Aptalis Pharma 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2011

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

For the transition period from            to            .

Commission File Number 333-153896

APTALIS PHARMA INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	74-3249870
(State or Other Jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
22 Inverness Center Parkway Suite 310 Birmingham, AL	35242
(Address of Principal Executive Offices)	(Zip Code)

(205) 991-8085

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  ¨

Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

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

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	x	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 10, 2012, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Aptalis MidHoldings Inc.

APTALIS PHARMA INC.

INDEX

Forward-Looking Statements	3
PART I. FINANCIAL INFORMATION	5
Item 1. Financial Statements	6
Condensed Consolidated Balance Sheets	6
Condensed Consolidated Statements of Operations	7
Condensed Consolidated Shareholders’ Deficit and Comprehensive Income (Loss)	8
Condensed Consolidated Cash Flows	9
Notes to Condensed Consolidated Financial Statements	10
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	34
Item 3. Quantitative And Qualitative Disclosure About Market Risk	53
Item 4. Controls and Procedures	53
PART II. OTHER INFORMATION	54
Item 1A. Risk Factors	54
Item 6. Exhibits	54
SIGNATURES	55
EXHIBIT INDEX	56

2

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes assumptions, expectations, projections, intentions and beliefs about future events. These statements are intended as “forward-looking statements.” We caution that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material.

All statements in this document that are not statements of historical fact are forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.

In addition to the risks and uncertainties included or incorporated by reference in this Quarterly Report on Form 10-Q, other factors that could cause our actual results or actual outcomes to differ materially from those expressed in or implied by such forward-looking statements include, but are not limited to:

• our ability to market, commercialize and achieve market acceptance for any of the products that we are developing, commercializing or may develop or commercialize in the future, including the growth, establishment, maintenance or acquisition of specialty sales, marketing and distribution capabilities to commercialize products;

• our ability to integrate acquired companies and successfully realize expected synergies, including from the acquisition of Eurand, without adversely affecting our business or results of operations;

• the expected timing, costs, progress or success of any of our preclinical and clinical development programs, regulatory approvals, or commercialization efforts;

• our ability to continue to successfully manufacture and commercialize our existing products or obtain third-party manufactured existing products;

• the potential advantages of our products or product candidates over other existing or potential products;

• our ability to enter into any new co-development, supply, or licensing agreements or to effectively maintain any existing co-development, supply, or licensing agreements with respect to our product candidates or products;

• the expense, time and uncertainty involved in the development of our product candidates, some or all of which may never reach the regulatory approval stage;

• our reliance on collaboration partners and licensees, to obtain and maintain regulatory approval for certain of our products and product candidates and to manufacture and commercialize such products;

• our ability to compete in the pharmaceutical industry against other branded or generic products, including in the pharmaceutical technologies market segment;

• delays in obtaining, or a failure to obtain and maintain, regulatory approval for our product candidates, including, but not limited to, ULTRASE MT, VIOKASE and AEROQUIN, in the United States and PYLERA and ZENPEP in the European Union;

• our ability to successfully regain market share for ULTRASE MT OR VIOKASE in the United States;

• our ability to obtain reimbursement for the products we commercialize;

• our ability to protect our intellectual property and know-how and operate our business without infringing the intellectual property rights or regulatory exclusivity of others;

• a loss of rights to develop and commercialize our products under our license and sublicense agreements;

• a loss of any of our key scientists or management personnel;

• our estimates of market sizes and anticipated uses of our product candidates;

• our estimates of future performance; and

• our estimates regarding anticipated future revenue, expenses, operating losses, capital requirements and our needs for additional financing.

3

When used in this document, the words “anticipate”, “believe”, “intend”, “estimate”, “project”, “forecast”, “plan”, “potential”, “will”, “may”, “should” and “expect” reflect forward-looking statements. Such statements reflect our current views and assumptions and all forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect our future financial results are discussed more fully under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Quarterly Report, “Risk Factors” in Item 1A of Part II of this Quarterly Report, as well as elsewhere in this Quarterly Report on Form 10-Q, and in our other filings with the U.S. Securities and Exchange Commission, referred to herein as the SEC. We caution readers of this Quarterly Report on Form 10-Q, also referred to herein as the Quarterly Report, not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.

The names APTALIS®, APTALIS PHARMA®, EURAND®, AEROQUIN^®, CANASA®, CARAFATE®, DELURSAN®, FLUTTER®, LACTEOL®, PANZYTRAT®, PHOTOBARR®, PHOTOFRIN®, PYLERA®, RECTIV®, SALOFALK®, ULTRASE®, VIOKASE® and ZENPEP® are trademarks or registered trademarks owned or used under license by the Company and/or its affiliated companies.

4

PART I. FINANCIAL INFORMATION

5

Item 1. Financial Statements

APTALIS PHARMA INC.

Condensed Consolidated Balance Sheets

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

	December 31, 2011			September 30, 2011
	(unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		132,005			126,509
Accounts receivable, net		88,014			75,616
Accounts receivable from the parent company (Note 18)		713			676
Income taxes receivable		1,968			2,972
Inventories, net (Note 6)		41,817			47,838
Prepaid expenses and other current assets		13,147			13,980
Deferred income taxes, net (Note 13)		8,941			4,730
Total current assets		286,605			272,321
Property, plant and equipment, net (Note 7)		84,029			84,411
Intangible assets, net (Note 8)		808,210			690,893
Goodwill, net (Note 8)		178,626			179,843
Deferred debt issue expenses, net of accumulated amortization of $13,636 ($12,142 as of September 30, 2011) (Note 11)		27,872			29,369
Deferred income taxes, net (Note 13)		360			1,023
Total assets		1,385,702			1,257,860
Liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 10)		193,436			159,357
Income taxes payable (Note 13)		3,283			9,784
Installments on long-term debt (Note 11)		8,800			8,511
Total current liabilities		205,519			177,652
Long-term debt (Note 11)		966,089			968,428
Other long-term liabilities (Note 3 and 5)		147,931			56,588
Deferred income taxes (Note 13)		80,219			82,566
Total liabilities		1,399,758			1,285,234
Shareholders’ Deficit
Capital Stock (Note 14)
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding		1			1
Deficit		(636,401	)		(656,476	)
9.05% Note receivable from the parent company (Note 18)		(78,154	)		(78,154	)
Additional paid-in capital		756,793			757,224
Accumulated other comprehensive loss		(56,295	)		(49,969	)
Total shareholders’ deficit		(14,056	)		(27,374	)
Total liabilities and shareholders’ deficit		1,385,702			1,257,860

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

These condensed interim financial statements should be read in conjunction with the annual consolidated financial statements.

for XBRL purpose only

6

APTALIS PHARMA INC.

Condensed Consolidated Statements of Operations

(in thousands of U.S. dollars)

(unaudited)

	Three Months Ended December 31,
	2011			2010
	$			$
Net product sales		150,466			85,938
Other revenue		1,937			—
Total revenue		152,403			85,938
Cost of goods sold(a)		37,180			17,423
Selling and administrative expenses(a) (Note 12)		33,267			25,171
Management fees (Note 18)		1,431			838
Research and development expenses(a)		15,754			6,955
Depreciation and amortization		21,062			13,573
Transaction, restructuring and integration costs (Notes 3 and 4)		2,714			3,048
Total operating expenses		111,408			67,008
Operating income		40,995			18,930
Financial expenses (Note 12)		22,099			16,229
Interest income		(69	)		(192	)
Loss on foreign currencies		196			243
Total other expenses		22,226			16,280
Income before income taxes		18,769			2,650
Income taxes expense (benefit) (Note 13)		(1,306	)		1,204
Net income		20,075			1,446

^(a)  Excluding depreciation and amortization

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

These condensed interim financial statements should be read in conjunction with the annual consolidated financial statements.

7

APTALIS PHARMA INC.

Condensed Consolidated Shareholders’ Deficit and Comprehensive Income (Loss)

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

(unaudited)

	Common Shares							Additional Paid-in Capital			9.05% Note Receivable From Parent Company			Accumulated Other Comprehensive Loss			Total Shareholders’ Deficit
	Shares		Amount		Deficit
	(number)		$		$			$			$			$			$
Balance, October 1, 2010		100		1		(468,152	)		614,113			(133,154	)		(33,840	)		(21,032	)
Net income		—		—		1,446			—			—						1,446
Foreign currency translation adjustments		—		—		—			—			—			(2,029	)		(2,029	)
Total Comprehensive loss																		(583	)
Stock-based compensation expense		—		—					491			—			—			491
Stock-based compensation plan redemptions		—		—		—			(49	)		—			—			(49	)
Provision on interest receivable from parent company		—		—		—			(3,037	)		—			—			(3,037	)
Interest income from parent company, net of taxes of $1,063		—		—		—			1,974			—			—			1,974
Balance, December 31, 2010		100		1		(466,706	)		613,492			(133,154	)		(35,869	)		(22,236	)
Amounts related to foreign currency translation adjustments															(35,869	)
Accumulated other comprehensive loss															(35,869	)
Balance, October 1, 2011		100		1		(656,476	)		757,224			(78,154	)		(49,969	)		(27,374	)
Net income		—		—		20,075			—			—						20,075
Hedging contracts fair value adjustments, net of taxes of $7		—		—		—			—			—			(246	)		(246	)
Foreign currency translation adjustments		—		—		—			—			—			(6,080	)		(6,080	)
Total Comprehensive loss																		13,749
Stock-based compensation expense		—		—		—			653			—			—			653
Stock-based compensation plan redemptions		—		—		—			(463	)		—			—			(463	)
Provision on interest receivable from parent company		—		—		—			(1,778	)		—			—			(1,778	)
Interest income from parent company, net of taxes of $621		—		—		—			1,157			—			—			1,157
Balance, December 31, 2011		100		1		(636,401	)		756,793			(78,154	)		(56,295	)		(14,056	)
Amounts related to foreign currency translation adjustments, net of tax															(40,084	)
Amounts related to hedging contracts fair value adjustments, net of tax															(16,211	)
Accumulated other comprehensive loss															(56,295	)

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

These condensed interim financial statements should be read in conjunction with the annual consolidated financial statements.

8

APTALIS PHARMA INC.

Condensed Consolidated Cash Flows

(in thousands of U.S. dollars)

(unaudited)

	Three Months Ended December 31,
	2011			2010
	$			$
Cash flows from operating activities
Net income		20,075			1,446
Adjustments to reconcile net income to cash flows from operating activities:
Non-cash financial expenses		2,258			1,754
Depreciation and amortization		21,062			13,573
Stock-based compensation expense		653			491
Loss on disposal and write-down of assets		—			30
Non-cash loss on foreign exchange		750			39
Deferred income taxes		(4,892	)		(1,601	)
Changes in assets and liabilities:
Accounts receivable		(13,118	)		(12,608	)
Accounts receivable from the parent company		(37	)		(38	)
Income taxes receivable		1,001			(1,937	)
Inventories		5,232			1,127
Prepaid expenses and other current assets		795			568
Accounts payable and accrued liabilities		(8,967	)		(1,914	)
Other long-term liabilities		(4,741	)		—
Income taxes payable		(6,835	)		2,766
Net cash provided by operating activities		13,236			3,696
Cash flows from investing activities
Acquisition of property, plant and equipment		(4,331	)		(1,135	)
Net cash used in investing activities		(4,331	)		(1,135	)
Cash flows from financing activities
Repayment of long-term debt		(2,216	)		(13,163	)
Stock-based compensation plan redemptions		(463	)		(49	)
Net cash used in financing activities		(2,679	)		(13,212	)
Foreign exchange loss on cash held in foreign currencies		(730	)		(116	)
Net increase (decrease) in cash and cash equivalents		5,496			(10,767	)
Cash and cash equivalents, beginning of period		126,509			161,503
Cash and cash equivalents, end of period		132,005			150,736

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

These condensed interim financial statements should be read in conjunction with the annual consolidated financial statements.

9

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

1. Governing Statutes, Description of Business and Basis of Presentation

On May 4, 2011, Axcan Intermediate Holdings Inc. announced that it has changed its name to Aptalis Pharma Inc. The entity is a corporation incorporated on November 28, 2007, under the General Corporation Law of the State of Delaware. The corporation and its subsidiaries (together the “Company”), commenced active operations with the purchase, through a wholly-owned indirect subsidiary on February 25, 2008, of all of the outstanding common shares of Axcan Pharma Inc., a company incorporated under the Canada Business Corporation Act. The Company provides innovative, effective therapies for unmet medical needs including cystic fibrosis and gastrointestinal disorders. The Company has manufacturing and commercial operations in the United States, the European Union and Canada. The Company also formulates and clinically develops enhanced pharmaceutical and biopharmaceutical products for itself and others using its proprietary technology platforms including bioavailability enhancement of poorly soluble drugs, custom release profiles, and taste-masking/orally disintegration tablet (ODT) formulations.

On February 11, 2011, the Company completed the acquisition of Eurand N.V. (“Eurand”) through a wholly owned indirect subsidiary pursuant to a Share Purchase Agreement dated November 30, 2010 (as amended) resulting in Eurand becoming an indirect subsidiary of the Company. Eurand was a specialty pharmaceutical company that was engaged in the development, manufacturing and commercialization of enhanced pharmaceutical and biopharmaceutical products based on its proprietary pharmaceutical technologies.

On December 28, 2011, the Company entered into a license agreement to acquire the exclusive rights to commercialize Rectiv^TM(nitroglycerin) Ointment 0.4% (“Rectiv”) in the U.S. As described in Note 3, the Eurand and Rectiv transactions have been accounted for in accordance with the acquisition method of accounting for business combinations. Accordingly, the Company’s condensed consolidated financial statements reflect the assets, liabilities and results of operations of Eurand and Rectiv from the date of acquisition.

The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency, and prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the requirements of the Securities and Exchange Commission for reporting on Form 10Q. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended September 30, 2011. When necessary, the financial statements include amounts based on informed estimates and best judgment of management. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. In Management’s opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operation for the periods shown. Certain prior period amounts have been reclassified to conform to the current period presentation. All intercompany transactions and balances have been eliminated on consolidation.

2. Recently Issued Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) amended the existing guidance on the annual testing of goodwill for impairment. The amended guidance gives an entity the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company has early adopted this new guidance in connection with the performance of its annual goodwill impairment test for fiscal year ended September 30, 2011.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity two options to present the components of net income and other comprehensive income; (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity (deficit). In December 2011, the FASB issued an amendment to indefinitely defer the specific requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. During the deferral period, the existing requirements in U.S. GAAP for the presentation of reclassification adjustments must continue to be followed. All other provisions of this new guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance will change how the Company presents other comprehensive income (loss) which has been historically presented as part of the Consolidated Statement of Shareholder’s equity (deficit).

In May 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. Additional disclosure requirements include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. This new guidance is effective for annual and interim periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

10

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

3. Business Combinations

Acquisition of Eurand N.V. (“Eurand”)

Description of the transaction

On February 11, 2011 (or the “Acquisition Date”), Axcan Holdings Inc., which subsequently changed its name to Aptalis Holdings Inc. (“Aptalis Holdings”), the Company’s indirect parent, and Axcan Pharma Holding B.V. (“Axcan AcquisitionCo”), an indirect subsidiary of the Company, pursuant to a Share Purchase Agreement dated November 30, 2010 (as amended) acquired the outstanding equity of Eurand N.V. (“Eurand”) for total cash consideration of approximately $589,555,000. As a result of the acquisition, Eurand has become an indirect subsidiary of the Company. Prior to the transaction, Eurand was a specialty pharmaceutical company that developed, manufactured and commercialized enhanced pharmaceutical and biopharmaceutical products based on its proprietary pharmaceutical technologies. Its technology platforms include bioavailability enhancement of poorly soluble drugs, custom release profiles and taste-masking/orally disintegrating tablet (ODT) formulations. Eurand was a global company with facilities in the U.S. and Europe. The acquisition of Eurand enables the Company to leverage the combination of two leading specialty pharmaceutical players, expand its gastroenterology product portfolio and provide the Company with a proprietary R&D growth engine and technology platforms supported by an extensive patent portfolio to meaningfully diversify its business and expand its geographic and manufacturing footprint.

Assets acquired and liabilities assumed

The Company finalized its purchase price allocation during the fourth quarter of the fiscal year ended September 30, 2011.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date.

	Book value			Step-up to fair value			Amounts recognized as of acquisition date
	$			$			$
Cash and cash equivalents		63,888			—			63,888
Accounts receivable(a)		22,662			—			22,662
Inventories(b)		25,465			18,727			44,192
Other current assets(c)		6,552			—			6,552
Property, plant and equipment		44,652			10,874			55,526
Identifiable intangible assets(d)		7,053			406,876			413,929
Current liabilities(e)		(51,960	)		—			(51,960	)
Long-term debt, including current portion		(3,394	)		—			(3,394	)
Deferred income taxes liabilities, net(f)		(237	)		(61,012	)		(61,249	)
Other non-current liabilities		(8,489	)		2,278			(6,211	)
Total identifiable net assets		106,192			377,743			483,935
Goodwill(g)		37,540			68,977			106,517
Net assets acquired		143,732			446,720			590,452
Effective settlement of pre-existing relationships(h)		(897	)		—			(897	)
Total fair value of consideration transferred								589,555

^(a)  As of the Acquisition Date, the fair value of accounts receivable acquired approximated book value. The gross contractual amount receivable was $23,118,000 of which $456,000 was not expected to be collected.

^(b)  Reflects the adjustment to step-up the carrying value of inventory acquired by $18,727,000 to estimated fair value as of February 11, 2011. The stepped-up value was recorded as a charge to cost of goods sold as acquired inventory was sold.

^(c)  Includes prepaid assets and income tax receivable.

11

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

^(d)  Identifiable intangible assets comprise trademarks, trademark licenses, manufacturing rights and other intangible assets with a finite life with weighted average useful lives of 17.04 years. The estimated aggregate amortization expense for the five succeeding years will be $25,599,000 annually.

^(e)  Includes accounts payable, accrued liabilities and income taxes payable.

^(f)  Comprises of current deferred tax assets $823,000, non current deferred tax assets $15,703,000, current deferred tax liabilities $3,000 and non current deferred tax liabilities $77,772,000.

^(g)  The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to synergies expected to result from combining the operations of Eurand and the Company and intangible assets that do not qualify for separate recognition. The Company does not expect any portion of this goodwill to be deductible for tax purposes.

^(h)  Prior to the acquisition, the Company had entered into an exclusive development license and supply agreement with Eurand. No gain or loss was recognized in conjunction with the effective settlement of the contractual relationship between the Company and Eurand as a result of this acquisition.

Transaction related costs

During the three months ended December 31, 2010, the Company had expensed $1,848,000 of costs relating to legal, financial, valuation and accounting advisory services performed in connection with effecting the transaction with Eurand, which are included in transaction, restructuring and integration costs in the accompanying Condensed Consolidated Statements of Operations. The Company did not incur transaction related costs during the three months ended December 31, 2011.

Acquisition of Rectiv™

On December 28, 2011, the Company entered into a license agreement with Strakan International S.A.R.L., and Prostrakan Inc. (collectively “ProStrakan”) to acquire the exclusive rights to commercialize Rectiv™ (nitroglycerin) Ointment 0.4% (“Rectiv™”) in the U.S (the “Rectiv Transaction”). In addition, the Company and ProStrakan have the right to undertake development work with respect to Rectiv™. Rectiv™ received FDA approval in June 2011 and is indicated for the treatment of moderate to severe pain associated with chronic anal fissure. On January 10, 2012, the Company made an upfront payment to ProStrakan of $20,000,000 and will pay a series of potential milestones comprising of a commercialization milestone payment of $20,000,000, payments up to $40,000,000 upon the achievement of certain sales milestones and double-digit royalties on net sales of Rectiv™. The Company has also entered into a separate supply agreement with ProStrakan and has the ability to change its source of supply of the product in the future. The Company plans to launch Rectiv^™ in fiscal 2012.

The Rectiv Transaction has been accounted for as a business combination under the acquisition method of accounting. The fair value of the consideration payable was determined to be $139,200,000 as of the acquisition date comprising of non-contingent milestones of $38,900,000 and contingent milestones and royalty payments of $100,300,000. The current and long-term portions of consideration payable were determined to be $43,500,000 and $95,700,000 and are reflected within accounts payable and accrued liabilities and other long-term liabilities respectively. The total fair value of the consideration transferred has been provisionally assigned (pending the finalization of a definitive valuation) to trademark license intangible asset valued at $139,200,000. The trademark license intangible asset has an estimated useful life of approximately 8 years.

The Company will finalize the purchase price allocation as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. The Company expects to finalize the purchase price allocation no later than one year from the acquisition date.

The Company determined the acquisition date fair value of the contingent consideration based on a probability weighted income approach. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement with the fair value hierarchy. These inputs include the estimated amount and timing of projected cash payments, the probability of the achievement of future milestone events, the risk-adjusted discount rate used to present value the probability-weighted cash flows, revenue estimates and other factors. These inputs are significant assumptions and changes in the fair value of the contingent consideration obligation may result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various milestone criteria. A 1% change in the discount rate, assuming all other assumptions remain consistent would result in a change of $3,000,000 to our contingent consideration obligation. A 10% change in our projected cash flows, assuming all other assumptions remain consistent would result in a change of $7,000,000 to our contingent consideration obligation ..

Subsequent to the acquisition date, on a quarterly basis at each reporting date, the contingent consideration liability will be remeasured at current fair value with changes recorded in earnings.

12

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

4. Restructuring and Integration

Acquisition related cost-rationalization and integration initiatives

The Company has initiated restructuring measures in conjunction with the integration of the operations of Eurand. These measures are intended to capture synergies and generate cost savings across the Company.

Restructuring actions taken thus far include workforce reductions across the Company and other organizational changes. These reductions primarily come from the elimination of redundancies and consolidation of staff in the sales and marketing, manufacturing, research and development, and general and administrative functions, as well as from the closure of Eurand’s manufacturing facility in Nogent-Oise, France.

The Company recorded a restructuring expense in the amount of $223,000 during the three months ended December 31, 2011 related to planned employee termination costs included in Transaction, restructuring and integration on the Condensed Consolidated Statements of operations. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits and health insurance continuation, many of which may be paid out during periods after termination.

The following table summarizes restructuring liability activity related to the Eurand acquisition for the quarter ended December 31, 2011

	Severance and related benefits
	$
Restructuring liability balance September 30, 2011		3,699
Expense		223
Payments		(2,788	)
Restructuring liability balance December 31, 2011		1,134

The Company had incurred restructuring expense of $16,051,000 during the fiscal year ended September 30, 2011. The Company estimates that it will incur additional restructuring costs between $600,000 and $1,200,000 primarily consisting of severance costs. The restructuring actions taken thus far are expected to be substantially completed by the end of 2012.

The Company has incurred integration costs of $2,491,000 during the three months ended December 31, 2011 ($1,200,000 was expensed in the three months ended December 31, 2010) representing certain external, incremental costs directly related to integrating the Eurand business and primarily include expenditures for consulting and systems integration. Restructuring and integration costs are included in transaction, restructuring and integration costs in the accompanying Condensed Consolidated Statements of Operations.

5. Acquisitions, Research Collaborations and License Agreements

Agreements with Mpex Pharmaceuticals Inc. for the acquisition and development of Aeroquin™

On April 11, 2011, Aptalis Holdings and Axcan Lone Star Inc. (“MergerSub”), the Company’s affiliates, entered into a series of agreements with Mpex Pharmaceuticals Inc. (“Mpex”) for the acquisition and development of Aeroquin™ (the “Aeroquin Transaction”), a proprietary aerosol formulation of levofloxacin, which is currently in Phase 3 clinical trials for the treatment of pulmonary infections in patients with cystic fibrosis (CF). Subsequently on August 31, 2011, under the terms of these agreements, Aptalis Holdings and Merger Sub acquired all of Mpex’s assets related to Aeroquin™ in a merger of Mpex with and into Merger Sub, with Mpex being the surviving corporation and a direct, wholly-owned unrestricted subsidiary of us. Prior to the merger, Mpex transferred all of its assets that are not related to Aeroquin™ to Rempex, a newly formed company that is owned primarily by the previous Mpex stockholders. As a result of the Aeroquin Transaction, the Company made an initial non-contingent payment of $12,000,000 on April 21, 2011. Additional consideration in relation with the Aeroquin Transaction consists of (i) remaining time-based, non-contingent payments amounting to $33,000,000 and an additional $17,500,000 of time-based payments will be paid in a number of installments, of which the final installment is due on April 1, 2014, plus, (ii) contingent payments of up to $195,000,000 if certain regulatory and commercial milestones are met related to Aeroquin™, and (iii) earn-out payments based on net sales of Aeroquin™. Indemnity obligations of the Mpex security holders will be satisfied by set-off against a portion of the foregoing merger consideration payments.

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APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

The further development of Aeroquin™ is being conducted pursuant to the terms of the Development Agreement dated April 11, 2011 among Aptalis Holdings, Merger Sub, and Mpex. Since the completion of the divestiture of assets and liabilities unrelated to Aeroquin™ (the “Divestiture”) to Rempex, Rempex has assumed all of Mpex’s obligations under the Development Agreement. Under the Development Agreement, Mpex (and after the Divestiture, Rempex) will be paid for the actual development costs of Aeroquin™ and has primary responsibility for conducting day-to-day development activities. The Company will be required to pay in advance development costs estimated for the next three months based on a rolling three months forecast. The Company and Merger Sub will have input regarding development strategy. Pursuant to the Development Agreement, on April 12, 2011 Mpex was paid $8,731,000 for development expenses incurred by Mpex from November 15, 2010, to March 31, 2011, which has been expensed as acquired in-process research and an additional $9,913,000 for estimated development costs to be incurred during the first three months of the Development Agreement, of which $8,514,000 has been expensed as research and development. All payments under the Development Agreement, Option Agreement and Merger Agreement to Mpex or Mpex security holders, as applicable, will be made by or on behalf of Merger Sub (or after the consummation of the Merger, the Surviving Company).

During the quarter ended December 31, 2011, the Company expensed $6,124,000 as research and development related to the development of Aeroquin™. As of December 31, 2011, (i) $7,598,000 reflecting forecasted development costs for the next three months is included in prepaid expenses and other current assets and (ii) $40,439,000 represents the amount accrued for the non-contingent payments payable under the Option and Merger agreements with $28,275,000 included in other long term liabilities and the balance included in accounts payable and accrued liabilities.

Equity investment in Axcan Holdings

Simultaneous with the execution of the Mpex agreements, Aptalis Holdings received the proceeds of a $55,000,000 equity investment from funds managed by Investor Growth Capital Limited. Aptalis Holdings contributed the proceeds of the equity investment to its subsidiaries to fund a portion of the cost of the Mpex transactions and a partial repayment on the Company’s $133,154,000 note receivable from its parent company.

6. Inventories

	December 31, 2011		September 30, 2011
	$		$
Raw material and packaging material, net of reserve for obsolescence of $2,607 ($3,197 at September 30, 2011)		4,005		19,741
Work in progress, net of reserve for obsolescence of $986 ($1,141 at September 30, 2011)		4,230		5,282
Finished goods, net of reserve for obsolescence of $1,527 ($1,290 at September 30, 2011)		33,582		22,815
		41,817		47,838

14

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

7. Property, Plant and Equipment

	December 31, 2011
	Cost		Accumulated depreciation		Net
	$		$		$
Land		4,614		—		4,614
Buildings		44,608		6,580		38,028
Machinery, equipment and office furnishings		37,337		7,806		29,531
Computer equipment and software		27,430		16,768		10,662
Leasehold improvements		1,786		592		1,194
		115,775		31,746		84,029

	September 30, 2011
	Cost		Accumulated depreciation		Net
	$		$		$
Land		4,713		—		4,713
Buildings		45,369		6,165		39,204
Machinery, equipment and office furnishings		36,427		6,864		29,563
Computer equipment and software		25,853		15,583		10,270
Leasehold improvements		1,194		533		661
		113,556		29,145		84,411

15

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

8. Goodwill and Intangible Assets

The following table reflects the changes in carrying amount of goodwill from September 30, 2011 to December 31, 2011:

	December 31, 2011			September 30, 2011
	$			$
Balance, beginning of period		179,843			73,540
Acquisition of Eurand (Note 3)		—			106,517
Foreign exchange		(1,217	)		(214	)
Balance, end of period		178,626			179,843

Trademarks, trademark licenses, manufacturing rights and other intangible assets with a finite life

The following table reflects the changes in the carrying amount of intangible assets:

	December 31, 2011
	Cost			Accumulated amortization			Net
	$			$			$
Balance, at October 1, 2011		860,614			169,721			690,893
Additions (Note 3)		139,200			—			139,200
Amortization		—			17,909			(17,909	)
Foreign exchange		(4,976	)		(1,002	)		(3,974	)
Balance, at December 31, 2011		994,838			186,628			808,210

	September 30, 2011
	Cost			Accumulated amortization			Net
	$			$			$
Balance, at October 1, 2010		459,207			111,245			347,962
Acquisition of Eurand (Note 3)		413,929			—			413,929
Other additions		431			—			431
Disposal of the PHOTOFRIN/PHOTOBARR product line		(11,749	)		(1,503	)		(10,246	)
Amortization		—			60,568			(60,568	)
Foreign exchange		(1,204	)		(589	)		(615	)
Balance, at September 30, 2011		860,614			169,721			690,893

As disclosed in Note 3, a trademark license intangible asset of $139,200,000 was recorded resulting from the Rectiv transaction and is reflected in the table above as additions made during the first quarter of fiscal 2012.

During the quarter ended December 31, 2011, the Company learned that a generic competitor to Delursan was being assessed by AFSSAPS (Agence francaise de securite sanitaire des produits de santé). Management considered the possible impact of a generic entrant in the market on Delursan’s future revenues. On reassessment, the Company reduced the remaining estimated useful life of the Delursan intangible asset to 5 years. As a result, an additional amortization expense of $1,630,000 was recorded in the first quarter of fiscal 2012.

16

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

9. Segment Information

Prior to the acquisition of Eurand, the Company operated in one operating segment, pharmaceutical products. Following the acquisition of Eurand, the Management of the Company reassessed the internal reporting structure and composition of its business units and concluded, based on the level of detail contained in the financial information package used by the Company’s chief operating decision maker to drive operational decision making, that it continues to operate in one operating segment, pharmaceutical products.

The Company operates in the following geographic areas:

	Three Months Ended December 31,
	2011		2010
	$		$
Total revenue
United States
Domestic sales		111,858		57,949
Foreign sales		1,518		270
Canada
Domestic sales		9,777		10,046
Foreign sales		—		136
European Union
Domestic sales		13,709		12,926
Foreign sales		15,541		4,611
		152,403		85,938

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

	December 31, 2011		September 30, 2011
	$		$
Property, plant, equipment and intangible assets
Canada		245,630		253,590
United States		187,029		47,314
European Union		459,580		474,400
		892,239		775,304

	December 31, 2011		September 30, 2011
	$		$
Goodwill
Canada		61,887		61,887
United States		20,931		20,931
European Union		95,508		97,025
		178,626		179,843

17

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

10. Accounts payable and accrued liabilities

	December 31, 2011		September 30, 2011
	$		$
Accounts payable		20,413		22,881
Contract rebates, product returns and accrued chargebacks		65,268		64,566
Accrued compensation and benefits		18,322		26,288
Accrued purchase consideration on business combination (Note 3)		43,500		—
Accrued research and development costs		16,517		17,359
Accrued royalties		3,719		3,951
Accrued liabilities related to Unapproved Pep’s		2,775		3,064
Deferred revenue		1,453		2,970
Accrued interest on long-term debt		10,024		2,515
Others accrued liabilities		11,445		15,763
		193,436		159,357

11. Long-term Debt

	December 31, 2011		September 30, 2011
	$		$
Senior secured term loan of $742,500 at December 31, 2011 ($744,375 at September 30, 2011) bearing interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the prime rate of Banc of America Securities LLC, (b) the federal funds effective rate plus 1/2 of 1.00% and (c) the three-month LIBOR rate plus 1.00% or (2) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margins for borrowings under the Senior Secured Term Loan Facility are 3.00% with respect to base rate borrowings and 4.00% with respect to LIBOR borrowings. In addition, the LIBOR rate and base rate for borrowings under the Senior Secured Term Loan Facility are subject to a floor of 150 basis points and 250 basis points, respectively, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in February 2017, subject to interest rate swap agreements as further disclosed in Note 16.		739,412		741,142
Unsecured loan of 1,502 Euros at December 31, 2011 (1,752 Euros at September 30, 2011), with a variable interest of 1.6% above Euribor. Euribor interest rate has a cap of 2.5%		1,948		2,356
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016		233,529		233,441
		974,889		976,939
Installments due within one year		8,800		8,511
		966,089		968,428

On February 11, 2011, the Company entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition. The amended and restated credit agreement and related security and other agreements is composed of (i) a senior secured revolving credit facility in an aggregate principal amount of $147,000,000 (the “Senior Secured Revolving Credit Facility”) and (ii) a $750,000,000 senior secured term loan facility (the “Senior Secured Term Loan Facility” and, together with the Senior Secured Revolving Credit Facility, collectively, the “Amended and Restated Senior Secured Credit Facilities”).

18

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

��

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

(unaudited)

The Company borrowed $500,000,000 of the amount available under the Senior Secured Term Loan Facility at the closing of the acquisition of Eurand. The Senior Secured Revolving Credit Facility remained undrawn at the closing of the acquisition. A portion of the proceeds of the equity and debt financings, together with cash on hand of the Company and Eurand, were used to repay the outstanding term loan portion amounting to $125,660,000 of the Company’s existing senior secured credit facilities. Following the repayment, all unamortized deferred financing fees of $2,653,000 and original issuance discount of $3,188,000 related to the term loan were written off and included in loss on extinguishment of debt during the three months ended March 31, 2011.

On February 25, 2008, the Company had issued $228,000,000 aggregate principal amount of its 9.25% senior secured notes (the “Senior Secured Notes”) due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a 10% yield to March 1, 2015. On March 15, 2011, $250,000,000 of the Senior Secured Term Loan Facility was drawn to redeem the Company’s Senior Secured Notes at a redemption price of 106.938%. The aggregate redemption amount consisted of $228,000,000 in aggregate principal amount, and $15,819,000 of redemption premium which is included in Loss on extinguishment of debt in the accompanying Consolidated Statements of Operations. Following the redemption all unamortized deferred financing fees of $4,992,000 and original issuance discount of $1,659,000 related to these notes were written off and included in Loss on extinguishment of during the three months ended March 31, 2011.

The Company’s Amended and Restated Senior Secured Credit Facilities totaling $897,000,000 is composed of a Senior Secured Term Loan Facility amounting to $750,000,000 and a Senior Secured Revolving Credit Facility totaling $147,000,000. The Senior Secured Revolving Credit Facility is comprised of $115,000,000 of existing revolving credit commitments that were extended or issued (the “ Extended Commitments”) and $32,000,000 of existing revolving credit commitments that were not extended (the “ Unextended Commitments”) pursuant to the Senior Secured Revolving Credit Facility. The Amended and Restated Senior Secured Credit Facilities bear interest at a variable rate available composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months. The principal amount of the Senior Secured Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount with payments beginning in fiscal year 2011. The principal amount outstanding of the loans under the Senior Secured Term Loan Facility will be due and payable on February 11, 2017. The principal amount of outstanding loans under the Senior Secured Revolving Facility will be due and payable on February 11, 2016 with respect to Extended Commitments and on February 25, 2014 with respect to Unextended Commitments.

At December 31, 2011, $750,000,000 of term had been issued and no amounts had been drawn during the year against the revolving credit facility. The term loans were priced at $0.995, with a yield to maturity of 5.6%, before the effect of interest rate swaps as disclosed in Note 16. The Amended and Restated Senior Secured Credit Facility requires the Company to meet certain financial covenants, beginning in the quarter ended June 30, 2011. The maintenance of these financial covenants is solely with respect to the Senior Secured Revolving Credit Facility. These covenants were met as of December 31, 2011.The credit agreement governing the Amended and Restated Senior Secured Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Amended and Restated Senior Secured Credit Facility, (2) commencing with the fiscal year ending September 30, 2012, 50% (which percentage will be reduced if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Senior Secured Term Loan Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestment rights and certain other exceptions.

Pursuant to the annual excess cash flow requirements defined in the preceding credit agreement, the Company was required to prepay $13,163,000 of outstanding term loans in the first quarter of fiscal year 2011. The Company was not required to make prepayments in the first quarter of fiscal year 2012.

On May 6, 2008, the Company had issued $235,000,000 of 12.75% senior unsecured notes due March 1, 2016, (the “Senior Unsecured Notes”). The Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior Unsecured Notes are subordinated to the Credit Facility and Senior Secured Notes.

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

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

19

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

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

	$
2012		8,800
2013		8,149
2014		7,500
2015		7,500
2016		242,500
Thereafter		705,000
		979,449
Unamortized original issuance discount		4,560
		974,889

12. Information Included in the Consolidated Operations and Cash Flows

a) Financial expenses

	Three Months Ended December 31,
	2011			2010
	$			$
Interest on long-term debt , including amortization of original issuance discount of $232 ($511 in 2010)		18,102			14,606
Accretion expense on amounts payable for the Aeroquin transaction		729			—
Interest and bank charges		(210	)		245
Interest rate swaps (Note 16)		1,690			—
Financing fees		294			135
Amortization of deferred debt issue expenses		1,494			1,243
		22,099			16,229

b) Other information

	Three Months Ended December 31,
	2011		2010
	$		$
Rental expenses		843		884
Shipping and handling expenses		1,793		1,338
Advertizing expenses		2,554		1,379
Depreciation of property, plant and equipment		3,153		2,118
Amortization of intangible assets		17,909		11,455
Stock-based compensation expense		653		491

20

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

c) Supplemental cash flow information

	Three Months Ended December 31,
	2011		2010
	$		$
Interest received		86		192
Interest paid		12,004		1,334
Income taxes received		8		—
Income taxes paid		9,496		2,285
Non-cash investing activities:
Acquisition of Rectiv, purchase consideration at fair value		139,200		—

13. Income Taxes

The Company establishes a valuation allowance against deferred tax assets in accordance with U.S. GAAP. At December 31, 2011, the Company has a valuation allowance of $163,652,000 mainly against the following net deferred tax assets: $122,504,000 for unused losses, $6,262,000 for interest rate swaps, $12,720,000 for tax credits, $3,898,000 for stock-based compensation. The jurisdictions in which the Company recorded valuation allowances are the United States for $149,489,000, France for $13,235,000 and Canada for $928,000. In future periods, if the deferred tax assets are determined by management to be more likely than not to be realized, the tax benefits relating to the reversal of the valuation allowance will be recorded in the Consolidated Statements of Operations.

The Company’s effective tax rate for the three months ended December 31, 2011 was minus 6.97% compared to 45.43% in the prior year’s period. The effective tax rate for the three months ended December 31, 2011, is affected by a number of elements, the most important being the tax benefit arising from a financing structure of $4,200,000, the reversal of a valuation allowance of $1,895,000, unrecognized tax benefits reversal of $1,741,000 and the difference with foreign tax rates of $1,236,000.

At December 31, 2011, with respect to uncertain tax positions, the Company had unrecognized tax benefits of $5,677,000 ($14,769,000 at September 30, 2011).

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

	Three Months Ended December 31,
	2011			2010
	$			$
Balance, beginning of period		14,769			11,485
Additions based on tax positions related to the current year		—			8
Additions for tax positions of prior years		49			433
Settlements		(7,243	)		(1,063	)
Reductions for tax positions of prior years		(1,898	)		(29	)
Balance, end of period		5,677			10,834

The Company has historically recognized interest relating to income tax matters as a component of financial expenses and penalties related to income tax matters as a component of income tax expense. At December 31, 2011, the Company had accrued $1,151,000 ($2,410,000 at September 30, 2011) for interest relating to income tax matters. There were no amounts recorded for penalties at December 31, 2011.

The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various states, local and foreign jurisdictions including Canada and France. In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is subject to federal and state income tax examination by U.S. tax authorities for fiscal years 2008 through 2011. The Company is subject to Canadian and provincial income tax examination for fiscal years 2009 through 2011 and for international transactions for fiscal years 2008 through 2011. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant.

21

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

As a result of the completion by the Canada Revenue Agency domestic audit for taxation years 2005 to 2008 in October 2011, effective settlement occurred and the Company paid $ 7,243,000. A favorable tax benefit of approximately $1,741,000 has been recorded in the statement of operations in the first quarter of 2012.

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

The Company has approximately $118,000,000 of unrecognized suspended capital loss in Canada that can be carried forward indefinitely.

At December 31, 2011, and September 30, 2011, no provision has been made for income taxes on the undistributed earnings of the Company’s foreign subsidiaries that the Company intends to indefinitely reinvest.

14. Stock Incentive Plans

Management equity incentive plan

In April 2008, the Company’s indirect parent company adopted a Management Equity Incentive Plan (the “MEIP Plan”), pursuant to which the indirect parent company grants options to selected employees and directors of the Company. The MEIP Plan provides that a maximum of 3,833,307 shares of common stock of the indirect parent company are issuable pursuant to the exercise of options. The per share purchase price cannot be less than the fair value of the share of common stock of the indirect parent company at the grant date and the option expires no later than ten years from the date of grant. Vesting of these stock options is split into 3 categories: 1) time-based options: 50% of option grants generally vest ratably over 5 years and feature a fixed exercise price equal to the fair value of common stock of the indirect parent company on grant date; 2) premium options: 25% of stock option grants with an exercise price initially equal to the fair value of common stock on grant date that will increase by 10% each year and generally vesting ratably over 5 years; and 3) performance-based options: 25% of stock option grants with a fixed exercise price equal to the fair value of common stock on grant date which vest upon the occurrence of a liquidity event (as defined under the terms of the MEIP Plan) based on the achievement of return targets calculated based on the return received by majority shareholders from the liquidity event. While the time-based options and the premium options are expensed over the requisite service period, the performance-based options will not be expensed until the occurrence of the liquidity event. The MEIP Plan was amended and restated effective February 11, 2011 primarily to reflect an increase to a maximum of 5,033,507 shares of common stock of the indirect parent company issuable pursuant to the exercise of options and to change the required return targets that need to be achieved for vesting performance based options for options issued under the amended and restated plan.

Special equity grant

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

The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the indirect parent company. The RSUs and Penny Options entitle the holders to receive common shares of the indirect parent company at the end of a vesting period. The total number of RSUs and Penny Options granted were 1,343,348 with an initial fair value of $10, equal to the share price at the date of grant. At December 31, 2011, there were 844,736 outstanding RSUs and Penny Options (889,336 at September 30, 2011) of which 843,069 (886,002 at September 30, 2011) were vested.

22

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Annual grant

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

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

The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event were probable as of December 31, 2011, the value of the awards to be expensed by the Company would range between $7,800,000 and $9,400,000 depending on the level of return expected to be realized by the majority shareholders.

15. Financial Instruments

Interest rate risk

The Company is exposed to interest rate risk on its variable interest bearing term loans. The term loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 16, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.

Currency risk

The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company has used derivative instruments historically to reduce its exposure to foreign currencies risk. At December 31, 2011, no foreign exchange contracts were outstanding. At December 31, 2011, the financial assets totaling $220,136,000 ($202,309,000 at September 30, 2011) include cash and cash equivalents and accounts receivable for CAN$ 5,922,000, 24,757,000 Euros and 1,416,000 Swiss francs respectively (CAN$3,681,000, 22,777,000 Euros and 1,391,000 Swiss francs at September 30, 2011). At December 31, 2011, the financial liabilities totaling $1,168,325,000 ($1,136,295,000 at September 30, 2011) include accounts payable and accrued liabilities and long-term debt of CAN$6,420,000, 18,176,000 Euros respectively (CAN$10,128,000 and 22,839,000 Euros at September 30, 2011).

Credit risk

Generally, the carrying amount of the Company’s financial assets exposed to credit risk, net of applicable provisions for losses, represents the maximum amount of exposure to credit risk. At December 31, 2011 and September 31, 2011, the Company’s financial assets exposed to credit risk are primarily composed of cash and cash equivalents and accounts receivable. The Company is not exposed to any substantial risk as a result of a particular customer or a third party.

The Company has approximately 72% of its cash and cash equivalents as of December 31, 2011 with two financial institutions. At times, such deposits may exceed the amount insured by the Federal Deposit Insurance Corporation.

23

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Fair value of the financial instruments on the balance sheet

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

	December 31, 2011				September 30, 2011
	Fair value		Carrying amount		Fair value		Carrying amount
	$		$		$		$
Assets
Cash and cash equivalents		132,005		132,005		126,509		126,509
Accounts receivable, net		88,014		88,014		75,616		75,616
Accounts receivable from the parent company		713		713		676		676
Liabilities
Accounts payable and accrued liabilities		193,436		193,436		159,357		159,357
Long-term debt		972,929		974,889		900,785		976,939

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

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

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

b) Long-term debt

The fair value of the long-term debt bearing interest at fixed rates has been established according to market prices obtained from a large U.S. financial institution. The fair value of the variable interest bearing term loan has been established based on broker-dealer quotes.

16. Derivates and Hedging Activities

Risk management objective of using derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, currency and credit risk primarily by managing the amount, sources, conditions and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments, if any, are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.

Cash flow hedges of interest rate risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three months ended December 31, 2011, such derivatives were used to hedge the variable cash flows associated with a portion of the existing variable-rate debt.

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

On April 4, 2011, the Company entered into two separate pay-fixed, receive-floating interest rate swap agreements with an effective date of December 31, 2011 effectively converting a portion of the variable rate debt under its Amended and Restated Senior Secured Credit Facilities to fixed rate debt. The first swap has a notional amount of $331,000,000 amortizing to $84,000,000 by its maturity in December 2015. The second swap has a notional amount of $219,000,000 and matures in December 2016. These swaps were designated as cash flow hedges of interest rate risk. The interest rate swaps will effectively fix the Company’s interest payments on the hedged debt at 2.386% for the first swap and 3.18% for the second swap, respectively, inclusive of a LIBOR floor of 1.5%, plus the appropriate margin on each debt interest period which is currently 4%.

24

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

As of December 31, 2011, the Company had two interest rate swaps with a combined notional amount of $550,000,000 that were designated as cash flow hedges of interest rate risk. The weighted average fixed interest rate on these swaps is 2.7%.

Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that $6,346,000 presently classified in Accumulated Other Comprehensive Income will be reclassed as an increase to interest expense during the next twelve months.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of December 31, 2011:

Tabular disclosure of fair values of derivative instruments

		Liability Derivatives
		December 31, 2011		September 30, 2011
	Balance sheet location	Fair value		Fair value
Derivatives designated as hedging instruments		$		$
Interest rate swaps	Other long-term liabilities, AOCI		16,647		16,394
Total derivatives designated as hedging instruments			16,647		16,394

The tables below present the effect of the Company’s derivative financial instruments on the consolidated operations at December 31, 2011, and 2010:

Tabular disclosure of the effect of derivative instruments for the three months ended December 31, 2011, and 2010

	Location in the Condensed Consolidated Financial		Three Months Ended December 31,
	Statements		2011			2010
Interest rate swaps in cash flow hedging relationships			$			$
Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $7 ($0 in 2010)		OCI		(1,935	)		—
Loss reclassified from accumulated comprehensive income into income (effective portion)		Financial expenses		(1,690	)		—

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. If the Company had breached this provision, it could have been required to settle its obligations under the agreements at their termination value, including accrued interest and excluding any adjustment for nonperformance risk, related to these agreements of $ 18,444,000. The Company has not posted any collateral related to these agreements.

25

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

17. Fair Value Measurements

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

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

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

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

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

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and September 30, 2011 are summarized below:

	Quoted prices in active markets for identical assets and liabilities (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at December 31, 2011
	$		$		$		$
Liabilities
Derivative financial instruments				16,647				16,647
Contingent consideration obligations						100,300		100,300
		—		16,647		100,300		116,947

	Quoted prices in active markets for identical assets and liabilities (Level 1)	Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)	Balance at September 30, 2011
	$	$		$	$
Liabilities
Derivative financial instruments			16,394			16,394

Derivative financial instruments represent interest rate swap agreements as more fully described in Note 16 and are measured at fair value based on market observable interest rate curves as of the measurement date.

The contingent consideration obligations are related to the Rectiv Transaction and the fair value measurement is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a probability-weighted income approach. The measurement is based upon unobservable inputs supported by little or no market activity based on the Company assumptions. Changes in the fair value of the contingent consideration obligations are recorded as a component of operating income in the Company’s consolidated statement of operations.

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2011:

	Balance at September 30, 2011		Net transfers in to (out of) Level 3		Purchases and settlements, net		Net accretion and fair value adjustments recorded in earnings		Balance at December 31, 2011
	$		$		$		$		$
Liabilities
Contingent consideration obligations		—		—		100,300		—		100,300

26

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

18. Related Party Transactions

At December 31, 2011, the Company had a note receivable from its parent company amounting to $78,154,000 ($78,154,000 at September 30, 2011). The Company earned interest income on the note of $1,157,000 (net of taxes of $ 622,000) during the three months ended December 31, 2011. The Company earned interest income on the note of $1,974,000 (net of taxes of $1,063,000) during the three months ended December 31, 2010. The related interest receivable from the parent company amounting to $38,613,000 at December 31, 2011, ($36,835,000 at September 30, 2011) has been recorded in the shareholders’ deficit section of the condensed consolidated balance sheet. This amount was subject to a full provision which was also recorded in the statement of shareholders’ deficit. At December 31, 2011, the Company has also an account receivable from the parent company amounting to $713,000 ($676,000 at September 30, 2011).

The Company recorded charges pursuant to the terms of a management fee arrangement with a controlling shareholding company of $1,431,000 during the three months ended December 31, 2011 ($838,000 for the three months ended December 31, 2010). At December 31, 2011, the Company accrued fees payable to a controlling shareholding company amounting to $1,332,000 ($1,354,000 at September 30, 2011).

27

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

19. Condensed Consolidating Financial Information

As of December 31, 2011, the Company had outstanding $235,000,000 aggregate principal amount of the Senior Unsecured Notes. The Senior Unsecured Notes are fully and unconditionally guaranteed, jointly and severally by certain of the Company’s wholly-owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors and non-guarantors at December 31, 2011, and September 30, 2011, the condensed consolidating statements of operations for the three months ended December 31, 2011 and December 31, 2010, and the condensed consolidating statement of cash flows for the three months ended December 31, 2011, and December 31, 2010.

Condensed consolidating balance sheet as of December 31, 2011

	Aptalis Pharma Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		5,685			86,271			40,049			—			132,005
Accounts receivable, net		—			59,437			28,577			���			88,014
Accounts receivable from the parent company		50			663			—			—			713
Intercompany receivables		53,664			19,590			15,318			(88,572	)		—
Income taxes receivable		—			1,563			405			—			1,968
Inventories, net		—			33,937			22,172			(14,292	)		41,817
Prepaid expenses and other current assets		22			3,285			9,840			—			13,147
Deferred income taxes, net		—			2,156			2,297			4,488			8,941
Total current assets		59,421			206,902			118,658			(98,376	)		286,605
Property, plant and equipment, net		—			39,980			44,049			—			84,029
Intangible assets, net		—			392,678			415,532			—			808,210
Investments in subsidiaries		(181,322	)		1,208,537			220,098			(1,247,313	)		—
Intercompany advances		1,030,006			199,061			635,245			(1,864,312	)		—
Goodwill, net		—			82,817			95,809			—			178,626
Deferred debt issue expenses, net		26,276			1,605			(9	)		—			27,872
Deferred income taxes, net		—			—			360			—			360
Total assets		934,381			2,131,580			1,529,742			(3,210,001	)		1,385,702
Liabilities
Current liabilities
Accounts payable and accrued liabilities		11,478			141,579			40,379			—			193,436
Income taxes payable		—			2,889			394			—			3,283
Intercompany payables		3,425			38,750			46,398			(88,573	)		—
Installments on long-term debt		6,770			730			1,300			—			8,800
Total current liabilities		21,673			183,948			88,471			(88,573	)		205,519
Long-term debt		894,201			71,239			649			—			966,089
Intercompany advances		17,135			1,665,250			181,926			(1,864,311	)		—
Other long-term liabilities		15,428			100,594			31,909			—			147,931
Deferred income taxes		—			23,854			56,365			—			80,219
Total liabilities		948,437			2,044,885			359,320			(1,952,884	)		1,399,758
Shareholders’ Equity (Deficit)
Capital stock
Common shares		1			22,281			1,114,850			(1,137,131	)		1
Preferred shares		—			334,098			—			(334,098	)		—
Retained earnings (deficit)		(636,401	)		(363,357	)		32,347			331,010			(636,401	)
9.05% Note receivable from the parent company		(78,154	)		—			—			—			(78,154	)
Additional paid-in capital		756,793			133,406			29,302			(162,708	)		756,793
Accumulated other comprehensive loss		(56,295	)		(39,733	)		(6,077	)		45,810			(56,295	)
Total shareholders’ equity (deficit)		(14,056	)		86,695			1,170,422			(1,257,117	)		(14,056	)
Total liabilities and shareholders’ equity (deficit)		934,381			2,131,580			1,529,742			(3,210,001	)		1,385,702

28

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Condensed consolidating balance sheet as of September 30, 2011

	Aptalis Pharma Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		6,596			89,533			30,380			—			126,509
Accounts receivable, net		—			52,264			23,352			—			75,616
Accounts receivable from the parent company		49			627			—			—			676
Intercompany receivables		36,631			19,726			13,419			(69,776	)		—
Income taxes receivable		—			2,555			417			—			2,972
Inventories, net		—			32,538			22,238			(6,938	)		47,838
Prepaid expenses and other current assets		56			3,004			10,920			—			13,980
Deferred income taxes, net		—			2,103			449			2,178			4,730
Total current assets		43,332			202,350			101,175			(74,536	)		272,321
Property, plant and equipment, net		—			38,326			46,085			—			84,411
Intangible assets, net		—			262,579			428,314			—			690,893
Investments in subsidiaries		(206,694	)		1,204,532			220,098			(1,217,936	)		—
Intercompany advances		1,034,315			185,948			635,245			(1,855,508	)		—
Goodwill, net		—			82,818			97,025			—			179,843
Deferred debt issue expenses, net		27,695			1,674			—			—			29,369
Deferred income taxes, net		—			—			1,023			—			1,023
Total assets		898,648			1,978,227			1,528,965			(3,147,980	)		1,257,860
Liabilities
Current liabilities
Accounts payable and accrued liabilities		3,997			107,549			47,811			—			159,357
Income taxes payable		—			9,508			276			—			9,784
Intercompany payables		3,454			32,058			34,264			(69,776	)		—
Installments on long-term debt		6,770			730			1,011			—			8,511
Total current liabilities		14,221			149,845			83,362			(69,776	)		177,652
Long-term debt		895,676			71,407			1,345			—			968,428
Intercompany advances		924			1,669,559			185,025			(1,855,508	)		—
Other long-term liabilities		15,201			5,017			36,370			—			56,588
Deferred income taxes		—			25,515			57,051			—			82,566
Total liabilities		926,022			1,921,343			363,153			(1,925,284	)		1,285,234
Shareholders’ Equity (Deficit)
Capital stock
Common shares		1			22,281			1,114,850			(1,137,131	)		1
Preferred shares		—			334,098			—			(334,098	)		—
Retained earnings (deficit)		(656,476	)		(398,190	)		24,860			373,330			(656,476	)
9.05% Note receivable from the parent company		(78,154	)		—			—			—			(78,154	)
Additional paid-in capital		757,224			133,865			29,197			(163,062	)		757,224
Accumulated other comprehensive loss		(49,969	)		(35,170	)		(3,095	)		38,265			(49,969	)
Total shareholders’ equity (deficit)		(27,374	)		56,884			1,165,812			(1,222,696	)		(27,374	)
Total liabilities and shareholders’ equity (deficit)		898,648			1,978,227			1,528,965			(3,147,980	)		1,257,860

29

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Condensed consolidating operations for the three months ended December 31, 2011

	Aptalis Pharma Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		—			121,911			38,646			(10,091	)		150,466
Other revenue		—			1,585			352			—			1,937
Total revenue		—			123,496			38,998			(10,091	)		152,403
Cost of goods sold		—			23,878			15,759			(2,457	)		37,180
Selling and administrative expenses		797			25,216			7,533			(279	)		33,267
Management fees		1,431			—			—			—			1,431
Research and development expenses		—			7,258			8,496			—			15,754
Depreciation and amortization		—			10,985			10,077			—			21,062
Transaction, restructuring and integration costs		40			2,412			262			—			2,714
Total operating expenses		2,268			69,749			42,127			(2,736	)		111,408
Operating income (loss)		(2,268	)		53,747			(3,129	)		(7,355	)		40,995
Financial expenses		20,322			32,629			4,165			(35,017	)		22,099
Interest income		(17,178	)		(3,432	)		(14,476	)		35,017			(69	)
Other income		—			—			(242	)		242			—
Loss (gain) on foreign currencies		6,418			(3,245	)		120			(3,097	)		196
Total other expenses (income)		9,562			25,952			(10,433	)		(2,855	)		22,226
Income (loss) before income taxes		(11,830	)		27,795			7,304			(4,500	)		18,769
Income taxes expense (benefit)		(2,160	)		3,346			(183	)		(2,309	)		(1,306	)
Equity in earnings in subsidiaries		29,745			9,740			—			(39,485	)		—
Net income		20,075			34,189			7,487			(41,676	)		20,075

30

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Condensed consolidating operations for the three months ended December 31, 2010

	Aptalis Pharma Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		—			68,512			17,538			(112	)		85,938
Cost of goods sold		3			10,956			6,585			(121	)		17,423
Selling and administrative expenses		4,523			13,652			6,996			—			25,171
Management fees		838			—			—			—			838
Research and development expenses		—			6,806			149			—			6,955
Depreciation and amortization		—			11,721			1,852			—			13,573
Transaction, restructuring and integration costs		—			3,048			—			—			3,048
Total operating expenses		5,364			46,183			15,582			(121	)		67,008
Operating income (loss)		(5,364	)		22,329			1,956			9			18,930
Financial expenses		14,924			28,800			1,788			(29,283	)		16,229
Interest income		(12,243	)		(1,911	)		(15,321	)		29,283			(192	)
Dividend income		—			—			(242	)		242			—
Loss (gain) on foreign currencies		3,797			(2,035	)		(157	)		(1,362	)		243
Total other expenses (income)		6,478			24,854			(13,932	)		(1,120	)		16,280
Income (loss) before income taxes		(11,842	)		(2,525	)		15,888			1,129			2,650
Income taxes expense (benefit)		(1,063	)		2,160			99			8			1,204
Equity in earnings in subsidiaries		12,225			16,910			—			(29,135	)		—
Net income		1,446			12,225			15,789			(28,014	)		1,446

31

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Condensed consolidating cash flows for the three months ended December 31, 2011

	Aptalis Pharma Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(15,428	)		17,609			11,055			—			13,236
Cash flows from investing activities
Acquisition of property, plant and equipment		—			(3,540	)		(791	)		—			(4,331	)
Intercompany advances		—			(16,210	)		—			16,210			—
Net cash used in investing activities		—			(19,750	)		(791	)		16,210			(4,331	)
Cash flows from financing activities
Repayment of long-term debt		(1,693	)		(182	)		(341	)		—			(2,216	)
Stock-based compensation plan redemptions					(463	)		—			—			(463	)
Intercompany advances		16,210			—			—			(16,210	)		—
Net provided by (used in) financing activities		14,517			(645	)		(341	)		(16,210	)		(2,679	)
Foreign exchange loss on cash held in foreign currencies		—			(476	)		(254	)		—			(730	)
Net increase (decrease) in cash and cash equivalents		(911	)		(3,262	)		9,669			—			5,496
Cash and cash equivalents, beginning of period		6,596			89,533			30,380			—			126,509
Cash and cash equivalents, end of period		5,685			86,271			40,049			—			132,005

32

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

Condensed consolidating cash flows for the three months ended December 31, 2010

	Aptalis Pharma Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(3,176	)		(755	)		7,627			—			3,696
Cash flows from investing activities
Acquisition of property, plant and equipment		—			(643	)		(492	)		—			(1,135	)
Intercompany advances		—			(7,975	)		—			7,975			—
Net cash used in investing activities		—			(8,618	)		(492	)		7,975			(1,135	)
Cash flows from financing activities
Repayment of long-term debt		(5,546	)		(7,617	)		—			—			(13,163	)
Stock-based compensation plan redemptions		(49	)		—			—			—			(49	)
Intercompany advances		7,975			—			—			(7,975	)		—
Net cash provided by (used in) financing activities		2,380			(7,617	)		—			(7,975	)		(13,212	)
Foreign exchange gain (loss) on cash held in foreign currencies		—			63			(179	)		—			(116	)
Net increase (decrease) in cash and cash equivalents		(796	)		(16,927	)		6,956			—			(10,767	)
Cash and cash equivalents, beginning of period		864			104,608			56,031			—			161,503
Cash and cash equivalents, end of period		68			87,681			62,987			—			150,736

33

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

On May 4, 2011, Axcan Intermediate Holdings Inc. announced that it has changed its name to Aptalis Pharma Inc.

You should read the following discussion together with our interim condensed consolidated financial statements and the related notes that appear in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements included in our Form 10-K for the fiscal year ended September 30, 2011.The results of operations for the three months ended December 31, 2011, and December 31, 2010, reflect the results of operations for Aptalis Pharma Inc. previously known as Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

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

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in Part 2, Item 1A of this Quarterly Report and “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. Actual results may differ materially from those contained in any forward-looking statements.

OVERVIEW

Our Business

We are a privately held, leading specialty pharmaceutical company providing innovative, effective therapies for unmet medical needs including cystic fibrosis and gastrointestinal disorders. We have manufacturing and commercial operations in the U.S., the European Union and Canada, and its products include ZENPEP®, CANASA®, CARAFATE®, PYLERA®, LACTEOL®, PANZYTRAT®, DELURSAN®, RECTIV™ and SALOFALK® . Our vision is to become the reference specialty pharma company providing innovative, effective therapies for unmet medical needs, including cystic fibrosis and gastrointestinal disorders, and we hope to achieve this through our mission: to improve health and quality of care by providing specialty therapies for patients around the world. We will strive to improve patient quality of care thanks to a broad range of products in cystic fibrosis and gastrointestinal disorders, a robust pipeline, technology platform, manufacturing capabilities and a skilled team of professionals with deep understanding of our customers’ needs.

In addition to our marketing activities, we also formulate and clinically develop enhanced pharmaceutical and biopharmaceutical products for ourselves and others using our proprietary pharmaceutical technology platforms including bioavailability enhancement of poorly soluble drugs, custom release profiles, and taste-masking/orally disintegrating tablet (ODT) formulations.

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

Business Environment

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

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

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

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

In March 2010, the Health Care and Education Reconciliation Act of 2010 was enacted in the U.S. This healthcare reform legislation contains several provisions that impact our business, which include expanding rebate coverage to managed Medicaid and an increase to the rate of rebates for all our drugs dispensed to Medicaid beneficiaries; expanding the 340(B) drug pricing program requiring drug manufacturers to provide discounted product to reduce the Medicare Part D coverage gap; and assessing a new fee on manufacturers and importers of branded prescription drugs paid for pursuant to coverage provided under specified government programs. The impact of these changes is further discussed below under the “Affordable Care Act” subsection.

On April 29, 2010, we announced that we had taken steps to cease the U.S. distribution of ULTRASE MT and VIOKASE, effective April 28, 2010, in response to U.S Food and Drug Administration (“FDA”) guidance related to the distribution of unapproved pancreatic enzyme products, or PEPs. The effects of ceasing to distribute these product lines on our financial statements are summarized in the section “Unapproved pancreatic enzyme products (“PEPs”) event” below.

34

Acquisition of Eurand N.V. (“Eurand Acquisition”)

On February 11, 2011 (or the “Acquisition Date”), Axcan Holdings Inc., which subsequently changed its name to Aptalis Holdings, Inc., our indirect parent (“Aptalis Holdings”), and Axcan Pharma Holding B.V. (“Axcan Acquisition Co”), an indirect subsidiary of ours, pursuant to a Share Purchase Agreement dated November 30, 2010 (as amended) acquired the outstanding equity of Eurand N.V. (“Eurand”) for total consideration of approximately $589.6 million. As a result of the acquisition, Eurand has become an indirect subsidiary of ours.

Prior to the Eurand Acquisition, Eurand was a specialty pharmaceutical company that developed, manufactured and commercialized enhanced pharmaceutical and biopharmaceutical products based on its proprietary pharmaceutical technologies. Eurand has had six products approved by the FDA since 2001 and has a pipeline of product candidates in development for itself and its collaboration partners. Its technology platforms include bioavailability enhancement of poorly soluble drugs, custom release profiles and taste-masking/orally disintegrating tablet (ODT) formulations. Eurand was a global company with facilities in the U.S. and Europe. The acquisition of Eurand enables us to leverage the combination of two leading specialty pharmaceutical players, expand our gastroenterology product portfolio and provide us with a proprietary R&D growth engine and technology platforms supported by an extensive patent portfolio to meaningfully diversify our business and expand our geographic and manufacturing footprint.

Assets acquired and liabilities assumed

We finalized our purchase price allocation during the fourth quarter of fiscal year ended September 30, 2011.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the Acquisition Date.

(in millions of U.S. dollars)	Book value as of the Acquisition Date			Step-up to fair value			Amounts recognized as of the Acquisition Date
	$			$			$
Cash and cash equivalents		63.9			—			63.9
Accounts receivable(a)		22.7			—			22.7
Inventories(b)		25.5			18.7			44.2
Other current assets(c)		6.6			—			6.6
Property, plant and equipment		44.6			10.9			55.5
Identifiable intangible assets(d)		7.0			406.9			413.9
Current liabilities(e)		(52.0	)		—			(52.0	)
Long-term debt, including current portion		(3.4	)		—			(3.4	)
Deferred income taxes liabilities, net(f)		(0.2	)		(61.0	)		(61.2	)
Other non-current liabilities		(8.5	)		2.3			(6.2	)
Total identifiable net assets		106.2			377.8			484.0
Goodwill(g)		37.5			69.0			106.5
Net assets acquired		143.7			446.8			590.5
Effective settlement of pre-existing relationships(h)		(0.9	)		—			(0.9	)
Total fair value of consideration transferred								589.6

^(a)  As of the Acquisition Date, the fair value of accounts receivable acquired approximated book value. The gross contractual amount receivable was $23.2 million, of which $0.5 million was not expected to be collected.

^(b)  Reflects the adjustment to step-up the carrying value of inventory acquired by $18.7 million to estimated fair value as of the Acquisition Date. The stepped-up value was recorded as a charge to cost of goods sold as acquired inventory was sold.

^(c)  Includes prepaid assets and income tax receivable.

35

^(d)  The amounts recorded for the major components of acquired identifiable intangible assets are as follows:

(in millions of U.S. dollars)	Amounts recognized as of acquisition date		Weighted average useful lives (years)
	$		$
Trademarks, trademark licenses, manufacturing rights and other intangible assets with a finite life		413.9		17.04
Total identifiable intangible assets		413.9		17.04

In addition, the estimated aggregate amortization expense for the five succeeding years will be $25.6 million annually.

^(e)  Includes accounts payable, accrued liabilities and income taxes payable.

^(f)  Comprises of current deferred tax assets $0.8 million, non-current deferred tax assets $15.7 million and non-current deferred tax liabilities $77.7 million.

^(g)  The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the Eurand Acquisition. The goodwill recorded as part of the Eurand Acquisition is largely attributable to synergies expected to result from combining our operations with Eurand and intangible assets that do not qualify for separate recognition. We do not expect any portion of this goodwill to be deductible for tax purposes.

^(h)  Prior to the Eurand Acquisition, we had entered into an exclusive development license and supply agreement with Eurand. No gain or loss was recognized in conjunction with the effective settlement of the contractual relationship between us and Eurand as a result of the Eurand Acquisition.

Transaction related costs

During the three months ended December 31, 2010, we had expensed $1.8 million of costs relating to legal, financial, valuation and accounting advisory services performed in connection with effecting the acquisition of Eurand, which are included in Transaction, restructuring and integration costs in the accompanying Statement of Condensed Consolidated Operations. We did not incur transaction related costs during the three months ended December 31, 2011.

Acquisition of Rectiv™

On December 28, 2011, we entered into a license agreement with Strakan International S.A.R.L., and Prostrakan Inc. (collectively “ProStrakan”) to acquire the exclusive rights to commercialize Rectiv™ (nitroglycerin) Ointment 0.4% (“Rectiv™”) in the United States (the “Rectiv Transaction”). In addition, we and ProStrakan have the right to undertake development work with respect to Rectiv™. Rectiv™ received FDA approval in June 2011 and is indicated for the treatment of moderate to severe pain associated with chronic anal fissure. On January 10, 2012, we made an upfront payment to ProStrakan of $20.0 million and will pay a series of potential milestones comprising of a commercialization milestone payment of $20.0 million upon first commercial sale, payments up to $40.0 million upon the achievement of certain sales milestones and double-digit royalties on net sales of Rectiv™. We have also entered into a separate supply agreement with ProStrakan, dated December 28, 2011, and we have the ability to change our source of supply of Rectiv™ in the future. The Company plans to launch Rectiv™ in fiscal 2012.

Although we have entered into a license agreement for Rectiv™, the Rectiv Transaction is being accounted for as a business combination under the acquisition method of accounting. The fair value of the consideration payable was determined to be $139.2 million as of the acquisition date comprising of non-contingent milestones of $38.9 million and contingent milestones and royalty payments of $100.3 million. The current and long-term portions of consideration payable were determined to be $43.5 million and $95.7 million and are reflected within accounts payable and accrued liabilities and other long-term liabilities respectively. The total fair value of the consideration transferred has been provisionally assigned (pending the finalization of a definitive valuation) to trademark license intangible asset valued at $139.2 million. The trademark license intangible asset has an estimated useful life of approximately 8 years.

We will finalize the purchase price allocation as we obtain the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. We expect to finalize the purchase price allocation no later than one year from the acquisition date.

We determined the acquisition date fair value of the contingent consideration based on a probability weighted income approach. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement with the fair value hierarchy. These inputs include the estimated amount and timing of projected cash payments, the probability of the achievement of future milestone events, the risk-adjusted discount rate used to present value the probability-weighted cash flows, revenue estimates and other factors. These inputs are significant assumptions and changes in the fair value of the contingent consideration obligation may result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various milestones. A 1% change in the discount rate, assuming all other assumptions remain consistent, would result in a change of approximately $3 million to our contingent consideration obligation. A 10% change in our projected cash flows, assuming all other assumptions remain consistent, would result in a change of $7 million to our contingent consideration obligation.

36

Subsequent to the acquisition date, on a quarterly basis at each reporting date, the contingent consideration liability will be remeasured at current fair value with changes recorded in earnings.

Agreements with Mpex Pharmaceuticals Inc. for the acquisition and development of Aeroquin™

On April 11, 2011, Aptalis Holdings and Axcan Lone Star Inc. (“Merger Sub”), affiliates of ours, entered into a series of agreements with Mpex Pharmaceuticals Inc. (“Mpex”) for the acquisition and development of Aeroquin™ (the “Aeroquin Transaction”), a proprietary aerosol formulation of levofloxacin, which is currently in Phase 3 clinical trials for the treatment of pulmonary infections in patients with cystic fibrosis (CF). Subsequently on August 31, 2011, under the terms of these agreements, Aptalis Holdings and Merger Sub acquired all of Mpex’s assets related to Aeroquin™ in a merger of Mpex with and into Merger Sub, with Mpex being the surviving corporation and a direct, wholly-owned unrestricted subsidiary of us. Prior to the merger, Mpex transferred all of its assets that are not related to Aeroquin™ to Rempex Pharmaceuticals, Inc. (“Rempex”), a newly formed company that is owned primarily by the previous Mpex stockholders. As a result of the Aeroquin Transaction, we made an initial non-contingent payment of $12.0 million on April 21, 2011. Additional consideration in relation with the Aeroquin Transaction consists of (i) remaining time-based, non-contingent payments amounting to $33.0 million and an additional $17.5 million of time-based payments will be paid in a number of installments, of which the final installment is due on April 1, 2014, plus, (ii) contingent payments of up to $195.0 million if certain regulatory and commercial milestones are met related to Aeroquin™, and (iii) earn-out payments based on net sales of Aeroquin™. Indemnity obligations of the Mpex security holders will be satisfied by set-off against a portion of the foregoing merger consideration payments.

The further development of Aeroquin™ is being conducted pursuant to the terms of the Development Agreement dated April 11, 2011 among Aptalis Holdings, Merger Sub, and Mpex. Since the completion of the divestiture of assets and liabilities unrelated to Aeroquin™ (the “Divestiture”) to Rempex, Rempex has assumed all of Mpex’s obligations under the Development Agreement. Under the Development Agreement, Rempex is paid for the actual development costs of Aeroquin™ and has primary responsibility for conducting day-to-day development activities. We are required to pay in advance development costs estimated for the next three months based on a rolling three months forecast. Aptalis Holdings and Mpex have input regarding development strategy. Pursuant to the Development Agreement, on April 12, 2011 Mpex was paid $8.7 million for development expenses incurred by Mpex from November 15, 2010, to March 31, 2011, which has been expensed as acquired in-process research and an additional $9.9 million for estimated development costs to be incurred during the first three months of the Development Agreement, of which $8.5 million has been expensed as research and development. All payments under the Development Agreement, Option Agreement and Merger Agreement to Mpex or Mpex security holders, as applicable, were made by or on behalf of Merger Sub prior to the closing of the Aeroquin Transaction, and are being made on behalf of Mpex since the closing of the Aeroquin Transaction.

During the quarter ended December 31, 2011, we expensed $6.1 million as research and development related to the development of Aeroquin™. As of December 31, 2011, (i) $7.6 million reflecting forecasted development costs for the next three months is included in prepaid expenses and other current assets and (ii) $40.4 million represents the amount accrued for the non-contingent payments payable under the Option and Merger agreements with $28.3 million included in other long term liabilities and the balance included in accounts payable and accrued liabilities.

Equity investment in Aptalis Holdings

Simultaneous with the execution of the Mpex agreements, Aptalis Holdings received the proceeds of a $55.0 million equity investment from funds managed by Investor Growth Capital Limited. Aptalis Holdings contributed the proceeds of the equity investment to its subsidiaries to fund a portion of the cost of the Mpex transactions and a partial repayment on our $133.2 million note receivable from our parent company.

37

FINANCIAL OVERVIEW FOR THREE MONTHS ENDED DECEMBER 31, 2011

This discussion and analysis is based on our unaudited condensed interim financial statements as of December 31, 2011 and our audited annual consolidated financial statements and the related notes thereto reported under U.S. GAAP. For a description of our products, see the section entitled “Business” in Item 1, Part I in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, filed with the Securities and Exchange Commission.

For the three months ended December 31, 2011, total revenue was $152.4 million ($85.9 million for the three months ended December 31, 2010), operating income was $41.0 million ($18.9 million for the three months ended December 31, 2010) and net income was $20.1 million ($1.4 million for the three months ended December 31, 2010).

Total revenue in the United States was $113.4 million (74.4% of total revenue) for the three months ended December 31, 2011, compared to $58.2 million (67.8% of total revenue) for the corresponding period of the preceding fiscal year. In the European Union, total revenue was $29.2 million (19.2% of total revenue) for the three months ended December 31, 2011, compared to $17.5 million (20.4% of total revenue) for the corresponding period of the preceding fiscal year. In Canada, total revenue was $9.8 million (6.4% of total revenue) for the three months ended December 31, 2011, compared to $10.2 million (11.9% of total revenue) for the corresponding period of the preceding fiscal year.

Unapproved pancreatic enzyme products (“PEPs”) event

As previously disclosed, we ceased distributing our ULTRASE MT and VIOKASE product lines in the U.S. effective April 28, 2010. ULTRASE MT and VIOKASE had accounted for approximately 19% of our total net sales in the 2008, 2009 and 2010 fiscal years.

This action was taken as we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products. We also interrupted shipments of product from the United States to Canada and export markets to allow time for the FDA to review our request confirming that applicable export requirements were being met as the FDA does not currently allow any shipment of this product within the U.S. As of December 31, 2011, this interruption of shipments was still in place. On September 1, 2011 we filed our response to the FDA’s Complete Response letters dated November 28, 2010 for the VIOKASE and ULTRASE NDAs. We have a PDFA date of March 1st, 2012. We continue to work with the manufacturer of the active pharmaceutical ingredient to address any open issues identified by the FDA. However, we do not believe additional clinical studies will be required at this time.

As a result of taking steps to cease distribution of ULTRASE MT and VIOKASE and in accordance with U.S. GAAP, we recorded an additional $23.5 million sales deduction reserve for the fiscal year ended September 30, 2010. This additional reserve was an estimate of our liability for ULTRASE MT and VIOKASE that may be returned by the original purchaser under our DSAs or applicable return policies as well as other incremental sales deductions that may be incurred in addition to those previously recorded for ULTRASE MT and VIOKASE prior to the PEPs event. The cease distribution order issued by the FDA was not considered as a product recall. This reserve was based on management estimates of ULTRASE MT and VIOKASE inventory in the distribution channel, assumptions on related expiration dates of this inventory as well as estimated erosion of ULTRASE MT and VIOKASE demand, based on competition from approved PEPs and the resulting estimated sell-through of ULTRASE MT and VIOKASE, actual return activity and other factors.

The reserves that we have taken as a result of having ceased distribution of our PEPs reflect many subjective estimates that were required to be made by management. These estimates include:

a) The quantity and expiration dates of PEPs inventory in the distribution channel;

b) Short-term prescription demand during the period of time during which the products continued to be available at the pharmacy level;

c) Other factors.

The remaining reserve related to the PEPs event, was $2.8 million at December 31, 2011, ($3.1 million at September 30, 2011). In future periods, we will continue to monitor and review the assumptions and estimates and will prospectively record changes to the PEPs reserve.

38

Financial highlights

(in millions of U.S. dollars)	December 31, 2011			September 30, 2011
	$			$
Total assets		1,385.7			1,257.9
Long-term debt(a)		974.9			976.9
Shareholders’ deficit		(14.1	)		(27.4	)

^(a)  Including the current portion

	Three Months Ended December 31,
(in millions of U.S. dollars)	2011		2010
	$		$
Total revenue		152.4		85.9
EBITDA(1)		61.9		32.2
Adjusted EBITDA(1)		75.2		36.8
Net income		20.1		1.4

⁽¹⁾  A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA to Adjusted EBITDA (a non-U.S. GAAP measure) for the three months ended December 31, 2011 and 2010 are as follows:

	Three Months Ended December 31,
(in millions of U.S. dollars)	2011			2010
	$			$
Net income		20.1			1.4
Financial expenses		22.1			16.2
Interest income		(0.1	)		(0.2	)
Income tax expense (benefit)		(1.3	)		1.2
Depreciation and amortization		21.1			13.6
EBITDAf)		61.9			32.2
Transaction, integration, refinancing costs and other payments to third partiesa)		5.1			3.3
Management feesb)		1.4			0.8
Unrestricted subsidiary c)		6.1			—
Stock-based compensation expensed)		0.7			0.5
Adjusted EBITDAf)		75.2			36.8

39

^a)  Represents transaction, integration, restructuring and refinancing costs as well as due diligence costs related to the Eurand Acquisition as well as to certain other business development projects, and certain payments to third parties in respect of research and development milestones and other progress payments as defined within our credit agreement and unrealized foreign exchange losses.

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

^c)  Represents EBITDA generated by MPEX Pharmaceuticals Inc., an unrestricted subsidiary, with the exception of Acquired in-process research charges.

^d)  Represents stock-based employee compensation expense.

^e)  EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are presented in this report because our management considers them important supplemental measures of our performance and believes that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income before financial expenses, interest income, income taxes and depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. We believe that EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items and other adjustments set forth above. Adjusted EBITDA is calculated in a similar manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indenture governing our senior notes and Credit Facility further described in the section “Liquidity and Capital Resources-Long-term Debt and New Senior Secured Credit Facility”, except that in calculating Adjusted EBITDA as presented above, we do not include certain additional adjustments under the indenture and the Credit Facility that permit us to increase “EBITDA” and “Consolidated EBITDA” by including projected cost savings and synergies calculated on a pro forma basis that we expect to realize in future periods related to actions already taken or expected to be taken within twelve months of the end of the applicable period, including the Eurand Acquisition and related initiatives. We believe that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in our indenture and Credit Facility. Adjusted EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and they should not be considered in isolation, or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

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

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

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

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

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

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

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

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Overview of results of operations

	Three Months Ended December 31,
(in millions of U.S. dollars)	2011			2010			Change
	$			$			$			%
Net product sales		150.5			85.9			64.6			75.2
Other revenue		1.9			—			1.9			100.0
Total revenue		152.4			85.9			66.5			77.4
Cost of goods solda)		37.2			17.4			19.8			113.8
Selling and administration expensesa)		33.2			25.2			8.0			31.7
Management fees		1.4			0.8			0.6			75.0
Research and development expenses a)		15.8			7.0			8.8			125.7
Depreciation and amortization		21.1			13.6			7.5			55.1
Transaction, restructuring and integration costs		2.7			3.0			(0.3	)		(10.0	)
Total operating expenses		111.4			67.0			44.4			66.3
Operating income		41.0			18.9			22.1			116.9
Financial expenses		22.1			16.2			5.9			36.4
Interest income		(0.1	)		(0.2	)		0.1			50.0
Loss on foreign currencies		0.2			0.3			(0.1	)		(33.3	)
Total other expenses		22.2			16.3			5.9			36.2
Income before income taxes		18.8			2.6			16.2			623.1
Income taxes expense (benefit)b)		(1.3	)		1.2			(2.5	)		(208.3	)
Net income		20.1			1.4			18.7			1,335.7

^a)  Exclusive of depreciation and amortization

Net product sales

Net product sales in the U.S. increased by $54.0 million (92.8%), to $112.2 million for the three months ended December 31, 2011, compared to $58.2 million for the corresponding period of the preceding fiscal year. The increase is mainly due to the inclusion of post-acquisition sales of legacy Eurand products, most notably Zenpep.

Net product sales in the European Union increased by $11.0 million (62.9%), to $28.5 million for the three months ended December 31, 2011, compared to $17.5 million for the corresponding period of the preceding fiscal year. The increase is mostly due to the inclusion of post-acquisition sales of legacy Eurand products.

Net product sales in Canada decreased by $0.4 million (3.9%), to $9.8 million for the three months ended December 31, 2011, compared to $10.2 million for the corresponding period of the preceding fiscal year.

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

	Three Months Ended December 31,
(in millions of U.S. dollars)	2011		2010		Change
	$		$		$			%
Gross product sales		182.4		107.8		74.6			69.2
Gross-to-net product sales adjustments
Product returns		1.7		2.9		(1.2	)		(41.4	)
Medicaid and other government programs		11.3		8.3		3.0			36.1
Chargebacks		8.1		3.5		4.6			131.4
Contract rebates		5.3		4.2		1.1			26.2
DSA fees, Discounts and other allowances		5.5		3.0		2.5			83.3
Total gross-to-net product sales adjustments		31.9		21.9		10.0			45.7
Total net product sales		150.5		85.9		64.6			75.2

Product returns, contract rebates, DSA fees, discounts and other allowances totalled $31.9 million (17.5% of gross product sales) for the three months ended December 31, 2011 compared to $21.9 million (20.3% of gross product sales) for the corresponding period of the preceding fiscal year.

The decrease in total deductions as a percentage of gross product sales was mainly due to the changes in the overall product sales mix as a result of the Eurand Acquisition as well as changes to estimates related to product returns which positively impacted net sales by approximately $3 million.

Affordable Care Act

The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, known together as the Affordable Care Act, enacted in the United States in March 2010 contain several provisions that could impact our business.

Although many provisions of the new legislation did not take effect immediately, several provisions became effective during the fiscal year ended September 30, 2010. These include (1) an increase in the minimum Medicaid rebate to States participating in the Medicaid program on our branded prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340(B) Public Health Service Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain children’s hospitals, free standing cancer hospitals, critical access hospitals, and rural referral centers.

In addition, beginning in 2011, the new law requires drug manufacturers to provide a 50% discount to Medicare beneficiaries for any covered prescription drugs purchased during a Medicare Part D coverage gap (i.e. the “doughnut hole”). Also, beginning in 2011, new fees are assessed on all branded prescription drug manufacturers and importers. This fee is calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare Parts B and D, Medicaid, Department of Veterans Affairs and Department of Defense programs and TRICARE retail pharmacy program) made during the previous fiscal year. The aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. The Internal Revenue Service, or “IRS”, has issued guidance for calculating preliminary fees, but there is still uncertainty as to final implementation, since the IRS has requested public comment and may make changes in response. The new law also imposes a 2.3% excise tax on sales of certain taxable medical devices that are made after December 31, 2012, including our FLUTTER mucus clearance device. Further, effective March 31, 2013, the law requires pharmaceutical, medical device, biological, and medical supply manufacturers to begin reporting to the federal government the payments they make to physicians and teaching hospitals, and physician ownership interests in those entities. The law also provides for the creation of an abbreviated regulatory pathway for FDA approval of biosimilars and interchangeable biosimilar products. While creation of the biosimilars program is authorized as of passage of the legislation in 2010, the process of creating the regulatory pathway for approval of biosimilars will likely be lengthy, and the FDA is in the process of soliciting public input.

While certain aspects of the new legislation implemented in 2010 are expected to reduce our revenues in future years, other provisions of this legislation may offset, at some level, any reduction in revenues when these provisions become effective. In future years, based on our understanding, these other provisions are expected to result in higher revenues due to an increase in the total number of patients covered by health insurance and an expectation that existing insurance coverage will provide more comprehensive consumer protections. This would include a federal subsidy for a portion of a beneficiary’s out-of-pocket cost under Medicare Part D. However, these higher revenues will be negatively impacted by the branded prescription drug manufacturers’ fee.

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Other Revenue

Other revenue consists of development fees, royalties and other revenue. For the three months ended December 31, 2011, development fees amounted to $0.9 million. These fees resulted from the inclusion of Eurand’s business in the post-acquisition period. Development of a new pharmaceutical formulation generally includes the following stages:

• feasibility and prototype development;

• formulation optimization and preparation of pilot clinical samples;

• scale-up, validation and preparation of clinical samples for regulatory and commercial purposes;

• clinical trials; and

• preparation of documents and regulatory filings.

We apply our proprietary pharmaceutical technologies in one of two ways — either to develop products on behalf of our collaborators or as internal programs. In both situations, we are involved in all stages of the formulation development process and perform largely the same types of work although, in general, we only perform clinical trials for the products we develop internally. Clinical trials for co-developed products are typically performed by our collaboration partners. For internal projects, we fund all of the development costs with a view either to out-license the product once it is fully developed and has obtained the applicable regulatory approvals, or to market it directly.

In our typical co-development contract, we generally receive development fees and milestones payments from our collaborators. Most of our current co-development agreements provide for us to perform development activities based on an hourly service fee. Our current co-development agreements also typically include provisions for the receipt of milestone payments upon the achievement of certain development and/or regulatory milestones including, by way of example, successful completion of development phases, successful demonstration of bioequivalence, and acceptance and approval by the applicable regulatory agencies. Milestone payments are usually structured as lump sum payments, which are due if and when we reach certain mutually agreed-upon development milestones as set forth in the agreements. In many cases, achievement of such milestone payments is based on factors that are out of our control, including, among other things, regulatory approval of the product. In addition, in many cases, decisions directly affecting the receipt of these payments are made at the sole discretion of our collaborator. Due to the structure of our co-development agreements and the inherent difficulty in predicting progress on development plans, our development fees may fluctuate significantly from quarter to quarter. In addition, development fees will fluctuate depending on the number of co-development agreements we enter into in a given year or quarter.

For the three months ended December 31, 2011, royalties amounted to $1.0 million and resulted from the inclusion of legacy Eurand’s business in the post-acquisition period. We earn royalty revenues from our collaborators equal to a percentage of their sales of products for which we provided assistance to develop.

Cost of goods sold

Cost of goods sold consists principally of the cost of raw materials, royalties and manufacturing. For the three months ended December 31, 2011, cost of goods sold increased $19.8 million (113.8%) to $37.2 million from $17.4 million for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the three months ended December 31, 2011, increased compared to the corresponding period of the preceding fiscal year to 24.7% from 20.3% mostly resulting from the impact of legacy Eurand’s business in the post-acquisition period, which has greater costs of goods sold as a percentage of net sales than legacy Axcan’s in its contract manufacturing business.

Selling and administrative expenses

Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other costs associated with our sales force and marketing activities. For the three months ended December 31, 2011, selling and administrative expenses increased $8.0 million (31.7%) to $33.2 million from $25.2 million for the corresponding period of the preceding fiscal year. The increase is mostly resulting from the inclusion of legacy Eurand’s business in the post-acquisition period, net of integration cost savings that have been achieved from our ongoing integration efforts.

Management fees

Management fees consist of fees and other charges associated with the Management Services Agreement with TPG. For the three months ended December 31, 2011, management fees increased by $0.6 million (75.0%) to $1.4 million from $0.8 million for the corresponding period of the preceding fiscal year as a result of an increase in adjusted EBITDA.

Research and development expenses

Research and development expenses refer to (i) internal research and development expense and consist principally of fees paid to outside parties that we use to conduct clinical studies and to submit governmental approval applications on our behalf, as well as the salaries and benefits paid to personnel involved in research and development projects and (ii) research and development expense on a number of external projects with third parties that generate development fee revenues and consist principally of personnel cost. For the three months ended December 31, 2011, research and development expenses increased $8.8 million (125.7%) to $15.8 million, from $7.0 million for the corresponding period of the preceding fiscal year. The increase in research and development expenses is mainly due to (i) expenses of $6.1 million incurred under the Mpex Development Agreement as described above and (ii) the inclusion of expenses associated with Eurand activities in the post-acquisition period.

During the three months ended December 31, 2011, we completed the rationalization of our internal research and development team as part of our cost reduction initiatives. Separation costs associated with headcount reductions are reflected in transaction, restructuring and integration costs as discussed below. We will also continue to incur ongoing development costs of Aeroquin under the Mpex Development Agreement.

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On March 14, 2011, we entered into an agreement with a third-party to jointly develop a new combination product including Sucralfate. Under the terms of this agreement, we will pay a series of contingent and non-contingent milestone based payments. Upon commercialization of the new product, we will pay the third party to the arrangement a single digit royalty on net sales of the new product. Additionally, we will pay the third party a single digit royalty on net sales of Carafate, beginning on January 1, 2013, until December 31, 2019.

Depreciation and amortization

Depreciation and amortization consists principally of the amortization of intangible assets with a finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For the three months ended December 31, 2011, depreciation and amortization increased $7.5 million (55.1%) to $21.1 million from $13.6 million for the corresponding period of the preceding fiscal year. This increase is mainly due to additional depreciation and amortization of intangible assets recognized on the acquisition of Eurand as well as having recorded $1.6 million of additional amortization due to a change in the useful life of Delursan related intangible assets. This change was applied as a result of a generic UDCA (ursodeoxycholic acid) 250mg being assessed by AFSSAPS (Agence francaise de securite sanitaire des produits de santé) on December 1, 2011. The results of the AFSSAPS decision regarding the approval of a generic UDCA has not yet been made public.

Transaction, restructuring and integration costs

During the three months ended December 31, 2010, we have expensed $1.8 million ($0 during the three months ended December 31, 2011) of costs relating to legal, financial, valuation and accounting advisory services performed in connection with effecting the Eurand Acquisition, which are included in Transaction, restructuring and integration costs in the accompanying Statement of Condensed Consolidated Operations.

We have continued our restructuring measures in conjunction with the integration of the operations of Eurand. These measures are intended to capture synergies and generate cost savings across the Company.

Restructuring actions taken thus far include workforce reductions across the Company and other organizational changes. These reductions primarily come from the elimination of redundancies and consolidation of staff in the sales and marketing, manufacturing, research and development, and general and administrative functions, as well as from the planned closure of Eurand’s manufacturing facility in Nogent-Oise, France.

During the three months ended December 31, 2011, we recorded a restructuring expense of $0.2 million ($0 during the three months ended December 31, 2010) related to planned employee termination costs. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits and health insurance continuation, many of which may be paid out during periods after termination.

We estimate we will incur additional restructuring costs between $0.6 million and $1.2 million, primarily consisting of severance costs. The restructuring actions taken thus far are expected to be substantially completed by the end of 2012.

During the three months ended December 31, 2011, we have incurred integration costs of $2.5 million ($1.2 million during the three months ended December 31, 2010) representing certain external, incremental costs directly related to integrating the Eurand business and primarily include expenditures for consulting and systems integration.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed primarily for the Eurand Acquisition and for the acquisition of the Company by TPG Capital in February 2008. For the three months ended December 31, 2011, financial expenses increased by $5.9 million (36.4%) to $ 22.1 million from $16.2 million for the corresponding period of the preceding fiscal year. On February 11, 2011, we entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition as described in the Long-term Debt and Credit Facility section below.

Interest income

For the three months ended December 31, 2011, total interest income decreased to $0.1 million from $0.2 million for the corresponding period of the preceding fiscal year.

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Income taxes

For the three months ended December 31, 2011, income tax benefit amounted to $1.3 million compared to income tax expense of $1.2 million for the corresponding period of the preceding fiscal year. The effective tax rate was minus 6.97%, for the three months ended December 31, 2011, compared to 45.43% for the corresponding period of the preceding fiscal year. The effective tax rate for the three months ended December 31, 2011 is affected by a number of elements, the most important being the tax benefit arising from a financing structure of $4.2 million, the reversal of a valuation allowance of $1.9 million, the unrecognized tax benefits reversal of $1.7 million and the difference with foreign tax rates of $1.2 million. The effective tax rate for the three months ended December 31, 2010, is affected by a number of elements, the most important being the establishment of a valuation allowance of $5.0 million mainly against our net deferred tax assets generated in the U.S. If, in future periods, the deferred tax assets are determined by management to be more likely than not to be realized, the tax benefits relating to the reversal of the valuation allowance will be recorded.

The difference between our effective tax rate and the statutory income tax rate is summarized as follows:

	Three months ended December 31,
(in millions of US dollars)	2011						2010
	%			$			%			$
Combined statutory rate applied to pre-tax income (loss)		35.00			6.64			35.00			0.9
Increase (decrease) in taxes resulting from:
Change in promulgated rates		0.15			0.0			(1.24	)		(0.0	)
Difference with foreign tax rates		(6.59	)		(1.2	)		(44.73	)		(1.2	)
Change in valuation allowance		(10.10	)		(1.9	)		190.42			5.0
Tax benefit arising from a financing structure		(22.39	)		(4.2	)		(139.96	)		(3.7	)
Non-deductible items		2.55			0.5			15.23			0.4
Unrecognized tax benefits reversal		(9.28	)		(1.7	)		—			—
Investment tax credits		—			—			(8.95	)		(0.2	)
State taxes		3.43			0.7			3.55			0.1
Other		0.26			0.0			(3.89	)		(0.1	)
		(6.97	)		(1.3	)		45.43			1.2

Balance sheets as of December 31, 2011, and September 30, 2011

The following table summarizes balance sheet information as of December 31, 2011, compared to September 30, 2011.

(in millions of U.S. dollars)	December 31, 2011			September 30, 2011			Change
	$			$			$			%
Cash and cash equivalents		132.0			126.5			5.5			4.3
Current assets		286.6			272.3			14.3			5.2
Total assets		1,385.7			1,257.9			127.8			10.2
Current liabilities		205.5			177.7			27.8			15.7
Long-term debt		966.1			968.4			(2.3	)		(0.2	)
Total liabilities		1,399.8			1,285.2			114.6			8.9
Shareholders’ deficit		(14.1	)		(27.4	)		13.3			48.5
Working capital		81.1			94.7			(13.6	)		(14.3	)

Working capital decreased by $13.6 million (14.3%) to $81.1 million as of December 31, 2011, from $94.7 million as of September 30, 2011.

Total assets increased $127.8 million (10.2%) to $1,385.7 million as of December 31, 2011, from $1,257.9 million as of September 30, 2011, primarily as a result of the acquisition Rectiv, which resulted in the recognition of an intangible asset of $139.2 million.

Long-term debt decreased $2.3 million (0.2%) to $966.1 million as of December 31, 2011, from $968.4 million as of September 30, 2011 as a result of senior secured debt repayments.

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Liquidity and Capital Resources

Cash requirements

As of December 31, 2011, working capital was approximately $81.1 million and $94.7 million as of September 30, 2011. Cash generated from operations, is used to fund working capital, capital expenditures, milestone payments, debt service and business development activities. We regularly review product and other acquisition opportunities and may therefore require additional debt or equity financing in order to pursue these opportunities. We cannot be certain that such additional financing, if required, will be available on acceptable terms, or at all.

The aggregate equity purchase price of $589.6 million plus acquisition costs (including related fees and expenses) for the Eurand Acquisition were funded by cash equity contributions amounting to $140.0 million from affiliates of TPG Capital L.P. and certain co-investors, the proceeds from the Senior Secured Term Loan Facility (as defined below) under our amended and restated credit agreement and related security and other agreements and cash on hand from Axcan and Eurand. The amended and restated credit agreement and related security and other agreements is composed of (i) a senior secured revolving credit facility in an aggregate principal amount of $147.0 million (the “Senior Secured Revolving Credit Facility”) and (ii) a $750.0 million senior secured term loan facility (the “Senior Secured Term Loan Facility” and, together with the Senior Secured Revolving Credit Facility, the “Amended and Restated Senior Secured Credit Facilities”). We borrowed $500.0 million of the amount available under the Senior Secured Term Loan Facility at the closing of the Eurand Acquisition.

A portion of the proceeds of the equity and debt financings, together with cash on hand of Aptalis and Eurand, were also used to repay the outstanding term loan portion amounting to $125.7 million of our existing senior secured credit facilities and to pay related fees and expenses. The remaining amount of $250.0 million of the Senior Secured Term Loan Facility was used on March 15, 2011 to redeem 100% of our existing 9.25% senior secured notes due 2015.

There are currently two rating agencies (Moody’s and Standard & Poor’s) rating our debt. These ratings are revised from time to time.

Contractual obligations and other commitments

The following table summarizes our significant contractual obligations as of December 31, 2011, and the effect such obligations are expected to have on our liquidity and cash flows in future years.

(in millions of U.S. dollars)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	$		$		$		$		$
Long-term debt		979.4		8.8		15.6		250.0		705.0
Other long-term liabilities		16.6		—		—		16.6		—
Capital and operating leases		8.5		2.9		3.4		1.9		0.3
Other commitments		2.4		1.9		0.5		—		—
Interest on long-term debt		361.6		65.9		152.3		126.2		17.2
		1,368.5		79.5		171.8		394.7		722.5

Purchase orders for raw materials, finished goods and other goods and services are not included in the above table. Management is not able to accurately determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table, contractual obligations for the purchase of goods or services are only included in other commitments where there exist agreements that are legally binding and enforceable on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current needs and are fulfilled by our vendors within relatively short timetables. We do not have significant agreements for the purchase of raw materials or finished goods specifying minimum quantities or set prices that exceed our short-term expected requirements. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. As milestone payments are primarily contingent upon successfully achieving clinical milestones, on receiving regulatory approval for products under development or on achieving certain net sales targets, they do not have defined maturities and therefore are not included in the above table.

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

As of December 31, 2011, we had unrecognized tax benefits of $5.7 million ($14.8 million as of September 30, 2011). Due to the nature and timing of the ultimate outcome of these uncertain tax positions, we cannot make a reasonably reliable estimate of the amount and period of related future payments. Therefore, our unrecognized tax benefits with respect to our uncertain tax positions has been excluded from the above contractual obligations table.

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Long-term debt and Credit Facility

On February 11, 2011, we entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition.

The amended and restated credit agreement and related security and other agreements is composed of (i) a senior secured revolving credit facility in an aggregate principal amount of $147.0 million (the “Senior Secured Revolving Credit Facility”) and (ii) a $750.0 million senior secured term loan facility (the “Senior Secured Term Loan Facility” and, together with the Senior Secured Revolving Credit Facility, the “Amended and Restated Senior Secured Credit Facilities”).

We borrowed $500.0 million of the amount available under the Senior Secured Term Loan Facility at the closing of the acquisition. The Senior Secured Revolving Credit Facility remained undrawn at the closing of the acquisition. A portion of the proceeds of the equity and debt financings, together with cash on hand of Aptalis and Eurand, were used to repay the outstanding term loan portion amounting to $125.7 million of our existing senior secured credit facilities and to pay related fees and expenses. Following the repayment, all unamortized deferred financing fees of $2.7 million and original issuance discount of $3.2 million related to the term loan were written off and included in loss on extinguishment of debt during the three months ended March 31, 2011. The remaining amount of $250.0 million of the Senior Secured Term Loan Facility was drawn on March 15, 2011 to redeem our existing 9.25% senior secured notes due 2015.

On February 25, 2008, we issued $228.0 million aggregate principal amount of its 9.25% senior secured notes (the “Senior Secured Notes”) due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a 10% yield to March 1, 2015. On March 15, 2011, $250.0 million of the Senior Secured Term Loan Facility was used to redeem 100% of our Senior Secured Notes at a redemption price of 106.938%. The aggregate redemption amount consisted of $228.0 million in aggregate principal amount, $0.8 million accrued interest and $15.8 million of redemption premium which is included in Loss on extinguishment of debt in the accompanying Consolidated Statements of Operations. Following the redemption all unamortized deferred financing fees of $5.0 million and original issuance discount of $1.7 million related to these notes were written off and included in during the three months ended March 31, 2011.

Our Amended and Restated Senior Secured Credit Facilities totaling $897.0 million is composed of a Senior Secured Term Loan Facility amounting to $750.0 million and a Senior Secured Revolving Credit Facility totaling $147.0 million. The Senior Secured Revolving Credit Facility is comprised of $115.0 million of existing revolving credit commitments that were extended or issued on February 11, 2011 (the “ Extended Commitments”) and $32.0 million of existing revolving credit commitments that were not extended (the “ Unextended Commitments”) pursuant to the Senior Secured Revolving Credit Facility. The Amended and Restated Senior Secured Credit Facilities bear interest at a variable rate composed of either (i) the highest of the federal funds rate plus 0.5%, Bank of America, N.A.’s “prime rate”, or the one month British Banker Association LIBOR rate plus 1.00%, or (ii) the British Banker Association LIBOR rate (subject to a floor of 1.50% with respect to borrowings under the Senior Secured Term Loan Facility) at our option, plus an applicable rate established by the credit agreement governing the Amended and Restated Senior Secured Credit Facilities (including, with respect to borrowings under the Senior Secured Revolving Credit Facility, step-downs based on our consolidated total leverage ratio). The principal amount of the Senior Secured Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount with payments beginning in March 2011. The principal amount outstanding of the loans under the Senior Secured Term Loan Facility will be due and payable on February 11, 2017. The principal amount of outstanding loans under the Senior Secured Revolving Facility will be due and payable on February 11, 2016 with respect to Extended Commitments and on February 25, 2014 with respect to Unextended Commitments.

As of December 31, 2011, $750.0 million of term loans had been issued and no amounts are currently drawn against the Senior Secured Revolving Credit Facility. The term loans were priced at $0.995 with a yield to maturity of 5.6% before the effect of the interest rate swaps. We use interest rate swaps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. On April 4, 2011, we entered into two separate pay-fixed, receive-floating interest rate swap agreements with an effective date of June 30, 2011 effectively converting a portion of the variable rate debt under our Amended and Restated Senior Secured Credit Facilities to fixed rate debt. The first swap has a notional amount of $331.0 million amortizing to $84 million by its maturity in December 2015. The second swap has a notional amount of $219 million and matures in December 2016. These swaps were designated as cash flow hedges of interest rate risk. The interest rate swaps will effectively fix our interest payments on the hedged debt at 2.386% for the first swap and 3.18% for the second swap, respectively, inclusive of a LIBOR floor of 1.5%, plus the appropriate margin on each debt interest period, which is currently 4%. As of December 31, 2011, we had two interest rate swaps with a combined notional amount of $550.0 million that were designated as cash flow hedges of interest rate risk. The weighted average fixed interest rate on these swaps is 2.7%. We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. If we had breached this provision, we could have been required to settle our obligations under the agreements at their termination value. As of December 31, 2011, the termination value of derivatives in a net liability position including accrued interest and excluding any adjustment for nonperformance risk, related to these agreements was $18.4 million and we have not posted any collateral related to these agreements.

The credit agreement governing the Amended and Restated Senior Secured Credit Facilities requires us to meet certain financial covenants, beginning the third quarter of the fiscal year ending September 30, 2011. The maintenance of these financial covenants is solely with respect to the Senior Secured Revolving Credit Facility. These covenants were met as of December 31, 2011. The credit agreement governing the Amended and Restated Senior Secured Credit Facility requires us to prepay outstanding term loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the credit agreement governing the Amended and Restated Senior Secured Credit Facilities, (2) commencing with the fiscal year ended September 30, 2012, 50% (which percentage will be reduced if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Senior Secured Term Loan Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by us or by our subsidiaries, subject to reinvestments rights and certain other exceptions.

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Pursuant to the annual excess cash flow requirements of our credit agreement in effect prior to the Amended and Restated Senior Secured Credit Facilities, we were required to prepay $13.2 million of outstanding term loans in the first quarter of fiscal year 2011. We were not required to make prepayments in the first quarter of fiscal year 2012.

On May 6, 2008, we issued $235.0 million of 12.75% senior unsecured notes due March 1, 2016, (the “Senior Unsecured Notes”). The Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior Unsecured Notes are subordinated to the Amended and Restated Senior Secured Credit Facilities.

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

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

Operating leases

We have various long-term operating lease agreements for office space, automotive equipment and other equipment. The latest expiry date for these agreements is in 2017.

Other commitments

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

development services.

Related party transactions

As of December 31, 2011, we had a note receivable from our parent company of $78.2 million ($78.2 million as of September 30, 2011). The note receivable has been recorded in the shareholders’ deficit section of the consolidated balance sheet. We earned interest income on the note of $1.2 million (net of taxes of $0.6 million) and $2.0 million (net of taxes of $1.1 million) during the three months ended December 31, 2011 and December 31, 2010 respectively. The related interest receivable from our parent company is $38.6 million as of December 31, 2011, ($36.8 million as of September 30, 2011) has been recorded in the shareholder’s deficit section of the consolidated balance sheet. This amount was subject to a full provision which was also recorded in the statement of shareholders’ equity. As of December 31, 2011, we have also an account receivable from our parent company of $0.7 million ($0.7 million as of September 30, 2011).

Pursuant to the terms of a management fee arrangement with a controlling shareholding company, we recorded charges of $1.4 million during the three months ended December 31, 2011 ($0.8 million for the three months ended December 31, 2010). As of December 31, 2011, we accrued fees payable to a controlling shareholding company of $1.3 million ($1.4 million as of September 30, 2011).

Balance sheet arrangements

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

Cash flows

Our cash flows from operating, investing and financing activities for the three months ended December 31, 2011 and 2010 as reflected in the condensed consolidated statements of cash flows, are summarized in the following table:

	Three months ended December 31,
(in millions of U.S. dollars)	2011			2010			Change
	$			$			$
Net cash provided by operating activities		13.2			3.7			9.5
Net cash used in investing activities		(4.3	)		(1.1	)		(3.2	)
Net cash used in financing activities		(2.7	)		(13.2	)		10.5

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Cash flows provided by operating activities increased by $9.5 million to $13.2 million from $3.7 million for the three months ended December 31, 2011 and 2010 respectively. The increase in net cash provided by operating activities is mainly due to the inclusion of legacy Eurand’s business net of integration savings in the post-acquisition period as well as expenditures of $6.1 million related to the Mpex Development Agreement.

Cash flows used in investing activities increased by $3.2 million to $4.3 million from $1.1 million for the three months ended December 31, 2011 and 2010 respectively. The increase in cash flows used by investing activities is mainly due to the acquisition of property plant and equipment as a result of ongoing integration efforts.

Cash flows used in financing activities decreased by $10.5 million to $2.7 million of cash from $13.2 million for the three months ended December 31, 2011 and 2010 respectively as a result of not having been required to make excess cash flow pre-payments under the Amended and Restated Senior Secured Credit Facilities in the three months ended December 31, 2011.

Significant accounting policies

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

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and also affect the recognized amounts of revenues and expenses during the fiscal year. Estimates are used when accounting for amounts recorded in connection with acquisitions, including fair value determinations of assets and liabilities. Other significant estimates and assumptions made by management include those related to the charges to be recorded in conjunction with ceasing of distributing ULTRASE MT and VIOKASE, allowances for accounts receivable, inventories, reserves for product returns, rebates, chargebacks and DSA fees, the classification of intangible assets between finite life and indefinite life, the useful lives of long-lived assets, the expected cash flows used in evaluating long-lived assets, goodwill and investments for impairment, stock based compensation costs, pending legal settlements and the establishment of provisions for income taxes including the realizability of deferred tax assets. The estimates are made using the historical information and various other relevant factors available to management. We review all significant estimates affecting the financial statements on a recurring basis and 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 the healthcare environment, foreign exchange and managed care and managed Medicaid consumption patterns.

The charges that we have recorded as a result of having ceased distribution of ULTRASE MT and VIOKASE also reflect many subjective estimates that were required to be made by management. These estimates include:

a) The quantity and expiration dates of ULTRASE MT and VIOKASE inventory in the distribution channel;

b) Assumptions regarding market share growth after an eventual re-launch of our ULTRASE MT and VIOKASE; and

c) Other factors.

In future periods, management will monitor and review the assumptions and estimates and will prospectively record changes to provisions reflected in the current fiscal year.

Revenue recognition

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

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

(in millions of U.S. dollars)	Product returns			Medicaid and other government programs			Contract rebates			Charge- backs			DSA fees, discounts and other			Reserves related to  the unapproved PEPs event			Total
	$			$			$			$			$			$			$
Balance as of September 30, 2011		20.6			30.9			6.5			3.0			3.6			3.1			67.7
Provisions		1.7			11.3			5.3			8.1			5.5			—			31.9
Settlements		(1.5	)		(15.1	)		(1.6	)		(7.9	)		(5.0	)		(0.3	)		(31.4	)
Balance as of December 31, 2011		20.8			27.1			10.2			3.2			4.1			2.8			68.2

Product returns

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

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

• past product returns activity;

• the duration of time taken for products to be returned;

• the estimated level of inventory in the distribution channel;

• product recalls and discontinuances;

• the shelf life of products;

• the launch of new drugs or new formulations; and

• the loss of patent protection or new competition.

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

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

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

The accrued liabilities include reserves of $20.8 million as of December 31, 2011, ($20.6 million as of September 30, 2011) for estimated product returns, excluding the additional provision related to the unapproved PEPs event. During the three-month period ended December 31, 2011, we recorded a reversal of our product returns reserve of $3 million, which is included in the provision of $1.7 million noted above as a result of a change in estimates.

As of December 31, 2011, the product returns reserve related to the unapproved PEPs event amounted to $2.8 million which represents primarily management’s current estimate of the balance of ULTRASE MT and VIOKASE inventory in the distribution channel. Due to the subjectivity of this estimate, we prepared various sensitivity analyses to ensure our final estimate is within a reasonable range. A change in assumptions that resulted in a 10% change in the quantity of ULTRASE MT and VIOKASE inventory in the distribution channel would have resulted in a change in the return reserve of approximately $0.3 million.

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Rebates, chargebacks and other sales deduction

In the U.S., we establish and maintain reserves for amounts payable to managed care organizations, state Medicaid and other government programs for the reimbursement of portions of the retail price of prescriptions filled that are covered by these programs.

We also establish and maintain reserves for amounts payable to wholesale distributors for the difference between their regular sale price and the contract price for the products sold to our contract customers.

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

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

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

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

Accrued liabilities include reserves of $27.1 million as of December 31, 2011 ($30.9 million as of September 30, 2011) for estimated for Medicaid and other government programs, $11.3 million ($6.5 million as of September 30, 2011) for estimated contract rebates and $3.2 million ($3.0 million as of September 30, 2011) for charge-backs.

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

Intangible assets and goodwill

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

During three month ended December 31, 2011, we learned that a generic competitor to Delursan was being assessed by AFSSAPS (Agence francaise de securite sanitaire des produits de santé). Management considered the possible impact of a generic entrant in the market on Delursan’s future revenues. On reassessment, we reduced the remaining estimated useful life of the Delursan intangible asset to 5 years. As a result, an additional amortization expense of $1.6 million was recorded in the three months ended December 31, 2011.

The following table summarizes the changes to the carrying value of the intangible assets and goodwill from September 30, 2011 to December 31, 2011:

	Intangible assets			Goodwill
	$			$
Balance as of September 30, 2011		690.9			179.8
Other additions		139.2			—
Depreciation and amortization		(17.9	)		—
Foreign exchange translation adjustments		(4.0	)		(1.2	)
Balance as of December 31, 2011		808.2			178.6

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Research and development expenses

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

Income taxes

Income taxes are calculated using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized to account for the estimated taxes that will result from the recovery or settlement of assets and liabilities recorded at their financial statement carrying amounts. Deferred income tax assets and liabilities are measured based on enacted tax rates and laws at the date of the financial statements for the fiscal years in which the temporary differences are expected to reverse. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to remain unrealized. Adjustments to the deferred income tax asset and liability balances are recognized in net income as they occur.

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

Changes in accounting standards

See Note 2 to our Condensed Consolidated Financial Statements in Item 1 of Part 1 of this Form 10-Q for a description of recently issued accounting standards, including our expected adoption dates and estimated effects, if any, on our results of operations, financial condition and cash flows.

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Item 3. Quantitative And Qualitative Disclosure About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see Item 1A of Part I and elsewhere in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. As of December 31, 2011, our exposure to market risk has not changed materially since September 30, 2011.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of December 31, 2011, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. During the period covered by the Quarterly Report on Form 10-Q, no change occurred in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our Form 10-K for the fiscal period ended September 30, 2011.

Item 6. Exhibits.

Exhibit No.	Exhibit
10.30	Commercialization and License Agreement entered into as of December 28, 2011 by and among Strakan International S.ÀR.L, ProStrakan Inc. and Aptalis Pharma US, Inc.*
10.31	Supply Agreement entered into as of December 28, 2011 by and among Strakan International S.ÀR.L. and Aptalis Pharma US, Inc.*
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment requested as to certain portions. Material has been omitted and separately filed with the Securities and Exchange Commission.

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SIGNATURES

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

	APTALIS PHARMA INC.
Date: February 10, 2012	BY:	/s/ Steve Gannon
		Steve Gannon
		Senior Vice President, Finance, Chief Financial Officer and Treasurer

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EXHIBIT INDEX

Exhibit No.	Exhibit
10.30	Commercialization and License Agreement entered into as of December 28, 2011 by and among Strakan International S.ÀR.L., ProStrakan Inc. and Aptalis Pharma US, Inc.*
10.31	Supply Agreement entered into as of December 28, 2011 by and among Strakan International S.ÀR.L. and Aptalis Pharma US, Inc.*
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment requested as to certain portions. Material has been omitted and separately filed with the Securities and Exchange Commission.

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