $609.6 million as of September 30, 2004. Shareholders'
equity increased $25.5 million (6.5%) to $417.6 million as of September 30, 2005
from $392.1 million as of September 30, 2004.
Historically, Axcan has financed research and development, operations,
acquisitions, milestone payments and investments out of the proceeds of public
and private sales of its equity and convertible debt, cash flows from operating
activities, and loans from joint venture partners and financial institutions.
Since it went public in Canada in December 1995, Axcan has raised approximately
$243.0 million from sales of its equity and $125.0 million from sales of
convertible notes. Furthermore, Axcan has borrowed and since repaid funds from
financial institutions to finance the acquisition of Axcan Scandipharm Inc. and
from Schwarz Pharma Inc., a former joint venture partner, to finance the
acquisition of Axcan URSO.
Axcan's research and development expenses totalled $19.9 million for fiscal
2004 and $31.9 million for fiscal 2005. Axcan believes that cash, cash
equivalents and short-term investments, together with funds provided by
operations, will be sufficient to meet its operating cash requirements,
including the development of products through research and development
activities, capital expenditures and repayment of its debt. Assuming regulatory
approvals of future products and indications stemming from its research and
development efforts, Axcan believes that these will also significantly
contribute to an increase in funds provided by operations. However, Axcan
regularly reviews product and other acquisition opportunities and may therefore
require additional debt or equity financing. Axcan cannot be certain that such
additional financing, if required, will be available on acceptable terms, or at
all.
Line of credit
Since September 22, 2004, the Company has had an amended credit facility
with a banking syndicate. The amended credit facility consists in a $125.0
million 364-day extendible revolving facility with a two-year term-out option
maturing on September 21, 2008.
The credit facility is secured by a first priority 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. Among the
restrictions imposed by the credit facility is a covenant limiting cash
dividends, share repurchases (other than redeemable shares issued in connection
with a permitted acquisition) and similar distributions to shareholders to 10%
of the Company's net income for the preceding fiscal year. As of September 30,
2005, Axcan was in compliance with all covenants under the credit facility.
The interest rate varies, depending on the Company's leverage, between 25
basis points and 100 basis points over Canadian prime rate or U.S. base rate,
and between 125 basis points and 200 basis points over the LIBOR rate or bankers
acceptances. The credit facility may be drawn in U.S. dollars, in Canadian
dollar or in Euros equivalents. As of September 30, 2005, there was no amount
outstanding under this credit facility.
Convertible subordinated notes and other long-term debt
Long-term debt, including instalments due within one year, totaled $127.8
million as of September 30, 2005 compared to $129.7 million as of September 30,
2004. As of September 30, 2005, the long-term debt included, $1.3 million of
bank loans, $1.5 million of obligations under capital leases contracted by
Axcan's French subsidiary and the $125.0 million 4.25% convertible subordinated
notes due 2008, which were issued on March 5, 2003.
AXCAN PHARMA INC.
Page 16
The notes are convertible into 8,924,113 common shares 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 notes are also convertible 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. 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 certain changes in tax treatment.
Cash Flows
Cash flows from operating activities increased $28.3 million from $5.6
million of cash used by operating activities for the quarter ended September 30,
2004 to $22.7 million of cash provided by operating activities for the quarter
ended September 30, 2005. Cash flows from operating activities increased $44.3
million from $23.4 million of cash provided by operating activities for the year
ended September 30, 2004 to $67.7 million for the year ended September 30, 2005.
This increase is mainly due to the fact that the inventories remained relatively
stable and the accounts receivable decreased by $8.6 million during the year
ended September 30, 2005 compared to the previous fiscal year when they
increased by $45.0 million following the increase in sales and the acquisition
of new products. Cash flows used by financing activities were $0.3 million for
the quarter ended September 30, 2005 and $1.4 million for the year ended
September 30, 2005. Cash flows used for investment activities for the quarter
ended September 30, 2005 were $8.1 million mainly due to the net cash used for
the acquisition of property, plant and equipment for $1.2 million and the
acquisition of short term investments for $6.9 million. Cash used by investment
activities for the year ended September 30, 2005 were $8.1 million mainly due to
the net acquisition of short-term investments of $1.7 million plus the cash used
for the acquisition of property, plant and equipment for $6.3 million. Cash
flows used for investment activities for the year ended September 30, 2004 were
$42.7 million mainly due to the net cash used for the acquisition of intangible
assets for $149.6 million and property, plant and equipment for $13.4 million
with the net proceeds from the disposal of short-term investments.
Off-Balance Sheet Arrangements
Axcan does not have any transactions, arrangements and other relationships
with unconsolidated entities that are likely to affect its operating results,
its liquidity or capital resources. Axcan has no special purpose or limited
purpose entities that provide off-balance sheet financing, liquidity or market
or credit risk support, engage in leasing, hedging, research and development
services, or other relationships that expose the Company to liability that is
not reflected on the face of the consolidated financial statements.
AXCAN PHARMA INC.
Page 17
Contractual Obligations
The following table summarizes Axcan's significant contractual obligations
(in thousands of dollars) as of September 30, 2005 and the effect such
obligations are expected to have on our liquidity and cash flows in future
years. This table excludes amounts already recorded on the balance sheet as
current liabilities at September 30, 2005 or certain other purchase obligations
as discussed below:
For the years ending September 30,
-----------------------------------------------------------
2010 and
2006 2007 2008 2009 thereafter
----------- ----------- ----------- ----------- -----------
$ $ $ $ $
Long-term
debt 1,497 1,021 125,239 72 -
Operating
leases 1,314 416 196 41 6
Other
commitments 595 475 716 250 -
----------- ----------- ----------- ----------- -----------
3,406 1,912 126,151 363 6
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Purchase orders for raw materials, finished goods and other goods and
services are not included in the above table. Management is not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this table,
contractual obligations for purchase of goods or services are defined as
agreements that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Axcan's purchase orders are based on current needs
and are fulfilled by our vendors with relatively short timetables. The Company
does not have significant agreements for the purchase of raw materials or
finished goods specifying minimum quantities or set prices that exceed its
short-term expected requirements. Axcan also enters into contracts for
outsourced services; however, the obligations under these contracts are not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty except for a sales management services
contract included in the above table. As milestone payments are primarily
contingent on receiving regulatory approval for products under development, they
do not have defined maturities.
The expected timing of payment of the obligations discussed above is
estimated based on current information. Timing of payments and actual amounts
paid may be different depending on the time of receipt of goods or services, or
for some obligations, changes to agreed-upon amounts.
Effect of recently issued U.S. accounting pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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
AXCAN PHARMA INC.
Page 18
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.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". SFAS
No. 123R requires all entities to recognize compensation cost for share- based
awards, including options, granted to employees. The Statement eliminated the
ability to account for share-based compensation transactions using APB No. 25,
"Accounting for Stock Issued to Employees", and generally require instead that
such transaction be accounted for using a fair-value based method. Public
companies are required to measure stock-based compensation classified as equity
by valuing the instrument the employee receives at its grant-date fair value.
Currently such awards are measured at intrinsic value under both APB No. 25 and
SFAS 123, "Accounting for Stock- Based Compensation". The Company will apply the
Statement for fiscal 2006 using the modified prospective transition approach and
expects the implementation to have a material impact on the consolidated balance
sheets and results of operations. For the historical impact of Stock-based
compensation expense using the fair-value based method, see note 8 of the
September 30, 2005 interim financial statement.
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 is 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, are therefore included in the Company's
diluted income per share calculation. For the year ended September 30, 2004, the
weighted number of common shares used in the calculation of the diluted income
per share has been increased from 52,787,964 to 55,031,184 and the diluted
income per share has been reduced from $ 0.98 to $ 0.96. This change in
accounting policies did not have an impact on the diluted income per share for
the year ended September 30, 2003.
Earnings coverage
Under U.S. GAAP, for the twelve months ended September 30, 2005, our
interest requirements amounted to $6.2 million on a pro-forma basis and our
earnings coverage ratio, defined as the ratio of earnings before interest and
income taxes to pro-forma interest requirements, was 6.2 to one.
Under Canadian GAAP, for the twelve months ended September 30, 2005, our
interest requirements amounted to $11.3 million on a pro-forma basis, and our
earnings coverage ratio was 3.6 to one. The principal difference between the
earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable to
the inclusion of implicit interest of $5.1 million as required by Canadian GAAP.
Risk Factors
AXCAN PHARMA INC.
Page 19
Axcan is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Axcan does not use derivative
financial instruments for speculative or trading purposes. Axcan does not use
off-balance sheet financing or similar special purpose entities. Inflation has
not had a significant impact on Axcan's results of operations.
Foreign Currency Risk
Axcan operates internationally; however, a substantial portion of the
revenue and expense activities and capital expenditures are transacted in U.S.
dollars. Axcan's exposure to exchange rate fluctuation is reduced because, in
general, Axcan's revenues denominated in currencies other than the U.S. dollar
are matched by a corresponding amount of costs denominated in the same currency.
Axcan expects this matching to continue.
Interest Rate Risk
The primary objective of Axcan's investment policy is the protection of
capital. Accordingly, investments are made in high-grade government and
corporate securities with varying maturities, but typically, less than 180 days.
Therefore, Axcan does not have a material exposure to interest rate risk, and a
100 basis-point adverse change in interest rates would not have a material
effect on Axcan's consolidated results of operations, financial position or cash
flows. Axcan is exposed to interest rate risk on borrowings under the credit
facility. The credit facility bears interest based on LIBOR, U.S. dollar base
rate, Canadian dollar prime rate, or Canadian dollar Bankers' Acceptances. Based
on projected advances under the credit facility, a 100 basis-point adverse
change in interest rates would not have a material effect on Axcan's
consolidated results of operations, financial position, or cash flows.
Supply and Manufacture
Axcan depends on third parties for the supply of active ingredients and for
the manufacture of the majority of its products. Although Axcan looks to secure
alternative suppliers, Axcan may not be able to obtain the active ingredients or
products from such third parties, the active ingredients or products may not
comply with specifications, or the prices at which Axcan purchases them may
increase and Axcan may not be able to locate alternative sources of supply in a
reasonable time period, or at all. If any of these events occur, Axcan may not
be able to continue to market certain of its products, and its sales and
profitability would be adversely affected.
Volatility of Share Prices
The market price of Axcan's shares is subject to volatility. Deviations in
actual financial or scientific results, as compared to expectations of
securities analysts who follow our activities can have a significant effect on
the trading price of Axcan's shares.
Forward-looking Statements
This document contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent that any
statements in this document contain information that is not historical, the
statements are essentially forward-looking and are often identified by words
such as "anticipate", "expect", "estimate", "intend", "project", "plan"
AXCAN PHARMA INC.
Page 20
and
"believe". These forward-looking statements include, but are not limited to, the
expected sales growth of the Company's products and the expected increase in
funds from operations resulting from the Company's research and development
expenditures. The forward-looking statements involve risks and uncertainties.
Actual events could differ materially from those projected herein and depend on
a number of factors, including but not limited to the successful and timely
completion of clinical studies, the difficulty of predicting FDA or other
regulatory approvals, the commercialization of a drug or therapy after
regulatory approval is received, the difficulty of predicting acceptance and
demand for pharmaceutical products, the impact of competitive products and
pricing, new product development and launch, the availability of raw materials,
the protection of our intellectual property, fluctuations in our operating
results and other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission and the Canadian Securities Commissions.
The reader is cautioned not to rely on these forward looking statements. The
Company disclaims any obligation to update these forward-looking statements.
This MD and A has been prepared as of November 8, 2005. Additional information
on the Company is available through regular filing of press releases, quarterly
financial statements and Annual Information Form on the SEDAR website.
On behalf of Management,
(signed)
Jean Vezina
Vice President, Finance and Chief Financial Officer
AXCAN PHARMA INC.
Page 21
AXCAN PHARMA INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In accordance with U.S. GAAP
in thousands of U.S. dollars, except share related data
September September
30, 30,
2005 2004
----------- -----------
(unaudited)
ASSETS $ $
Current assets
Cash and cash equivalents 79,969 21,979
Short-term investments available for sale 17,619 15,922
Accounts receivable 37,587 46,585
Income taxes receivable 8,351 9,196
Inventories (Note 4) 36,016 37,270
Prepaid expenses and deposits 1,771 3,494
Deferred income taxes 9,044 4,586
-------------------------------------------------------------------------
Total current assets 190,357 139,032
Property, plant and equipment, net 31,673 31,252
Intangible assets, net (Note 5) 388,921 407,875
Goodwill, net 27,467 27,467
Deferred debt issue expenses, net 2,577 3,088
Deferred income taxes 412 930
-------------------------------------------------------------------------
Total assets 641,407 609,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 52,990 47,917
Income taxes payable 3,247 731
Instalments on long-term debt 1,497 1,778
Deferred income taxes 602 936
-------------------------------------------------------------------------
Total current liabilities 58,336 51,362
Long-term debt 126,332 127,916
Deferred income taxes 39,135 38,290
-------------------------------------------------------------------------
Total liabilities 223,803 217,568
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock
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; 45,682,175 and 45,562,336
issued and outstanding as at September 30,
2005 and 2004, respectively 261,714 260,643
Retained earnings 138,787 112,362
Contributed surplus 1,329 -
Accumulated other comprehensive income 15,774 19,071
AXCAN PHARMA INC.
Page 22
-------------------------------------------------------------------------
Total shareholders' equity 417,604 392,076
-------------------------------------------------------------------------
Total liabilities and shareholders' equity 641,407 609,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC.
Page 23
AXCAN PHARMA INC.
Consolidated Statements of Shareholders' Equity
-------------------------------------------------------------------------
In accordance with U.S. GAAP
in thousands of U.S. dollars, except share related data
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Common shares (number)
Balance, beginning
of period 45,674,674 45,556,032 45,562,336 45,004,320
Exercise of options 7,501 6,304 119,839 558,016
-------------------------------------------------------------------------
Balance, end of period 45,682,175 45,562,336 45,682,175 45,562,336
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Common shares
Balance, beginning
of period 261,531 260,572 260,643 255,743
Exercise of options 183 71 1,071 4,900
-------------------------------------------------------------------------
Balance, end of period 261,714 260,643 261,714 260,643
-------------------------------------------------------------------------
Retained earnings
Balance, beginning
of period 129,638 99,042 112,362 63,634
Net income 9,149 13,320 26,425 48,728
-------------------------------------------------------------------------
Balance, end of period 138,787 112,362 138,787 112,362
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning
of period 1,329 - - -
Income tax deductions on
stock options exercise - - 1,329 -
-------------------------------------------------------------------------
Balance, end of period 1,329 - 1,329 -
-------------------------------------------------------------------------
Accumulated other
comprehensive income
Balance, beginning
of period 16,003 16,834 19,071 11,634
Foreign currency
translation adjustments (229) 2,237 (3,297) 7,437
-------------------------------------------------------------------------
Balance, end of period 15,774 19,071 15,774 19,071
-------------------------------------------------------------------------
Total shareholders' equity 417,604 392,076 417,604 392,076
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive income
Foreign currency
AXCAN PHARMA INC.
Page 24
translation adjustments (229) 2,237 (3,297) 7,437
Net income 9,149 13,320 26,425 48,728
-------------------------------------------------------------------------
Total comprehensive income 8,920 15,557 23,128 56,165
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC.
Page 25
AXCAN PHARMA INC.
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
In accordance with U.S. GAAP
in thousands of U.S. dollars,
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Operations $ $ $ $
Net income 9,149 13,320 26,425 48,728
Non-cash items
Amortization of deferred
debt issue expenses 275 291 1,100 1,144
Other depreciation and
amortization 5,492 4,164 21,532 16,359
Loss (Gain) on disposal
of assets - 21 - (5)
Foreign currency
fluctuation 222 (89) (84) 342
Deferred income taxes 769 2,847 (3,261) 6,625
Share in net loss of
joint ventures - 511 - 455
Changes in working
capital items
Accounts receivable 2,158 (15,128) 8,648 (27,795)
Income taxes receivable (1,318) (1,373) 1,610 (3,773)
Inventories 923 (3,700) 1,490 (17,157)
Prepaid expenses and
deposits 1,646 190 1,861 (703)
Accounts payable and
accrued liabilities 1,766 (2,860) 4,429 3,191
Income taxes payable 1,596 (3,802) 3,995 (4,051)
-------------------------------------------------------------------------
Cash flows from
operating activities 22,678 (5,608) 67,745 23,360
-------------------------------------------------------------------------
Financing
Long-term debt - - - 2,212
Repayment of long-term debt (457) (473) (1,857) (3,842)
Deferred debt issue expenses - - (589) -
Issue of shares 183 71 1,071 4,900
-------------------------------------------------------------------------
Cash flows from financing
activities (274) (402) (1,375) 3,270
-------------------------------------------------------------------------
Investment
Acquisition of short-term
investments (6,950) (3,348) (14,519) (20,936)
Disposal of short-term
investments - 3,129 12,822 138,074
Disposal of investments - 141 - 1,876
Acquisition of property,
plant and equipment (1,182) (2,335) (6,330) (13,409)
Disposal of property,
plant and equipment - 8 - 405
Acquisition of intangible
assets (7) (3,943) (51) (149,628)
Disposal of intangible assets - - - 917
AXCAN PHARMA INC.
Page 26
-------------------------------------------------------------------------
Cash flows from investment
activities (8,139) (6,348) (8,078) (42,701)
-------------------------------------------------------------------------
Foreign exchange gain on
cash held in foreign
currencies 37 103 (302) 277
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 14,302 (12,255) 57,990 (15,794)
Cash and cash equivalents,
beginning of period 65,667 34,234 21,979 37,773
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 79,969 21,979 79,969 21,979
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 562 681 1,256 1,035
Interest paid 41 31 5,626 6,122
Income taxes paid 2,815 9,330 6,984 23,620
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC.
Page 27
AXCAN PHARMA INC.
Consolidated Statements of Operations
-------------------------------------------------------------------------
In accordance with U.S. GAAP
in thousands of U.S. dollars, except share related data
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Revenue 66,987 60,872 251,343 243,634
-------------------------------------------------------------------------
Cost of goods sold 18,299 11,060 71,534 54,247
Selling and
administrative expenses 21,068 18,412 85,997 76,365
Research and development
expenses 8,206 6,760 31,855 19,866
Depreciation and
amortization 5,492 4,164 21,532 16,359
-------------------------------------------------------------------------
53,065 40,396 210,918 166,837
-------------------------------------------------------------------------
Operating income 13,922 20,476 40,425 76,797
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Financial expenses 1,847 1,804 7,140 6,885
Interest income (659) (350) (1,340) (756)
Loss (gain) on foreign
currency 162 (202) (213) (313)
-------------------------------------------------------------------------
1,350 1,252 5,587 5,816
-------------------------------------------------------------------------
Income before income taxes 12,572 19,224 34,838 70,981
Income taxes 3,423 5,904 8,413 22,253
-------------------------------------------------------------------------
Net income 9,149 13,320 26,425 48,728
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per common share
Basic 0.20 0.29 0.58 1.08
Diluted 0.19 0.26 0.56 0.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
Basic 45,679,973 45,561,149 45,617,703 45,286,199
Diluted 55,016,910 55,214,113 55,219,202 55,031,184
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the
AXCAN PHARMA INC.
Page 28
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Page 29
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------
In accordance with U.S. GAAP
Amounts in tables are stated in thousands of U.S. dollars, except share
related data.
(unaudited)
1. Significant Accounting Policies
The accompanying unaudited financial statements are prepared in accordance
with U.S. GAAP for interim financial statements and do not include all the
information required for complete financial statements. They are consistent with
the policies outlined in the Company's audited financial statements for the year
ended September 30, 2004 except for the change mentioned in note 2. The interim
financial statements and related notes should be read in conjunction with the
Company's audited financial statements for the year ended September 30, 2004.
When necessary, the financial statements include amounts based on informed
estimates and best judgements of management. The results of operations for the
interim periods reported are not necessarily indicative of results to be
expected for the year. Consolidated financial statements prepared in U.S.
dollars and in accordance with Canadian GAAP are available to shareholders and
filed with regulatory authorities.
2. Change in Accounting Policies
Effects of contingently convertible instruments on diluted income 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 is 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, are therefore included in the Company's
diluted income per share calculation. For the year ended September 30, 2004, the
weighted number of common shares used in the calculation of the diluted income
per share has been increased from 52,787,964 to 55,031,184 and the diluted
income per share has been reduced from $0.98 to $0.96.
3. Product Acquisition
On November 18, 2003, the Company acquired the rights to a group of products
from Aventis Pharma S.A. 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 December 3, 2002, the Company acquired
the worldwide rights to the PANZYTRAT enzyme product line from Abbott
Laboratories.
During a transition period, the sellers may act as agents for the management
of the products sales. For the year ended September 30, 2005, a portion of the
sales of some 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 for the year ended September 30, 2005 were $2,431,789 ($7,667,940 in
2004), the Company only included in its revenue an amount of $949,866
($4,685,673 in 2004) representing the net sales less cost of goods sold and
other seller related expenses.
AXCAN PHARMA INC.
Page 30
4. Inventories
September September
30, 30,
2005 2004
----------- -----------
$ $
Raw materials and packaging material 18,710 10,311
Work in progress 1,547 1,781
Finished goods 15,759 25,178
-------------------------------------------------------------------------
36,016 37,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Intangible Assets
-------------------------------------------------------------------------
September 30, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and manufacturing rights with a:
Finite life 334,749 45,841 288,908
Indefinite life 112,430 12,417 100,013
-------------------------------------------------------------------------
447,179 58,258 388,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2004
-------------------------------------------------------------------------
Accumulated
Cost amortization 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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of the product PANZYTRAT 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,
2004, which amounted to $56,817,802, is therefore amortized over a 25-year
period.
AXCAN PHARMA INC.
Page 31
6. Segmented Information
The Company considers that it operates in a single reportable segment, the
pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Revenue
Canada
Domestic sales 9,054 7,485 34,412 28,002
Foreign sales - - - -
United States
Domestic sales 42,625 41,522 155,261 162,810
Foreign sales 1,264 1,421 4,394 3,921
Europe
Domestic sales 10,899 9,161 46,225 43,830
Foreign sales 3,105 1,228 10,857 4,846
Other 40 55 194 225
-------------------------------------------------------------------------
66,987 60,872 251,343 243,634
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September September
30, 30,
2005 2004
----------- -----------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 39,506 40,401
United States 127,915 131,242
Europe 252,509 265,417
Other 28,131 29,534
-------------------------------------------------------------------------
448,061 466,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to geographic segments based on the sales country of
origin.
AXCAN PHARMA INC.
Page 32
7. Financial Information Included in the Consolidated Statement of
Operations
a) Financial expenses
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Interest on long-term debt 1,422 1,495 5,542 5,614
Bank charges 71 18 165 127
Financing fees 79 - 333 -
Amortization of deferred
debt issue expenses 275 291 1,100 1,144
-------------------------------------------------------------------------
1,847 1,804 7,140 6,885
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Selling and administrative expenses
Selling and administrative expenses include the followings:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Shipping and handling
expenses 1,088 901 4,901 4,349
Advertising expenses 2,960 4,197 16,592 15,155
c) Other information
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Rental expenses 287 394 1,148 1,216
Depreciation of property,
plant and equipment 1,485 808 5,339 3,720
Amortization of
intangible assets 4,007 3,356 16,193 12,639
Share in net loss of
AXCAN PHARMA INC.
Page 33
joint ventures - (399) - (455)
Investment tax credits
applied against current
income taxes 768 519 2,619 1,163
d) Income per common share
The following tables reconcile the numerators and the denominators of the
basic and diluted income per common share computations:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Net income available to
common shareholders
Basic 9,149 13,320 26,425 48,728
Financial expenses
relating to the
convertible
subordinated notes 1,069 1,012 4,257 4,200
-------------------------------------------------------------------------
Net income available to
common shareholders
on a diluted basis 10,218 14,332 30,682 52,928
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Weighted average number
of common shares
Weighted average number
of common shares
outstanding 45,679,973 45,561,149 45,617,703 45,286,199
Effect of dilutive
stocks options 412,824 728,851 677,386 820,872
Effect of dilutive
convertible
subordinated notes 8,924,113 8,924,113 8,924,113 8,924,113
-------------------------------------------------------------------------
Adjusted weighted
average number of
common shares
outstanding 55,016,910 55,214,113 55,219,202 55,031,184
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares
outstanding as at November 4, 2005 45,686,544
AXCAN PHARMA INC.
Page 34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options to purchase 706,950 and 283,000 common shares were outstanding as at
September 30, 2005 and 2004 respectively but were not included in the
computation of diluted income per share for the year ended September 30, 2005
and 2004 respectively because the exercise price of the options was greater than
the average market price of the common shares.
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 noteholders 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.
e) 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. For the year ended September
30, 2005, the Company made matching contributions to the Plan totalling $495,195
($268,757 in 2004).
8. Stock Options
The estimated fair value of stock options at the time of grant using the
Black-Scholes option pricing model was as follows:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Fair value per option $6.62 $8.12 $7.01 $6.80
Assumptions used
Expected volatility 43% 43% 43% 44%
Risk-free interest rate 3.58% 4.04% 3.94% 4.17%
Expected option life
(years) 6 6 6 6
Expected dividend - - - -
The Company's net income, basic income per share and diluted income per
share would have been reduced on a pro-forma basis as follows:
For the For the For the For the
three-month three-month three-month three-month
AXCAN PHARMA INC.
Page 35
period period period period
ended ended ended ended
September September September September
30, 30, 30, 30,
2005 2005 2004 2004
------------ ----------- ----------- -----------
As reported Pro-forma As reported Pro-forma
------------ ----------- ----------- -----------
$ $ $ $
Net income 9,149 8,088 13,320 12,244
Basic income per share 0.20 0.18 0.29 0.27
Diluted income per share 0.19 0.17 0.26 0.24
For the For the For the For the
year ended year ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2005 2004 2004
------------ ----------- ----------- -----------
As reported Pro-forma As reported Pro-forma
------------ ----------- ----------- -----------
$ $ $ $
Net income 26,425 21,836 48,728 44,442
Basic income per share 0.58 0.49 1.08 0.98
Diluted income per share 0.56 0.48 0.96 0.88
9. Summary of Differences Between Generally Accepted Accounting Principles
in the United States and in Canada
The consolidated interim financial statements have been prepared in
accordance with U.S. GAAP which, in the case of the Company, conform in all
materials respects with Canadian GAAP, except as set forth below:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Operations adjustments $ $ $ $
Net income in accordance
with U.S. GAAP 9,149 13,320 26,425 48,728
Implicit interest on
convertible debt (1,205) (1,103) (4,631) (4,234)
Stock-based compensation
expense (1,062) - (4,589) -
Amortization of new
product acquisition costs (14) (14) (54) (54)
Income tax impact of the
above adjustments 6 5 337 20
-------------------------------------------------------------------------
Net earnings in accordance
with Canadian GAAP 6,874 12,208 17,488 44,460
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share in
accordance with
AXCAN PHARMA INC.
Page 36
Canadian GAAP
Basic 0.15 0.27 0.38 0.98
Diluted 0.15 0.26 0.38 0.96
September 30, 2005 September 30, 2004
------------------------ -----------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
------------ ----------- ----------- -----------
Balance sheet adjustments $ $ $ $
Current assets 190,357 190,357 139,032 139,054
Property, plant and
equipment 31,673 31,673 31,252 31,265
Intangible assets 388,921 401,229 407,875 420,235
Goodwill 27,467 28,862 27,467 28,862
Deferred debt issue
expenses 2,577 2,577 3,088 3,088
Deferred income tax asset 412 412 930 930
Current liabilities 58,336 58,336 51,362 51,430
Long-term debt 126,332 113,250 127,916 110,203
Deferred income tax
liability 39,135 40,234 38,290 39,376
Shareholders' equity
Equity component of
convertible debt - 24,239 - 24,239
Capital stock 261,714 273,022 260,643 267,288
Contributed surplus 1,329 13,293 - -
Retained earnings 138,787 112,806 112,362 107,671
Accumulated foreign
currency translation
adjustments 15,774 19,930 19,071 23,227
AXCAN PHARMA INC.
Page 37
AXCAN PHARMA INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
September September
30, 30,
2005 2004
----------- -----------
ASSETS (unaudited)
$ $
Current assets
Cash and cash equivalents 79,969 22,063
Short-term investments 17,619 15,922
Accounts receivable 37,587 46,518
Income taxes receivable 8,351 9,196
Inventories (Note 4) 36,016 37,270
Prepaid expenses and deposits 1,771 3,499
Future income taxes 9,044 4,586
-------------------------------------------------------------------------
Total current assets 190,357 139,054
Property, plant and equipment, net 31,673 31,265
Intangible assets, net (Note 5) 401,229 420,235
Goodwill, net 28,862 28,862
Deferred debt issue expenses, net 2,577 3,088
Future income taxes 412 930
-------------------------------------------------------------------------
655,110 623,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 52,990 47,985
Income taxes payable 3,247 731
Instalments on long-term debt 1,497 1,778
Future income taxes 602 936
-------------------------------------------------------------------------
Total current liabilities 58,336 51,430
Long-term debt 113,250 110,203
Future income taxes 40,234 39,376
-------------------------------------------------------------------------
211,820 201,009
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Equity component of convertible debt (Note 6) 24,239 24,239
Capital stock 273,022 267,288
Contributed surplus 13,293 -
Retained earnings 112,806 107,671
Accumulated foreign currency translation
adjustments 19,930 23,227
-------------------------------------------------------------------------
443,290 422,425
-------------------------------------------------------------------------
655,110 623,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AXCAN PHARMA INC.
Page 38
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC.
Page 39
AXCAN PHARMA INC.
Consolidated Cash Flows
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars,
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Operations
Net earnings 6,874 12,208 17,488 44,460
Non-cash items
Implicit interest on
convertible debt 1,205 1,102 4,631 4,234
Amortization of
deferred debt issue
expenses 275 291 1,100 1,144
Other depreciation
and amortization 5,504 4,180 21,583 16,421
Loss (Gain) on
disposal of assets - 506 - 475
Foreign currency
fluctuation 222 (89) (84) 342
Future income taxes 764 2,834 (3,281) 6,597
Stock-based
compensation expense 1,062 - 4,589 -
Changes in working
capital items
Accounts receivable 2,158 (15,052) 8,648 (27,748)
Income taxes receivable (1,003) (1,373) 1,610 (3,752)
Inventories 923 (3,700) 1,490 (17,157)
Prepaid expenses
and deposits 1,646 223 1,861 (654)
Accounts payable and
accrued liabilities 1,769 (2,966) 4,348 3,018
Income taxes payable 1,279 (3,802) 3,678 (4,051)
-------------------------------------------------------------------------
Cash flows from operating
activities 22,678 (5,638) 67,661 23,329
-------------------------------------------------------------------------
Financing
Long-term debt - - - 2,212
Repayment of long-term debt (457) (471) (1,857) (3,840)
Deferred debt issue expenses - - (589) -
Issue of shares 183 71 1,071 4,900
-------------------------------------------------------------------------
Cash flows from financing
activities (274) (400) (1,375) 3,272
-------------------------------------------------------------------------
Investment
Acquisition of short-term
investments (6,950) (3,348) (14,519) (20,936)
Disposal of short-term
investments - 3,129 12,822 138,074
AXCAN PHARMA INC.
Page 40
Disposal of investments - 141 - 1,876
Acquisition of property,
plant and equipment (1,182) (2,333) (6,330) (13,409)
Disposal of property,
plant and equipment - 1 - 405
Acquisition of
intangible assets (7) (3,943) (51) (149,628)
Disposal of intangible
assets - - - 917
-------------------------------------------------------------------------
Cash flows from investment
activities (8,139) (6,353) (8,078) (42,701)
-------------------------------------------------------------------------
Foreign exchange gain
on cash held in foreign
currencies 37 101 (302) 277
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents 14,302 (12,290) 57,906 (15,823)
Cash and cash equivalents,
beginning of period 65,667 34,353 22,063 37,886
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 79,969 22,063 79,969 22,063
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 562 674 1256 1,031
Interest paid 41 31 5,626 6,122
Income taxes paid 2,815 9,309 6,984 23,599
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC.
Page 41
AXCAN PHARMA INC.
Consolidated Earnings
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars, except share related data
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
REVENUE 66,987 60,933 251,343 243,792
-------------------------------------------------------------------------
Cost of goods sold 18,371 11,060 71,845 54,247
Selling and
administrative expenses 21,914 18,618 89,651 76,574
Research and development
expenses 7,582 6,088 29,861 18,641
Depreciation and
amortization 5,505 4,180 21,584 16,421
-------------------------------------------------------------------------
53,372 39,946 212,941 165,883
-------------------------------------------------------------------------
Operating income 13,615 20,987 38,402 77,909
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Financial expenses 3,052 2,912 11,771 11,131
Interest income (659) (354) (1,340) (762)
Loss (gain) on foreign
currency 162 (200) (213) (308)
-------------------------------------------------------------------------
2,555 2,358 10,218 10,061
-------------------------------------------------------------------------
Earnings before income
taxes 11,060 18,629 28,184 67,848
Income taxes 4,186 6,421 10,696 23,388
-------------------------------------------------------------------------
NET EARNINGS 6,874 12,208 17,488 44,460
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share
Basic 0.15 0.27 0.38 0.98
Diluted 0.14 0.26 0.38 0.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
Basic 45,679,973 45,561,149 45,617,703 45,286,199
Diluted 46,092,797 55,214,113 46,295,089 52,797,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AXCAN PHARMA INC.
Page 42
AXCAN PHARMA INC.
Consolidated Retained Earnings
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Balance, beginning
of period 105,932 95,463 107,671 63,211
Retroactive adjustment
for stock-based
compensation (Note 2) - - (12,353) -
Net earnings 6,874 12,208 17,488 44,460
-------------------------------------------------------------------------
Balance, end of period 112,806 107,671 112,806 107,671
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Contributed Surplus
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
(unaudited)
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Balance, beginning
of period 12,272 - - -
Retroactive adjustment
for stock-based
compensation (Note 2) - - 8,723 -
Tax deduction from
exercise of stock
options - 544 -
Stock-based
compensation expense 1,062 - 4,589 -
Exercise of stock options (41) - (563) -
-------------------------------------------------------------------------
Balance, end of period 13,293 - 13,293 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements. These
interim financial statements should be read in conjunction with the
AXCAN PHARMA INC.
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annual Consolidated Financial Statements.
AXCAN PHARMA INC.
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AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------
In accordance with Canadian GAAP
Amounts in tables are stated in thousands of U.S. dollars, except share
related data.
(unaudited)
1. Significant Accounting Policies
The accompanying unaudited financial statements are prepared in accordance
with Canadian GAAP for interim financial statements and do not include all the
information required for complete financial statements. They are consistent with
the policies outlined in the Company's audited financial statements for the year
ended September 30, 2004 except for the change mentioned in note 2. The interim
financial statements and related notes should be read in conjunction with the
Company's audited financial statements for the year ended September 30, 2004.
When necessary, the financial statements include amounts based on informed
estimates and best judgements of management. The results of operations for the
interim periods reported are not necessarily indicative of results to be
expected for the year. Consolidated financial statements prepared in U.S.
dollars and in accordance with U.S. GAAP are available to shareholders and filed
with regulatory authorities.
2. Change in Accounting Policies
Stock-based compensation
In September and November 2003, the Accounting Board made amendments to CICA
Handbook Section 3870 to require that the fair value based method be applied to
awards granted to employees, which previously had not been accounted for at fair
value. Thus, enterprises are required to account for the effect of such awards
in their financial statements for fiscal years beginning on or after January 1,
2004. The Company adopted the fair value based method in its fiscal year 2005
with a retroactive application, without restating prior periods. As at October
1, 2004, the retained earnings of the Company have been reduced by $12,353,000,
the capital stock has been increased by $4,100,233, the contributed surplus has
been increased by $8,722,767 and the income taxes receivable have been increased
by $470,000. Stock-based compensation expense charged to the consolidated
statement of earnings for the year ended September 30, 2005 was $4,589,254. If
this change in accounting policy had been applied to the previous fiscal year,
the Company's net earnings, basic earnings per share and diluted earnings per
share for the periods ended September 30, 2004 would have been reduced on a
pro-forma basis as follows:
For the three-month For the year
period ended ended
September 30, 2004 September 30, 2004
------------------------ -----------------------
As reported Pro-forma As reported Pro-forma
------------ ----------- ----------- -----------
$ $ $ $
Net earnings 12,208 11,132 44,460 40,174
Basic earnings per share 0.27 0.24 0.98 0.89
Diluted earnings per share 0.26 0.24 0.96 0.88
AXCAN PHARMA INC.
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The estimated fair value of granted stock options for the periods ended
September 30, 2005 and 2004 using the Black-Scholes model was as follows:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Fair value per option $6.62 $8.12 $7.01 $6.80
Assumptions used
Expected volatility 43% 43% 43% 44%
Risk-free interest rate 3.58% 4.04% 3.94% 4.17%
Expected options life
(years) 6 6 6 6
Expected dividend - - - -
3. Products Acquisitions
On November 18, 2003, the Company acquired the rights to a group of products
from Aventis Pharma S.A. 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 December 3, 2002, the Company acquired
the worldwide rights to PANZYTRAT enzyme product line from Abbott Laboratories.
During a transition period, the sellers may act as agents for the management
of the products sales. For the year ended September 30, 2005, a portion of the
sales of some 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 for the year ended September 30, 2005 were $2,431,789 ($7,667,940 in
2004), the Company only included in its revenue an amount of $949,866
($4,685,673 in 2004) representing the net sales less cost of goods sold and
other seller related expenses.
4. Inventories
September September
30, 30,
2005 2004
----------- -----------
$ $
Raw materials and packaging material 18,710 10,311
Work in progress 1,547 1,781
Finished goods 15,759 25,178
-------------------------------------------------------------------------
36,016 37,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Intangible Assets
-------------------------------------------------------------------------
September 30, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
AXCAN PHARMA INC.
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Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 347,578 46,362 301,216
Indefinite life 112,430 12,417 100,013
-------------------------------------------------------------------------
460,008 58,779 401,229
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2004
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 292,863 30,338 262,525
Indefinite life 170,127 12,417 157,710
-------------------------------------------------------------------------
462,990 42,755 420,235
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of the product PANZYTRAT 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,
2004, which amounted to $56,817,802, is therefore amortized over a 25-year
period.
6. Equity Component of Convertible Debt
The Company issued convertible subordinated notes for $125,000,000 on March
5, 2003. According to the features of this debt, an amount of $24,238,899,
representing the estimated value of the right of conversion, was included in the
shareholders' equity as equity component of convertible debt and an amount of
$100,761,101 was included in the long-term debt as liability component of
convertible debt. As of September 30, 2004, implicit interest of 9.17% and
totaling $6,526,246 was accounted for and added to the liability component. For
the year ended September 30, 2005, implicit interest in the amount of $4,630,987
($4,233,768 in 2004) was accounted for and added to the liability component.
AXCAN PHARMA INC.
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7. Segmented Information
The Company considers that it operates in a single reportable segment, the
pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Revenue
Canada
Domestic sales 9,054 7,485 34,412 28,002
Foreign sales - - - -
United States
Domestic sales 42,625 41,522 155,261 162,810
Foreign sales 1,264 1,421 4,394 3,921
Europe
Domestic sales 10,899 9,222 46,225 43,988
Foreign sales 3,105 1,228 10,857 4,846
Other 40 55 194 225
-------------------------------------------------------------------------
66,987 60,933 251,343 243,792
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September September
30, 30,
2005 2004
----------- -----------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 43,781 44,676
United States 128,223 131,602
Europe 252,510 265,431
Other 37,250 38,653
-------------------------------------------------------------------------
461,764 480,362
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to geographic segments based on the sales country of
origin.
AXCAN PHARMA INC.
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8. Financial Information Included in the Consolidated Statement of Earnings
a) Financial expenses
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Interest on long-term debt 2,627 2,598 10,173 9,848
Bank charges 71 23 165 139
Financing fees 79 - 333 -
Amortization of deferred
debt issue expenses 275 291 1,100 1,144
-------------------------------------------------------------------------
3,052 2,912 11,771 11,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Selling and administrative expenses
Selling and administrative expenses include the followings:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Shipping and handling
expenses 1,088 901 4,901 4,349
Advertising expenses 2,960 3,973 16,592 15,155
AXCAN PHARMA INC.
Page 49
c) Other information
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Rental expenses 287 394 1,148 1,216
Depreciation of property,
plant and equipment 1,484 810 5,338 3,728
Amortization of
intangible assets 4,020 3,370 16,245 12,693
Investment tax credits
applied against research
and development expenses 768 519 2,619 1,163
d) Earnings per common share
The following tables reconcile the numerators and the denominators of the
basic and diluted earnings per common share computations:
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
$ $ $ $
Net income available to
common shareholders
Basic 6,874 12,208 17,488 44,460
Financial expenses
relating to the
convertible
subordinated notes - 2,169 - 6,379
-------------------------------------------------------------------------
Net income available to
common shareholders
on a diluted basis 6,874 14,377 17,488 50,839
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the For the
three-month three-month
period period For the For the
ended ended year ended year ended
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Weighted average number
of common shares
Weighted average number
AXCAN PHARMA INC.
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of common shares
outstanding 45,679,973 45,561,149 45,617,703 45,286,199
Effect of dilutive
stock options 412,824 728,851 677,386 820,872
Effect of dilutive
convertible
subordinated notes - 8,924,113 - 6,680,893
-------------------------------------------------------------------------
Adjusted weighted
average number of
common shares
outstanding 46,092,797 55,214,113 46,295,089 52,787,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares
outstanding at the
end of the year 45,682,175 45,562,336
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares
outstanding as at November 4, 2005 45,686,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Options to purchase 706,950 and 283,000 common shares were outstanding as at
September 30, 2005 and 2004 respectively but were not included in the
computation of diluted earnings per share for the years ended September 30, 2005
and 2004 respectively, because the exercise price of the options was greater
than the average market price of the common shares.
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 noteholders 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
notesholders 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 of
September 30, 2005, the subordinated notes had no effect on the diluted earnings
per share. Since the trigger event did not occur during the third and fourth
quarters, the 8,924,113 common shares were not included in the weighted number
of common shares outstanding for these periods.
e) 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. For the year ended September
30, 2005, the Company made matching contributions to the Plan totalling $495,195
($268,757 in 2004).
AXCAN PHARMA INC.
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