Aptalis Pharma 10-Q 2009 Q3 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 June 30, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ____________.

Commission File Number 333-153896

AXCAN INTERMEDIATE HOLDINGS INC.

(Exact Name of Registrant as Specified in Its Charter)

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

(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.  x Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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). oYes xNo (Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time).

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

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

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

Yes o No x

As of August 14, 2009, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Axcan MidCo Inc.

1

AXCAN INTERMEDIATE HOLDINGS INC.

INDEX

PART I. FINANCIAL INFORMATION 5

Item 1.	Financial Statements.	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	31
Item 3.	Quantitative And Qualitative Disclosure About Market Risk	43
Item 4T.	Controls and Procedures	43

PART II. OTHER INFORMATION		44
Item 1A.	Risk Factors	44
Item 6.	Exhibits.	44
SIGNATURES		45
EXHIBIT INDEX		46

Forward-Looking Statements

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

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

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

5

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Balance Sheets

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

	Successor June 30, 2009			Successor September 30, 2008
	(unaudited)			(audited)
Assets	$			$
Current assets
Cash and cash equivalents		139,801			56,105
Accounts receivable, net		55,963			42,513
Accounts receivable from the parent company (Note 17)		300			987
Income taxes receivable		1,980			17,743
Inventories (Note 5)		44,629			37,671
Prepaid expenses and deposits		2,340			3,347
Deferred income taxes		22,424			18,614
Total current assets		267,437			176,980
Property, plant and equipment, net (Note 6)		35,565			34,675
Intangible assets, net (Note 7)		432,843			528,376
Goodwill		165,299			165,014
Other long-term assets		-			449
Deferred debt issue expenses, net of accumulated amortization of $7,924 ($4,201 as at September 30, 2008)		26,656			30,378
Deferred income taxes		10,513			8,940
Total assets		938,313			944,812
Liabilities
Current liabilities
Accounts payable and accrued liabilities		94,230			78,667
Income taxes payable		9,351			7,653
Installments on long-term debt		13,125			10,938
Deferred income taxes		764			2,042
Total current liabilities		117,470			99,300
Long-term debt (Note 10)		602,908			611,246
Other long-term liabilities		8,852			1,242
Deferred income taxes		41,659			67,354
Total liabilities		770,889			779,142
Shareholders’ Equity
Capital Stock
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding		1			1
Deficit		(288,930	)		(289,264	)
Note receivable from the parent company (Note 17)		(133,154	)		(133,154	)
Additional paid-in capital		619,407			617,255
Accumulated other comprehensive loss		(29,900	)		(29,168	)
Total shareholders’ equity		167,424			165,670
Total liabilities and shareholders’ equity		938,313			944,812

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

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

6

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Operations

(in thousands of U.S. dollars)

(unaudited)

	Successor												Predecessor
	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008			For the nine-month period ended June 30, 2009			For the four-month period ended June 30, 2008			For the five-month period ended February 25, 2008
	$			$			$			$			$
Net product sales		100,806			96,489			325,545			126,701			158,579
Other revenue		5,221			-			5,221			-			-
Total revenue		106,027			96,489			330,766			126,701			158,579
Cost of goods sold (a)		22,093			38,098			76,950			53,347			38,739
Selling and administrative expenses (a)(Note 11)		28,573			37,955			92,437			53,662			76,198
Management fees (Note 17)		4,756			-			4,899			-			-
Research and development expenses (a)		10,701			6,290			26,840			8,796			10,256
Acquired in-process research		-			-			-			272,400			-
Depreciation and amortization		14,836			16,546			43,788			21,624			9,595
Partial write-down of intangible assets		55,665			-			55,665			-			-
Total operating expenses		136,624			98,889			300,579			409,829			134,788
Operating income (loss)		(30,597	)		(2,400	)		30,187			(283,128	)		23,791
Financial expenses (Note 11)		16,723			16,922			52,955			24,122			262
Interest income		(18	)		(298	)		(277	)		(443	)		(5,440	)
Other income		(3,500	)		-			(3,500	)		-			-
Gain on foreign currency		(866	)		(51	)		(1,121	)		(463	)		(198	)
Total other expenses (income)		12,339			16,573			48,057			23,216			(5,376	)
Income (loss) before income taxes		(42,936	)		(18,973	)		(17,870	)		(306,344	)		29,167
Income taxes expense (benefit)		(21,528	)		(10,362	)		(18,704	)		(13,851	)		12,042
Net income (loss)		(21,408	)		(8,611	)		834			(292,493	)		17,125

(a) Excluding depreciation and amortization

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

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

7

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Shareholders’ Equity and Comprehensive Income

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

(unaudited)

	Successor												Predecessor
	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008			For the nine-month period ended June 30, 2009			For the four-month period ended June 30, 2008			For the five-month period ended February 25, 2008
Common shares (number)
Balance, beginning of period		100			100			100			-			55,359,652
Shares issued for cash at inception		-			-			-			100			-
Shares issued pursuant to the stock incentive plans for cash		-			-			-			-			17,299
Balance, end of period		100			100			100			100			55,376,951
		$			$			$			$			$
Common shares
Balance, beginning of period		1			1			1			-			395,888
Shares issued for cash at inception		-			-			-			1			-
Stock-based compensation on exercised options		-			-			-			-			41
Shares issued pursuant to the stock incentive plans for cash		-			-			-			-			224
Balance, end of period		1			1			1			1			396,153
Retained earnings (deficit)
Balance, beginning of period		(267,022	)		(283,882	)		(289,264	)		-			249,371
Stock-based compensation cancellation		-			-			-			-			(8,821	)
Dividends paid		(500	)		-			(500	)		-			-
Net income (loss)		(21,408	)		(8,611	)		834			(292,493	)		17,125
Balance, end of period		(288,930	)		(292,493	)		(288,930	)		(292,493	)		257,675
Additional paid-in capital
Balance, beginning of period		619,087			607,739			617,255			-			9,089
Shares issued for cash at inception		-			-			-			608,154			-
Stock-based compensation expense		1,494			5,539			5,455			5,539			7,474
Stock-based compensation on exercised options		-			-			-			-			(41	)
Stock-based compensation cancellation		(148	)		-			(148	)		-			(16,395	)
Income tax deduction on stock options exercise		-			-			-			-			(127	)
Foreign currency translation adjustments		26			-			-			-			-
Interest receivable from the parent company		(3,004	)		(2,996	)		(9,013	)		(4,181	)		-
Interest income from the parent company, net of taxes of ($1,052, $1,049, $3,155 and $1,464)		1,952			1,947			5,858			2,717			-
Balance, end of period		619,407			612,229			619,407			612,229			-
9.05% Note receivable from the parent company
Balance, beginning of period		(133,154	)		(133,154	)		(133,154	)		-			-
9.05% Note receivable from the parent company		-			-			-			(133,154	)		-
Balance, end of period		(133,154	)		(133,154	)		(133,154	)		(133,154	)		-
Accumulated other comprehensive income (loss)
Balance, beginning of period		(36,550	)		9,399			(29,168	)		-			35,849
Hedging contracts adjustments, net of taxes benefits (expenses) [$27, ($198), $214, and ($198)]		(49	)		880			(397	)		368			-
Foreign currency translation adjustments		6,699			2,993			(335	)		12,904			5,724
Balance, end of period		(29,900	)		13,272			(29,900	)		13,272			41,573
Total shareholders’ equity		167,424			199,855			167,424			199,855			695,401
Comprehensive income (loss)
Other comprehensive income (loss)		6,650			3,873			(732	)		13,272			5,724
Net income (loss)		(21,408	)		(8,611	)		834			(292,493	)		17,125
Total comprehensive income (loss)		(14,758	)		(4,738	)		102			(279,221	)		22,849

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

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

8

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Cash Flows

(in thousands of U.S. dollars)

(unaudited)

	Successor												Predecessor
	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008			For the nine-month period ended June 30, 2009			For the four-month period ended June 30, 2008			For the five-month period ended February 25, 2008
	$			$			$			$			$
Operating activities
Net income (loss)		(21,408	)		(8,611	)		834			(292,493	)		17,125
Non-cash items
Non-cash financial expenses		1,758			2,335			5,265			3,596			-
Inventories stepped-up value expensed		-			15,143			-			22,714			-
Depreciation and amortization		14,836			16,546			43,788			21,624			9,595
Acquired in-process research		-			-			-			272,400			-
Stock-based compensation expense		1,494			5,539			5,455			5,539			7,474
Partial write-down of intangible assets		55,665			-			55,665			-			-
Loss on write-down of assets		96			-			117			-			-
Foreign currency fluctuations		318			550			2,132			(897	)		(67	)
Change in fair value of derivatives		(58	)		-			815			-			-
Deferred income taxes		(29,052	)		(12,142	)		(32,413	)		(15,501	)		432
Accounts receivable from the parent company		2,291			-			687			-			-
Changes in working capital items
Accounts receivable		13,391			9,116			(14,012	)		9,587			(12,340	)
Income taxes receivable		(1,793	)		3,857			15,347			504			(5,929	)
Inventories		(7,374	)		(2,892	)		(7,920	)		(6,918	)		(3,803	)
Prepaid expenses and deposits		171			651			932			763			(49	)
Accounts payable and accrued liabilities		13,656			1,749			17,527			(62,089	)		67,865
Income taxes payable		4,969			(3,104	)		3,702			(7,764	)		(7,058	)
Cash flows from operating activities		48,960			28,737			97,921			(48,935	)		73,245
Investing activities
Disposal of short-term investments		-			-			-			-			129,958
Acquisition of property, plant and equipment		(2,462	)		(1,080	)		(5,382	)		(1,817	)		(3,314	)
Acquisition of intangible assets		-			(13	)		(10	)		(28	)		(14	)
Net cash used for the acquisition (Note 4)		-			-			-			(958,463	)		-
Cash flows from investing activities		(2,462	)		(1,093	)		(5,392	)		(960,308	)		126,630
Financing activities
Long-term debt		-			-			-			634,120			-
Repayment of long-term debt		(3,281	)		(2,409	)		(7,656	)		(8,455	)		(221	)
Advances from the parent company		-			3,975			-			3,975			-
Deferred debt issue expenses		-			(5,815	)		-			(36,360	)		(889	)
Stock-based compensation plan cancellation		(148	)		-			(148	)		-			(30,357	)
Issue of shares		-			-			-			475,001			224
Dividends paid		(500	)		-			(500	)		-			-
Cash flows from financing activities		(3,929	)		(4,249	)		(8,304	)		1,068,281			(31,243	)
Foreign exchange gain (loss) on cash held in foreign currencies		837			(23	)		(529	)		435			487
Net increase in cash and cash equivalents		43,406			23,372			83,696			59,473			169,119
Cash and cash equivalents, beginning of period		96,395			36,101			56,105			-			179,672
Cash and cash equivalents, end of period		139,801			59,473			139,801			59,473			348,791
Additional information
Interest received		13			333			324			573			4,507
Interest paid		2,037			7,507			32,981			7,541			11
Income taxes received		-			-			16,761			-			-
Income taxes paid		3,222			133			11,579			8,048			24,080

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

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

9

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

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

Axcan Intermediate Holdings Inc., a corporation incorporated on November 28, 2007, under the General Corporation Law of the State of Delaware and its subsidiaries (together the “Company” or the “Successor”), commenced active operations with the purchase, through a wholly-owned indirect subsidiary, of all of the outstanding common shares of Axcan Pharma Inc. (the “February 2008 Transactions”) a company incorporated under the Canada Business Corporation Act (the “Predecessor”). The Company is involved in the research, development, production and distribution of pharmaceutical products mainly in the field of gastroenterology. Prior to the February 2008 Transactions, Axcan Intermediate Holdings Inc. had no independent operations or assets. Accordingly, the financial information is presented separately for the period prior to the completion of the February 2008 Transactions and the period after the completion of the February 2008 Transactions, which relate to the accounting periods preceding and succeeding the completion of the February 2008 Transactions. The financial information presented for the Predecessor is the financial information for Axcan Pharma Inc. and its consolidated subsidiaries and the financial information presented for the Successor is the financial information for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries. The financial information as of June 30, 2009 and for the Successor’s periods is not comparable to the financial information of the Predecessor because of the new basis of accounting resulting from the February 2008 Transactions. The results of operations for the Predecessor periods and the Successor periods should not be considered representative of the Company’s future results of operations.

These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are presented in U.S. dollars, the reporting currency.

2. Significant Accounting Policies

The accompanying unaudited financial statements are prepared in accordance with “U.S. GAAP” for interim financial statements and do not include all the information required for complete financial statements. They are consistent with the policies outlined in the Company’s audited financial statements for the fiscal year ended September 30, 2008. 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, 2008. When necessary, the financial statements include amounts based on informed estimates and best judgment of management. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operation for the periods shown. Certain prior period amounts have been reclassified to conform to the current period presentation. All intercompany transactions and balances have been eliminated on consolidation. Further in connection with the preparation of these financial statements and in accordance with the recently issued Statement of Financial Accounting Standard No. 165, “Subsequent Events” (“SFAS 165”), the Company evaluated significant events after the balance sheet date of June 30, 2009 through August 14, 2009, the date of issuance of these financial statements.

3. Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement (“SFAS”) No. 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not anticipate that the adoption of the provisions of this statement will have a material impact on its consolidated financial statement footnote disclosures.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under SFAS 167, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. SFAS 167 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. SFAS 167 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. SFAS 167 is effective for fiscal years beginning after November 15, 2009 with early adoption prohibited. The Company is currently evaluating the impact of the adoption of the provisions of SFAS 167 on its consolidated financial statements.

In June 2009, the SEC Staff issued Staff Accounting Bulletin No. 112 (“SAB 112”). SAB 112 amends or  rescinds portions of the SEC staff’s interpretive guidance included in the Staff Accounting Bulletin Series in order to make the relevant interpretive guidance consistent with SFAS 141-R, “Business Combinations” and SFAS 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). This standard establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for fiscal years and interim periods ended after June 15, 2009 and will be applied prospectively. The adoption of the provisions of this standard did not have a material impact on the Company’s consolidated financial statements.

10

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

3. Recently Issued Accounting Standards (continued)

In April 2009, FASB issued FASB Staff Position (“FSP”) FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”) which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements of publicly traded companies. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in all interim financial statements. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”) and FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). The adoption of this FSP did not have a material impact on its consolidated financial statements since the Company has provided disclosures about fair value of financial instruments in its interim financial statements prior to the issuance of this FSP.

In April 2009, the FASB issued FSP FAS 157-4 which provides additional guidance for determining whether a market is not active and a transaction is not distressed for fair value measurements under FASB Statement No. 157, “Fair Value Measurements”. The FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and FAS 124-2. The Company has elected to early adopt this FSP and the adoption of the provisions of this FSP did not have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 which provide additional guidance to provide greater clarity about the credit and non-credit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS 157-4. The Company has elected to early adopt this FSP and the adoption of the provisions of this FSP did not have a material impact on its consolidated financial statements.

In April 2009, the SEC Staff issued Staff Accounting Bulletin No. 111 (“SAB 111”) which aligns SEC regulations to the newly issued accounting standards (FSP FAS 115-1 and FAS 124-2) on accounting for other-than-temporary impairments for marketable debt securities. SAB  111 maintains the SEC staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope.

In April 2009, the FASB issued FSP FAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies” (“FSP FAS 141R-1”). This FSP amends and clarifies FASB Statement No. 141 (revised 2007), “Business Combinations”,  to require that an acquirer recognize assets acquired and liabilities assumed in a business combination that arise from contingencies, at fair value at the acquisition date,  if fair value can be determined during the measurement period.  If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of FASB Statement No. 5, “Accounting for Contingencies”, to determine whether the contingency should be recognized at the acquisition date or after it. FSP FAS 141R-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is after the beginning of the first annual reporting period beginning after December 15, 2008. The Company will apply the principles set forth in this FSP for future acquisitions.

In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, Accounting for Defensive Intangible Assets. EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting. Defensive intangible assets must be recognized at fair value in accordance with SFAS 141(R) and SFAS 157. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the adoption of provisions of EITF 08-7 on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 became effective November 15, 2008. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued FSP FAS No.142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised 2007), “Business Combinations,” and other U.S.GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of the adoption of the provisions of this FSP on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS No.161 requires enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of the provisions of SFAS No. 161 did not have a material impact on the Company’s consolidated financial statements (see Note 15).

11

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

3. Recently Issued Accounting Standards (continued)

In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations”, which replaces SFAS No. 141, “Business Combinations”. SFAS No. 141(R) expands the definition of a business combination and requires the acquisition method of accounting to be used for all business combinations and an acquirer to be identified for each business combination. SFAS No. 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, SFAS No. 141(R) establishes requirements in the recognition of acquisition costs, restructuring costs and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties. SFAS No. 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will apply the principles set forth in SFAS No. 141 (R) for future acquisitions.

In December 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-01, “Accounting for Collaborative Arrangements”. EITF No. 07-01 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF No. 07-01 also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF No. 07-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of the provisions of EITF No. 07-1 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”. SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS No. 160 requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS No.160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements, because the Company has wholly-owned subsidiaries.

In June 2007, the EITF reached a consensus on Issue No. 07-3, “Accounting for Non-refundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.” As a result of this consensus, non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2007, and earlier application is not permitted. This consensus is to be applied prospectively for new contracts entered into on or after the effective date. The adoption of this consensus did not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option at the effective date (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. This statement is effective for fiscal years beginning after November 15, 2007. The Company chose not to elect the fair value option for its financial assets and liabilities upon adoption. Therefore, the adoption of SFAS No. 159 had no impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements and is effective for fair-value measurements already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), that deferred the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued FSP 157-3 “Determining Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the application of SFAS No. 157 in an inactive market. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The Company has adopted SFAS 157 in accordance with FSP 157-2 and FSP 157-3. The adoption of SFAS 157 for financial assets and liabilities carried at fair value did not have a material impact on its consolidated financial statements (see Note 16).

12

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

4. Acquisition

On February 25, 2008, the Company, pursuant to a Plan of Arrangement dated November 29, 2007, and through a wholly-owned indirect subsidiary, completed the acquisition of all common shares of Axcan Pharma Inc. at a price of $23.35 per share and entered into various related transactions (the “Acquisition”). The cash consideration of $1,293,000,000 plus the capitalized portion of acquisition costs of approximately $14,100,000 were funded by cash equity contributions from affiliates of TPG Capital L.P. (the “Sponsor”) and certain co-investors of $475,000,000, the proceeds from long-term debt of $634,100,000 and $198,200,000 in cash on hand from Axcan Pharma Inc. The business acquired is a specialty pharmaceutical company concentrating in the field of gastroenterology, with operations in North America and the European Union.

The Company accounted for this acquisition as a purchase combination and, accordingly, the cost was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. As at September 30, 2008, the Company finalized its allocation of the purchase price. As a result of finalization of the purchase price allocation, the Company recorded adjustment in the fourth quarter of fiscal year 2008 to the preliminary purchase price allocation of $1,087,000 for other current assets, $4,939,000 for property, plant and equipment, $7,073,000 for goodwill, $1,487,000 for deferred income taxes assets and $1,734,000 for deferred income taxes liabilities. None of the goodwill recorded as a result of the Acquisition is expected to be tax deductible. As at September 30, 2008, the final purchase price allocation was as follows:

	$
Cash	348,791
Inventories (a)	54,055
Other current assets	91,951
Property, plant and equipment	36,912
Intangible assets	581,653
Acquired in-process research (b)	272,400
Goodwill	169,625
Deferred debt issue expenses	889
Deferred income taxes assets	7,246
Current liabilities	(174,554	)
Long-term debt	(68	)
Deferred income taxes liabilities	(81,646	)
Total	1,307,254

(a)  As part of the purchase price allocation for the acquisition, the carrying value of inventory acquired was stepped-up to fair value by $22,714,000 as of February 25, 2008. The stepped-up value is recorded as a charge to cost of goods sold as acquired inventory is sold.

(b) Represents the estimated fair value of acquired in-process R&D projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. The value assigned to purchased in-process technology is mainly attributable to the following projects: CANASA MAX 002, pancreatic enzymes, PYLERA in the European Union, AGI 010 and Cx401.

5. Inventories

	Successor June 30, 2009		Successor September 30, 2008
	$		$
Raw material and packaging material		9,325		8,177
Work in progress		989		1,867
Finished goods		34,315		27,627
		44,629		37,671

13

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

6. Property, Plant and Equipment

	Successor
	June 30, 2009
	Cost		Accumulated depreciation		Net
	$		$		$
Land		2,255		-		2,255
Buildings		21,767		2,386		19,381
Furniture and equipment		6,307		1,923		4,384
Computer equipment		11,886		3,488		8,398
Leasehold and building improvements		1,150		3		1,147
		43,365		7,800		35,565

	Successor
			September 30, 2008
	Cost		Accumulated depreciation		Net
	$		$		$
Land		2,257		-		2,257
Buildings		21,066		1,213		19,853
Furniture and equipment		5,471		936		4,535
Automotive equipment		9		9		-
Computer equipment		9,739		1,716		8,023
Leasehold and building improvements		9		2		7
		38,551		3,876		34,675

7. Intangible Assets

	Successor
			June 30, 2009
	Cost		Accumulated amortization		Net
	$		$		$
Trademarks, trademark licenses and manufacturing rights with finite life		487,950		55,107		432,843

	Successor
			September 30, 2008
	Cost		Accumulated amortization		Net
	$		$		$
Trademarks, trademark licenses and manufacturing rights with finite life		559,146		30,770		528,376

14

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

8. Partial Write-Down of Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, the Company assesses the impairment of identifiable intangible assets whenever events or changes in circumstance indicate that the carrying value might not be recoverable. As a result of certain factors related to the ongoing marketing of certain of our products including the approval of a generic formulation of URSO 250 and URSO FORTE, the Company reviewed the carrying amount of its intangible assets specifically related to its products. Based on a discounted cash-flow analysis and market prices, the Company concluded that a $55,665,000 reduction to the carrying value of  its intangible assets totalling $83,709,000 prior to the write-down was required. In addition, the remaining amortizable life of these intangible assets was reduced to periods ranging from 6 months to 14 years.

9. Segmented Information

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

The Company operates in the following geographic areas:

	Successor								Predecessor
	For the three-month period ended June 30, 2009		For the three-month period ended June 30, 2008		For the nine-month period ended June 30, 2009		For the four-month period ended June 30, 2008		For the five-month period ended February 25, 2008
	$		$		$		$		$
Total revenue
United States
Domestic sales		79,613		69,265		254,821		90,074		112,146
Foreign sales		1,018		1,348		3,768		1,681		2,221
Canada
Domestic sales		7,498		9,001		22,969		11,866		15,302
Foreign sales		118		-		165		-		-
European Union
Domestic sales		16,515		14,590		43,443		19,921		24,608
Foreign sales		1,103		2,255		5,154		3,078		4,093
Other		162		30		446		81		209
		106,027		96,489		330,766		126,701		158,579

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

	Successor June 30, 2009		Successor September 30, 2008
	$		$
Property, plant, equipment and intangible assets
Canada		339,693		352,974
United States		47,681		106,526
European Union		81,034		86,751
Other		-		16,800
		468,408		563,051

	Successor June 30, 2009		Successor September 30, 2008
	$		$
Goodwill
Canada		61,886		61,548
United States		91,400		91,400
European Union		12,013		12,066
		165,299		165,014

15

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

10. Long-Term Debt

	Successor June 30, 2009		Successor September 30, 2008
	$		$
Senior notes secured by substantially all of the present and future assets of the Company, bearing interest at 9.25% and maturing in March 2015		225,662		225,360
Term loans of $162,969,000 at June 30, 2009, $112,969,000 bearing interest at the one-month British Banker Association LIBOR (0.31% as at June 30, 2009) and $50,000,000 bearing interest at the three-month British Banker Association LIBOR (0.60% as at June 30, 2009), $170,625,000 at September 30, 2008 bearing interest at the three-month British Banker Association LIBOR (3.76% as at September 30, 2008), plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in February 2014, subject to interest rate swap agreements as further disclosed in Note 15		157,729		164,400
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016		232,642		232,424
		616,033		622,184
Installments due within one year		13,125		10,938
		602,908		611,246

On February 25, 2008, the Company obtained various types of financing in connection with the acquisition of the common shares of Axcan Pharma Inc. The Company issued $228,000,000 aggregate principal amount of its 9.25% Senior Secured Notes due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a yield to March 1, 2015, of 10%. On November 14, 2008, the SEC declared the Company’s registration statement to be effective. The Senior Secured Notes rank pari passu with the Credit Facility.

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

	Senior Secured Notes
	%
2011		106.938
2012		104.625
2013		102.213
2014 and thereafter		100.000

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

The Company also obtained a Credit Facility for a total amount of $290,000,000 composed of term loans totaling $175,000,000 and of a revolving credit facility of $115,000,000 (“Credit Facility”). The Credit Facility bears interest at a variable rate composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014, with payments on the term loans beginning in fiscal year 2008. As at June 30, 2009, $175,000,000 of term loans had been issued and no amounts had been drawn against the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of 8.75% before the effect of the interest rate swaps as disclosed in Note 15. The Credit Facility requires the Company to meet certain financial covenants, which were met as at June 30, 2009. The credit agreement governing the Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of their events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit Facility, (2) commencing with the fiscal year ending September 30, 2009, 50% (which percentage will be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Credit Facility), and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestment rights and certain other exceptions.

16

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

10. Long-Term Debt (continued)

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

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

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

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

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

	$
2010		13,125
2011		14,219
2012		18,594
2013		41,563
2014		75,469
Thereafter		462,975
		625,945
Unamortized original issuance discount		9,912
		616,033

17

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

11. Financial Information in the Consolidated Operations

a) Financial expenses

	Successor								Predecessor
	For the three-month period ended June 30, 2009		For the three-month period ended June 30, 2008		For the nine-month period ended June 30, 2009		For the four-month period ended June 30, 2008		For the five-month period ended February 25, 2008
	$		$		$		$		$
Interest on long-term debt (including amortization of original issuance discount of ($515, $475, $1,542 and $635)		15,006		14,803		46,921		20,733		14
Interest and bank charges		72		109		562		131		76
Interest rate swaps		239		-		1,212		-		-
Financing fees		163		150		537		297		172
Amortization of deferred debt issue expenses		1,243		1,860		3,723		2,961		-
		16,723		16,922		52,955		24,122		262

b) Other information

	Successor								Predecessor
	For the three-month period ended June 30, 2009		For the three-month period ended June 30, 2008		For the nine-month period ended June 30, 2009		For the four-month period ended June 30, 2008		For the five-month period ended February 25, 2008
	$		$		$		$		$
Rental expenses		794		830		2,112		1,159		1,052
Shipping and handling expenses		1,626		1,491		5,747		2,127		2,263
Advertizing expenses		2,663		4,010		11,425		5,633		4,628
Depreciation of property, plant and equipment		1,517		1,717		4,481		2,273		2,526
Amortization of intangible assets		13,319		14,829		39,307		19,351		7,069
Stock-based compensation expense		1,494		5,539		5,455		5,539		10,046
Transaction and integration costs		599		2,901		2,536		8,980		26,489

c) Employee benefit plan

A subsidiary of the Company has a defined contribution plan (the “Plan”) for its U.S. employees. Participation is available to substantially all U.S. employees. Employees may contribute up to 15% of their gross pay or up to limits set by the U.S. Internal Revenue Service. The Company may make matching contributions of a discretionary percentage. The Company charged to operations contributions to the plan totaling $155,000 for the three-month period and $406,000 for the nine-month period ended June 30, 2009 ($132,000 for the three-month period ended June 30, 2008, $153,000 for the four-month period ended June 30, 2008, and $218,000 for the five-month period ended February 25, 2008).

18

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

12. Uncertain Tax Positions

Effective October 1, 2007, the Predecessor adopted the provisions of FASB Interpretation (“FIN”) No. 48. “Accounting for Uncertainty in income taxes, an interpretation of FASB Statement No.109”. Fin No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of the provisions of FIN No. 48 did not have a material impact on the Company’s consolidated financial position and results of operations, and a cumulative effect adjustment to the opening balance of retained earnings was not necessary. As at September 30, 2008, the Company had unrecognized tax benefits of $10,446,000 of which $9,666,000 would be treated as a reduction of goodwill if subsequently recognized. As at June 30, 2009, the Company had unrecognized tax benefits of $9,711,000 of which $9,190,000 would be treated as a reduction of goodwill and $521,000 would favorably impact the Company’s effective tax rate if subsequently recognized.

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

	Successor									Predecessor
	For the three-month period ended June 30, 2009		For the three-month period ended June 30, 2008		For the nine-month period ended June 30, 2009			For the four-month period ended June 30, 2008		For the five-month period ended February 25, 2008
	$		$		$			$		$
Balance, beginning of period		8,973		2,015		10,446			2,015		1,245
Additions based on tax positions related to the current year		15		-		23			-		-
Additions for tax positions of prior years		723		34		1,117			34		1,110
Reductions for tax positions of prior years		-		-		(1,875	)		-		(340	)
Balance, end of period		9,711		2,049		9,711			2,049		2,015

The Company has historically recognized interest relating to income tax matters as a component of financial expenses and penalties related to income tax matters as a component of income tax expense. As at September 30, 2008, the Company had accrued $428,000 for interest relating to income tax matters. As at June 30, 2009, the Company had accrued $521,000 for interest relating to income tax matters.

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 2006 through 2008. The Company is subject to Canadian and provincial income tax examination for fiscal years 2003 through 2008. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant.

The Company and its U.S. subsidiaries file a U.S. consolidated tax return, of which Axcan Holdings Inc. is the parent, under a proposed tax allocation agreement, which will be executed for the fiscal year ending September 30, 2009. Axcan Holdings Inc. allocated income tax expenses or credits based upon the pro rata contribution of taxable income or losses, which generally results in reporting income taxes as though the Company filed a separate tax return.

19

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

13. 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 parent company will grant options to selected employees and directors of the Company. The MEIP Plan provides that a maximum of 3,833,307 shares of common stock of the 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 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 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 will be expensed over the requisite service period, the performance-based options will not be expensed until the occurrence of the liquidity event.

Special equity grant

In April 2008, the 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 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 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 is based on the fair value of the shares on the date the award is settled. The RSUs and Penny Options expire no later than four years and ten years from the date of grant. One third of the granted RSUs and Penny Options vested immediately on date of grant and the remainder shall vest in equal portions on August 25, 2009 and 2010.

The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the parent company. The RSUs and Penny Options entitle the holders to receive common shares of the parent company at the end of a vesting period. The total number of RSUs and Penny Options granted were 1,343,348 with an initial fair value of $10 each, equal to the share price at the date of grant. As at June 30, 2009, there were 1,295,197 outstanding RSUs and Penny Options (1,309,909 as at September 30, 2008) of which 436,659 (436,636 as at September 30, 2008) were vested.

Annual grant

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

The awards granted under this LTIP are classified as liabilities in accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity”, since the award is for a fixed amount of value that can be settled, at the option of the participant, in (i) cash, or (ii) a variable number of parent company common stock of equivalent value.

The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event was probable at the balance sheet date, the value of the award to be expensed by the Company would range between $2,852,000 and $3,422,000 depending on the level of return expected to be realized by the majority shareholders.

20

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

14. 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 15, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.

Currency risk

The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk. As of June 30, 2009, the financial assets totaling $195,085,000 ($98,872,000 as of September 30, 2008) include cash and cash equivalents and accounts receivable for CAN$4,092,000 and 19,358,000 Euros respectively (CAN$687,000 and 16,721,000 Euros as of September 30, 2008). As of June 30, 2009, the financial liabilities totaling $710,263,000 ($700,851,000 as of September 30, 2008) include accounts payable and accrued liabilities and long-term debt of CAN$10,588,000 and 7,915,000 Euros respectively (CAN$13,419,000 and 8,199,000 Euros as of September 30, 2008).

Fair value of the financial instruments on the balance sheet

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

	Successor				Successor
	June 30, 2009				September 30, 2008
	Fair value		Carrying amount		Fair value		Carrying amount
Assets
Cash and cash equivalents		139,801		139,801		56,105		56,105
Accounts receivable from the parent company		300		300		987		987
Accounts receivable, net		54,984		54,984		41,780		41,780
Liabilities
Accounts payable and accrued liabilities		94,230		94,230		78,667		78,667
Long-term debt		624,807		616,033		614,862		622,184

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

a) Financial instruments valued at carrying amount

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

b) Long-term debt

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

15. Derivates and Hedging Activities

Risk management objective of using derivatives

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

21

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

15. Derivates and Hedging Activities (continued)

Cash flow hedges of interest rate risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During the three and nine-month periods ended June 30, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

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

Effective March 3, 2008, the Company entered into two pay-fixed, receive-floating interest rate swap agreements, effectively converting $115,000,000 of variable-rate debt under its secured senior credit facilities to fixed-rate debt. Through the first two quarters of 2008, the Company’s two interest rate swaps were designated as effective hedges of cash flows as defined by SFAS 133. For the quarter ended September 30, 2008, due to the increased volatility in short-term interest rates, and a realignment of the Company’s LIBOR rate election on our debt capital repayment schedule, hedge accounting was discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge accounting under SFAS 133. On December 1, 2008, the Company redesignated its $50,000,000 notional interest rate swap that matures in February 2010 anew as a cash flow hedge using an improved method of assessing the effectiveness of the hedging relationship. The Company’s $65,000,000 notional interest rate swap matured in February 2009. Effective March 2009, the Company entered into a pay-fixed, receive-floating interest rate swap of a notional amount of $52,000,000 amortizing to $13,000,000 through February 2010. As of June 30, 2009, the Company had two interest rate swaps with a combined $102,000,000 notional that were designated as cash flow hedges of interest rate risk. The weighted average fixed interest rate on these swaps was 1.91%.

Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the twelve month ending June 30, 2010, the Company estimates that an additional $152,000 of amounts presently classified in Accumulated Other Comprehensive Income will be reclassified as an increase to interest expense.

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

Tabular disclosure of fair values of derivative instruments

	Liability Derivatives As of June 30, 2009
	Balance sheet location	Fair value
Derivatives designated as hedging instruments under SFAS 133		$
Interest rate swaps	Other long-term liabilities		859
Total derivatives designated as hedging instruments under SFAS 133			859

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Operations as of June 30, 2009.

Tabular disclosure of the effect of derivative instruments for the three-month and nine-month periods ended June 30, 2009

Interest rate swaps in cash flow hedging relationships under SFAS 133	Location in the Financial Statements		For the three-month period ended June 30, 2009			For the nine-month period ended June 30, 2009
Loss recognized in OCI on derivative (effective portion), net of tax of $114 and $181		OCI		($212	)		($521	)
Gain (loss) reclassified from accumulated OCI into income (effective portion)	Financial expenses			($239	)		($180	)
Gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Financial expenses			-			-
Interest rate swaps not designated as hedging instruments under SFAS 133
Loss recognized in income on derivative	Financial expenses			-			($1,032	)

22

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

16. Fair Value Measurements

Effective October 1, 2008, the Company adopted the provisions of SFAS No. 157. SFAS No. 157 defines fair value 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. SFAS No. 157 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. SFAS No. 157 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 June 30, 2009 are summarized below:

							Successor
	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 June 30, 2009
	$		$		$		$
Liabilities
Derivative financial instruments		-		859		-		859

Derivative financial instruments consist of interest rate swap agreements as more fully described in Note 15, and are measured at fair value based on observable market interest rate curves as of the measurement date.

17. Related Party Transactions

As at June 30, 2009 and September 30, 2008, the Company had a note receivable from its parent company amounting to $133,154,000. During the three-month period ended June 30, 2009, the Company has earned interest income amounting to $1,952,000, net of taxes amounting to $1,052,000 and, for the nine-month period ended June 30, 2009, the Company has earned interest income amounting to $5,858,000 net of taxes amounting to $3,155,000 ($1,947,000 net of taxes amounting to $1,049,000 during the three-month period ended June 30, 2008 and $2,717,000 net of taxes amounting to $1,464,000 during the four-month period ended June 30, 2008)  and related interest receivable from the parent company amounting to $12,042,000 as at June 30, 2009 ($3,029,000 as at September 30, 2008) which have been recorded in the shareholder’s equity section of the consolidated balance sheet. As at June 30, 2009, the Company also recorded an account receivable from the parent company amounting $300,000 ($987,000 as at September 30, 2008).

During the three-month period ended June 30, 2009, the Company recorded fees from a controlling shareholding company amounting to $4,756,000, accounted for as management fees, and, for the nine-month period ended June 30, 2009, the Company recorded fees from a controlling shareholding company amounting to $4,899,000 accounted for as management fees. The Company recorded fees paid to a controlling shareholding company amounting to $13,000 accounted for as selling and administrative expense for the three-month period ended June 30, 2008 and recorded fees amounting to $12,876,000, of which $4,785,000 was accounted for as debt issue expenses, $6,128,000 as transaction costs and $1,963,000 was expensed and included in selling and administrative expenses during the four-month period ended June 30, 2008. As at June 30, 2009, the Company had on its balance sheet, accrued fees payable to a controlling shareholding company amounting to $1,145,000.

23

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information

As of June 30, 2009, the Company had outstanding $228,000,000 aggregate principal amount of the Senior Secured Notes. The Secured Notes are fully and unconditionally guaranteed, jointly and severally by certain of the Company’s wholly-owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors and non-guarantors as at June 30, 2009 (Successor) and September 30, 2008 (Successor), the condensed consolidating statements of operations for the three-month and the nine-month periods ended June 30, 2009 (Successor) and the three-month and the four-month periods ended June 30, 2008 (Successor) and the five-month period ended February 25, 2008 (Predecessor) and the condensed consolidating statement of cash flows for the nine-month period ended June 30, 2009 (Successor) and the four-month period ended June 30, 2008 (Successor) and the five-month period ended February 25, 2008 (Predecessor).

Condensed Consolidating Balance Sheet as of June 30, 2009 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		1,255			57,474			81,072			-			139,801
Accounts receivable, net		-			43,204			12,790			(31	)		55,963
Accounts receivable from the parent company		42,796			6,620			14,618			(63,734	)		300
Income taxes receivable		1,972			(8	)		16			-			1,980
Inventories		-			37,972			6,796			(139	)		44,629
Prepaid expenses and deposits		-			1,826			514			-			2,340
Deferred income taxes		1,045			20,993			386			-			22,424
Total current assets		47,068			168,081			116,192			(63,904	)		267,437
Property, plant and equipment, net		-			26,653			8,912			-			35,565
Intangible assets, net		-			360,721			72,122			-			432,843
Investments in subsidiaries		(227,792	)		787,104			-			(559,312	)		-
Intercompany advances		884,758			137,497			664,383			(1,686,638	)		-
Goodwill		-			153,286			12,013			-			165,299
Deferred debt issue expense, net		24,459			2,197			-			-			26,656
Deferred income taxes		800			3,169			6,544			-			10,513
Total assets		729,293			1,638,708			880,166			(2,309,854	)		938,313
Liabilities
Current liabilities
Accounts payable and accrued liabilities		18,473			65,060			10,697			-			94,230
Income taxes payable		4,627			1,436			3,288			-			9,351
Installments on long-term debt		5,530			7,595			-			-			13,125
Short-term portion of intercompany advances		4,907			57,267			1,553			(63,727	)		-
Deferred income taxes		1,045			419			(700	)		-			764
Total current liabilities		34,582			131,777			14,838			(63,727	)		117,470
Long-term debt		519,217			83,691			-			-			602,908
Intercompany advances		30,907			1,559,750			95,981			(1,686,638	)		-
Other long-term liabilities		368			8,484			-			-			8,852
Deferred income taxes		(23,205	)		68,188			(3,324	)		-			41,659
Total liabilities		561,869			1,851,890			107,495			(1,750,365	)		770,889
Shareholders’ equity
Capital stock
Common shares		1			21,022			745,399			(766,421	)		1
Retained earnings (deficit)		(288,930	)		(233,415	)		52,004			181,411			(288,930	)
9.05% Note receivable from the parent company		(133,154	)		-			-			-			(133,154	)
Additional paid-in capital		619,407			12,883			563			(13,446	)		619,407
Accumulated other comprehensive loss		(29,900	)		(13,672	)		(25,295	)		38,967			(29,900	)
Total shareholder’s equity		167,424			(213,182	)		772,671			(559,489	)		167,424
Total liabilities and shareholders’ equity		729,293			1,638,708			880,166			(2,309,854	)		938,313

24

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information (continued)

Condensed Consolidating Balance Sheet as of September 30, 2008 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		21			26,181			29,903			-			56,105
Accounts receivable, net		-			29,613			12,900			-			42,513
Accounts receivable from the parent company		5,803			29,712			30,305			(64,833	)		987
Income taxes receivable		-			15,841			1,902			-			17,743
Inventories		-			30,376			7,433			(138	)		37,671
Prepaid expenses and deposits		-			2,679			668			-			3,347
Deferred income taxes		-			18,258			336			20			18,614
Total current assets		5,824			152,660			83,447			(64,951	)		176,980
Property, plant and equipment, net		-			25,097			9,578			-			34,675
Intangible assets, net		-			434,403			93,973			-			528,376
Investments in subsidiaries		(247,787	)		863,676			-			(615,889	)		-
Intercompany advances		898,816			32,878			671,702			(1,603,396	)		-
Goodwill		-			152,948			12,066			-			165,014
Other long-term assets		192			257			-			-			449
Deferred debt issue expense, net		26,714			3,664			-			-			30,378
Deferred income taxes		21,716			(22,652	)		9,876			-			8,940
Total assets		705,475			1,642,931			880,642			(2,284,236	)		944,812
Liabilities
Current liabilities
Accounts payable and accrued liabilities		7,188			118,273			18,828			(65,622	)		78,667
Income taxes payable		318			6,345			990			-			7,653
Installments on long-term debt		4,609			6,329			-			-			10,938
Deferred income taxes		-			1,611			431			-			2,042
Total current liabilities		12,115			132,558			20,249			(65,622	)		99,300
Long-term debt		522,384			88,862			-			-			611,246
Intercompany advances		-			1,590,988			12,408			(1,603,396	)		-
Other long-term liabilities		-			1,242			-			-			1,242
Deferred income taxes		5,306			60,389			1,659			-			67,354
Total liabilities		539,805			1,874,039			34,316			(1,669,018	)		779,142
Shareholders’ equity
Capital stock
Common shares		1			98,459			875,682			(974,141	)		1
Retained earnings (deficit)		(289,264	)		(248,703	)		2,533			246,170			(289,264	)
9.05% Note receivable from the parent company		(133,154	)		-			-			-			(133,154	)
Additional paid-in capital		617,255			1,975			297			(2,272	)		617,255
Accumulated other comprehensive loss		(29,168	)		(82,839	)		(32,186	)		115,025			(29,168	)
Total shareholder’s equity		165,670			(231,108	)		846,326			(615,218	)		165,670
Total liabilities and shareholders’ equity		705,475			1,642,931			880,642			(2,284,236	)		944,812

25

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information (continued)

Condensed Consolidating Operations for the three-month period ended June 30, 2009 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		-			88,836			12,391			(421	)		100,806
Other revenue		-			-			5,221			-			5,221
Total revenue		-			88,836			17,612			(421	)		106,027
Cost of goods sold		-			17,514			4,834			(255	)		22,093
Selling and administrative expenses		4,882			18,673			5,147			(129	)		28,573
Management fees		4,756			-			-			-			4,756
Research and development expenses		-			9,683			1,329			(311	)		10,701
Depreciation and amortization		-			13,412			1,424			-			14,836
Partial write-down of intangible assets		-			55,414			251			-			55,665
Total operating expenses		9,638			114,696			12,985			(695	)		136,624
Operating income (loss)		(9,638	)		(25,860	)		4,627			274			(30,597	)
Financial expenses		15,148			29,015			(2,045	)		(25,395	)		16,723
Interest expense (income)		(13,161	)		2,059			(14,311	)		25,395			(18	)
Other income		-			(3,500	)		-			-			(3,500	)
Loss (gain) on foreign currency		-			(680	)		(186	)		-			(866	)
Total other expenses (income)		1,987			26,894			(16,542	)		-			12,339
Income (loss) before income taxes		(11,625	)		(52,754	)		21,169			274			(42,936	)
Income taxes expense (benefit)		1,854			(24,467	)		1,085			-			(21,528	)
Equity in earnings (loss) of subsidiaries		(8,203	)		20,084			-			(11,881	)		-
Net income (loss)		(21,682	)		(8,203	)		20,084			(11,607	)		(21,408	)

Condensed Consolidating Operations for the three-month period ended June 30, 2008 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Revenue		-			79,615			23,541			(6,667	)		96,489
Cost of goods sold		-			35,107			9,212			(6,221	)		38,098
Selling and administrative expenses		821			28,543			8,615			(24	)		37,955
Research and development expenses		-			6,065			236			(11	)		6,290
Depreciation and amortization		-			10,708			5,838			-			16,546
Total operating expenses		821			80,423			23,901			(6,256	)		98,889
Operating loss		(821	)		(808	)		(360	)		(411	)		(2,400	)
Financial expenses		15,358			44,809			26			(43,271	)		16,922
Interest income		(14,443	)		(11,930	)		(17,196	)		43,271			(298	)
Loss (gain) on foreign currency		(4,009	)		9,899			(5,941	)		-			(51	)
Total other expenses (income)		(3,094	)		42,778			(23,111	)		-			16,573
Income (loss) before income taxes		2,273			(43,586	)		22,751			(411	)		(18,973	)
Income taxes expense (benefit)		3,702			(12,437	)		(1,502	)		(125	)		(10,362	)
Equity in earnings (loss) of subsidiaries		(7,182	)		23,967			-			(16,785	)		-
Net income (loss)		(8,611	)		(7,182	)		24,253			(17,071	)		(8,611	)

26

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information (continued)

Condensed Consolidating Operations for the nine-month period ended June 30, 2009 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		-			284,110			45,493			(4,058	)		325,545
Other revenue		-			-			5,221			-			05,221
Total revenue		-			284,110			50,714			(4,058	)		330,766
Cost of goods sold		-			59,131			18,290			(471	)		76,950
Selling and administrative expenses		6,741			65,953			19,872			(129	)		92,437
Management fees		4,899			-			-			-			4,899
Research and development expenses		-			25,748			1,403			(311	)		26,840
Depreciation and amortization		-			37,954			5,834			-			43,788
Partial write-down of intangible assets		-			55,414			251			-			55,665
Total operating expenses		11,640			244,200			45,650			(911	)		300,579
Operating income (loss)		(11,640	)		39,910			5,064			(3,147	)		30,187
Financial expenses		46,913			89,292			49			(83,299	)		52,955
Interest income		(40,406	)		(174	)		(42,996	)		83,299			(277	)
Other income		-			(3,500	)		-			-			(3,500	)
Loss (gain) on foreign currency		-			(1,003	)		(118	)		-			(1,121	)
Total other expenses (income)		6,507			84,615			(43,065	)		-			48,057
Income (loss) before income taxes		(18,147	)		(44,705	)		48,129			(3,147	)		(17,870	)
Income taxes benefit		(6,840	)		(10,522	)		(1,342	)		-			(18,704	)
Equity in earnings (loss) of subsidiaries		15,288			49,471			-			(64,759	)		-
Net income		3,981			15,288			49,471			(67,906	)		834

Condensed Consolidating Operations for the four-month period ended June 30, 2008 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Revenue		-			103,622			31,146			(8,067	)		126,701
Cost of goods sold		-			48,336			12,659			(7,648	)		53,347
Selling and administrative expenses		6,004			36,940			10,690			28			53,662
Research and development expenses		-			8,410			411			(25	)		8,796
Acquired in-process research		-			272,400			-			-			272,400
Depreciation and amortization		-			14,205			7,419			-			21,624
Total operating expenses		6,004			380,291			31,179			(7,645	)		409,829
Operating loss		(6,004	)		(276,669	)		(33	)		(422	)		(283,128	)
Financial expenses		21,262			46,810			35			(43,985	)		24,122
Interest income		(20,080	)		(296	)		(24,052	)		43,985			(443	)
Loss (gain) on foreign currency		(7,935	)		(6,751	)		14.223			-			(463	)
Total other expenses (income)		(6,753	)		39,763			(9,794	)		-			23,216
Income (loss) before income taxes		749			(316,432	)		9,761			(422	)		(306,344	)
Income taxes expense (benefit)		5,032			(17,031	)		(1,694	)		(158	)		(13,851	)
Equity in earnings (loss) of subsidiaries		(288,210	)		11,191			-			277,019			-
Net income (loss)		(292,493	)		(288,210	)		11,455			276,755			(292,493	)

27

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information (continued)

Condensed Consolidating Operations for the five-month period ended February 25, 2008 (Predecessor)

	Axcan Intermediate Holdings Inc.		Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$		$			$			$			$
Revenue		-		129,669			38,142			(9,232	)		158,579
Cost of goods sold		-		37,346			10,869			(9,476	)		38,739
Selling and administrative expenses		-		65,595			10,581			22			76,198
Research and development expenses		-		7,826			2,452			(22	)		10,256
Depreciation and amortization		-		2,952			6,643			-			9,595
Total operating expenses		-		113,719			30,545			(9,476	)		134,788
Operating income		-		15,950			7,597			244			23,791
Financial expenses		-		3,238			41			(3,017	)		262
Interest income		-		(5,096	)		(3,361	)		3,017			(5,440	)
Loss (gain) on foreign currency		-		8,267			76			(8,541	)		(198	)
Total other expenses (income)		-		6,409			(3,244	)		(8,541	)		(5,376	)
Income before income taxes		-		9,541			10,841			8,785			29,167
Income taxes		-		11,682			297			63			12,042
Equity in earnings of subsidiaries		-		19,266			-			(19,266	)		-
Net income		-		17,125			10,544			(10,544	)		17,125

Condensed Consolidating Cash Flows for the nine-month period ended June 30, 2009 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Operating activities
Cash flows from operating activities		(41,968	)		178,634			(38,745	)		-			97,921
Investing activities
Acquisition of property, plant and equipment		-			(4,724	)		(658	)		-			(5,382	)
Acquisition of intangible assets		-			-			(10	)		-			(10	)
Intercompany advances		14,054			(104,618	)		7,319			83,245			-
Cash flows from investing activities		14,054			(109,342	)		6,651			83,245			(5,392	)
Financing activities														-
Repayment of long-term debt		(1,111	)		(6,545	)		-			-			(7,656	)
Stock-based compensation cancellation		(148	)		-			-			-			(148	)
Intercompany advances		30,907			(31,236	)		83,574			(83,245	)		-
Dividends paid		(500	)		-			-			-			(500	)
Cash flows from the financing activities		29,148			(37,781	)		83,574			(83,245	)		(8,304	)
Foreign exchange loss on cash held in foreign currency		-			(218	)		(311	)		-			(529	)
Net increase in cash and cash equivalents		1,234			31,293			51,169			-			83,696
Cash and cash equivalents, beginning of period		21			26,181			29,903			-			56,105
Cash and cash equivalents, end of period		1,255			57,474			81,072			-			139,801

28

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information (continued)

Condensed Consolidating Cash Flows for the four-month period ended June 30, 2008 (Successor)

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Operating activities
Cash flows from operating activities		(22,900	)		(60,996	)		34,961			-			(48,935	)
Investing activities
Acquisition of property, plant and equipment		-			(1,297	)		(520	)		-			(1,817	)
Acquisition of intangible assets		-			-			(28	)		-			(28	)
Intercompany advances		(946,283	)		(36,664	)		(671,589	)		1,654,536			-
Investments in subsidiaries		(21,020	)		(663,674	)		-			684,694			-
Net cash used for the acquisition		-			(958,463	)		-			-			(958,463	)
Cash flows from investing activities		(967,303	)		(1,660,098	)		(672,137	)		2,339,230			(960,308	)
Financing activities
Issuance of long-term debt		538,120			96,000			-			-			634,120
Repayment of long-term debt		(8,270	)		(83	)		(102	)		-			(8,455	)
Deferred debt issue expenses		(33,921	)		(2,439	)		-			-			(36,360	)
Intercompany advances		16,146			692,107			-			(708,253	)		-
Advances from the parent company		3,975			946,283			-			(946,283	)		3,975
Issue of shares		475,001			21,020			663,674			(684,694	)		475,001
Cash flows from the financing activities		991,051			1,752,888			663,572			(2,339,230	)		1,068,281
Foreign exchange gain (loss) on cash held in foreign currency		-			(11	)		446			-			435
Net increase in cash and cash equivalents		848			31,783			26,842			-			59,473
Cash and cash equivalents, beginning of period		-			-			-			-			-
Cash and cash equivalents, end of period		848			31,783			26,842			-			59,473

29

AXCAN INTERMEDIATE HOLDINGS INC.

Notes to Consolidated Financial Statements

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

(unaudited)

18. Condensed Consolidating Financial Information (continued)

Condensed Consolidating Cash flows for the five-month period ended February 25, 2008 (Predecessor)

	Axcan Intermediate Holdings Inc.		Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$		$			$			$			$
Operating activities
Cash flows from operating activities		-		77,714			(4,469	)		-			73,245
Investing activities
Disposal of short-term investments		-		129,958			-			-			129,958
Acquisition of property, plant and equipment		-		(3,063	)		(251	)		-			(3,314	)
Acquisition of intangible assets		-		-			(14	)		-			(14	)
Intercompany advances		-		4,500			-			(4,500	)		-
Cash flows from investing activities		-		131,395			(265	)		(4,500	)		126,630
Financing activities
Repayment of long-term debt		-		(101	)		(120	)		-			(221	)
Deferred debt issue expenses		-		(889	)		-			-			(889	)
Intercompany advances		-		-			(4,500	)		4,500			-
Stock-based compensation plans cancellation		-		(29,219	)		(1,138	)		-			(30,357	)
Issue of shares		-		224			-			-			224
Cash flows from the financing activities		-		(29,985	)		(5,758	)		4,500			(31,243	)
Foreign exchange gain on cash held in foreign currency		-		64			423			-			487
Net increase in cash and cash equivalents		-		179,188			(10,069	)		-			169,119
Cash and cash equivalents, beginning of period		-		150,856			28,816			-			179,672
Cash and cash equivalents, end of period		-		330,044			18,747			-			348,791

19. Subsequent Event

On August 14, 2009, AGI Therapeutics plc (“AGI”) and Axcan announced that their co-development/co-fund and licensing agreement for AGI-010 has been terminated by mutual agreement. As a consequence, AGI regained full control of AGI-010 and neither party has any outstanding or future obligations to the other.

30

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

You should read the following discussion in conjunction with the Consolidated Financial Statements and the related notes that appear in Part I, Item 1 of this Quarterly Report. The results of operations for the three-month and nine-month periods ended June 30, 2009 and for the three-month and four-month periods ended June 30, 2008 reflect the results of operations for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries (the Successor) and the results of operations for the five-month period ended February 25, 2008 reflect the results of operations for Axcan Pharma Inc. and its consolidated subsidiaries (the Predecessor).

Unless the context otherwise requires, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the terms "Axcan",”Axcan Pharma Inc.”, "Company", "we", "us" and "our" refer (i) for the  period prior to the consummation of the February 2008 Transactions (as defined in this section), to Axcan Pharma Inc. and its consolidated subsidiaries and (ii) for periods following the consummation of the February 2008 Transactions, to Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

OVERVIEW

Our business

We are a leading specialty pharmaceutical company concentrating in the field of gastroenterology, with operations mainly in the United Sates, Canada and the European Union. We market and sell pharmaceutical products used in the treatment of a variety of gastrointestinal diseases and disorders. Our main product lines include ULTRASE, PANZYTRAT and VIOKASE, which are pancreatic enzyme products for the treatment of exocrine pancreatic insufficiency; URSO / URSO 250, URSO FORTE / URSO DS, and DELURSAN, which are ursodiol products for the treatment of certain cholestatic liver diseases; SALOFALK and CANASA, which are mesalamine-based products for the treatment of certain inflammatory bowel diseases; CARAFATE and SULCRATE, which are sucralfate products for the treatment of gastric and duodenal ulcers; and PYLERA, a product for the eradication of Helicobacter pylori in patients with duodenal ulcer disease. We also have a number of projects in all phases of clinical development.

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

Business environment

Our revenue in the U.S. and Canada has historically been and continues to be principally derived from sales of pharmaceutical products to large pharmaceutical wholesalers and large pharmacy chains. We utilize a “pull-through” marketing approach that is typical for pharmaceutical companies. Our sales representatives demonstrate the features and benefits of our products to gastroenterologists and other targeted physicians, who may write their patients prescriptions for our products. The patients, in turn, take the prescriptions to pharmacies to be filled. The pharmacies then place orders with the wholesalers or, in the case of large pharmacy chains, their distribution centres, to which we sell our products. Our revenue in the EU and other markets has historically been and continues to be principally derived from sales of pharmaceutical products to institutional buyers and pharmacies through a network of distributors. The level of patient and physician acceptance of our products, as well as the availability of similar therapies, which may be less effective but also less expensive than some of our products, impact our revenues by driving the level and timing of prescriptions for our products. Our operating revenues are also affected by other factors, including our ability to convince healthcare practitioners to use our products for approved indications and wholesaler buying patterns.

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

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

The transactions

The February 2008 Transactions

On November 29, 2007, we entered into an Arrangement Agreement with Axcan Pharma Inc. (“Axcan Pharma”), pursuant to which we agreed to, through an indirect wholly-owned subsidiary, acquire all of the common stock of Axcan Pharma and enter into various other transactions in accordance with the Plan of Arrangement (the “Arrangement” or “Acquisition”).

At a special meeting of Axcan Pharma’s shareholders on January 25, 2008, the holders of more than 99% of Axcan Pharma’s outstanding common stock voted on a special resolution to approve the Arrangement.

On January 28, 2008, the Superior Court of Quebec issued a final order approving the Arrangement. The Arrangement closed on February 25, 2008 and at such time, each outstanding share of Axcan Pharma common stock was transferred to us in exchange for a payment of $23.35 per share, or the offer price, without interest and less any required withholding taxes. In addition, all granted and outstanding options to purchase common stock of Axcan Pharma, other than those options held by us or any of our affiliates, were vested, transferred by the holder of such option to Axcan Pharma and cancelled in exchange for an amount in cash equal to the excess, if any, of the offer price over the applicable option exercise price for each share of common stock subject to such option, less any required withholding taxes and all vested and unvested deferred stock units, or DSUs, and restricted stock units, or RSUs, issued under any and all of Axcan Pharma’s existing stock option plans were, without any further action by the holders thereof, vested, cancelled and terminated. The holders of such DSUs and RSUs received the offer price, less any required withholding taxes, for each DSU and RSU formerly held.

31

The Arrangement was financed through the proceeds from the initial offering of our secured notes, initial borrowings under our new senior secured credit facilities and our senior unsecured bridge facility, equity investments funded by the Sponsor Funds, the Co-Investors and Axcan Pharma’s cash on hand. The closing of the offering of the secured notes, the new senior secured credit facilities and the senior unsecured bridge facility occurred substantially concurrently with the closing of the Arrangement on February 25, 2008. We refer to the Arrangement, the closing of the transaction relating to the Arrangement and our payment of any fees and expenses related to the Arrangement and such transactions collectively in this report as the “February 2008 Transactions”.

Subsequent to the February 2008 Transactions, we are an indirect wholly-owned subsidiary of Axcan Holdings Inc., or “Holdings”, and Axcan Pharma is our indirect wholly-owned subsidiary.

On May 6, 2008, we completed our offering of $235.0 million aggregate principal amount of our 12.75% senior unsecured notes due 2016, or, the senior notes. We used the net proceeds from this offering, along with our cash on hand, to repay in full our senior unsecured bridge facility. We refer to this offering of our senior notes, along with related use of proceeds, as the “Refinancing” and, collectively, with the February 2008 Transactions, as the “Transaction”.

Presentation of financial information

In this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when financial information for the nine-month period ended June 30, 2008 is presented, including the results of operations, the information presented is the mathematical combination of the relevant financial information of the Predecessor (from October 1, 2007 to February 25, 2008) and the Successor (from February 26, 2008 to June 30, 2008) for such period. This mathematical combination is presented because we believe it assists in a reader’s analysis of our fiscal year 2009 results as compared to our fiscal year 2008 results in comparable time periods. However, this approach is not consistent with U.S. GAAP and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the February 2008 Transactions and the lack of substantial debt outstanding of the Predecessor as compared to the Successor. Furthermore, this financial information may not reflect the actual financial results we would have achieved if the February 2008 Transactions had occurred prior to such period and may not be predictive of future financial results.

FINANCIAL OVERVIEW

This discussion and analysis is based on our unaudited interim financial statements as at June 30, 2009 and our audited annual consolidated financial statements as at September 30, 2008 and the related notes thereto reported under U.S. GAAP. For a description of our products, see “Business-Products” in Item 1 of Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 filed with the Securities and Exchange Commission.

For the three-month period ended June 30, 2009, total revenue was $106.1 million ($96.5 million for the corresponding period of fiscal year 2008), operating loss was $30.5 million (loss of $2.4 million for corresponding period of fiscal year 2008) and net loss was $21.4 million (loss of $8.6 million for the corresponding period of fiscal year 2008). For the nine-month period ended June 30, 2009, total revenue was $330.8 million ($285.3 million for the corresponding period of fiscal year 2008), operating income was $30.2 million (loss of $259.3 million for the corresponding period of fiscal year 2008) and net income was $0.8 million (loss of $275.4 million for the corresponding period of fiscal year 2008). Net product sales in the United States were $80.6 million (79.9% of net product sales) for the three-month period ended June 30, 2009, compared to $70.6 million (73.2% of net product sales) for the corresponding period of fiscal year 2008. In Canada, net product sales were $7.6 million (7.5% of net product sales) for the three-month period ended June 30, 2009, compared to $9.0 million (9.3% of net product sales) for the corresponding period of fiscal year 2008. In the European Union, net product sales were $12.4 million (12.3% of net product sales) for the three-month period ended June 30, 2009, compared to $16.8 million (17.4% of net product sales) for the corresponding period of fiscal year 2008. Net product sales in the United States were $258.6 million (79.4% of net product sales) for the nine-month period ended June 30, 2009, compared to $206.1 million (72.2% of net product sales) for the corresponding period of fiscal year 2008. In Canada, net product sales were $23.1 million (7.1% of net product sales) for the nine-month period ended June 30, 2009, compared to $27.2 million (9.5% of net product sales) for the corresponding period of fiscal year 2008. In the European Union,net product sales were $43.4 million (13.3% of total net product sales) for the nine-month period ended June 30, 2009, compared to $51.7 million (18.1% of net product sales) for the corresponding period of fiscal year 2008.

32

Financial highlights

(in millions of U.S. dollars)	As at June 30, 2009		As at September 30, 2008
	Successor		Successor
	$		$
Total assets		938.3		944.8
Long-term debt (a)		616.0		622.2
Shareholders’ equity		167.4		165.7

(a) Including the current portion

(in millions of U.S. dollars)	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008
	Successor			Successor
	$			$
Revenue		106.1			96.5
EBITDA (a)		(11.4	)		14.1
Adjusted EBITDA (a)		55.6			38.3
Net loss		(21.4	)		(8.6	)

(in millions of U.S. dollars)	For the nine-month period ended June 30, 2009		For the nine-month period ended June 30, 2008			For the four-month period ended June 30, 2008			For the five-month period ended February 25, 2008
	Successor		Combined Predecessor/ Successor			Successor			Predecessor
	$		$			$			$
Revenue		330.8		285.3			126.7			158.6
EBITDA (a)		78.6		(227.5	)		(261.1	)		33.6
Adjusted EBITDA (a)		151.6		119.3			49.2			70.1
Net income (loss)		0.8		(275.4	)		(292.5	)		17.1

(a) A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA to Adjusted EBITDA (a non-U.S. GAAP measure) for the three-month and nine-month periods ended June 30, 2009 and 2008 are as follows:

(in millions of U.S. dollars)	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008
	Successor			Successor
	$			$
Net loss		(21.4	)		(8.6	)
Financial expenses		16.7			16.9
Interest income		-			(0.3	)
Depreciation and amortization		14.8			16.5
Income taxes benefit		(21.5	)		(10.4	)
EBITDA		(11.4	)		14.1
Transaction, integration, refinancing costs and nonrecurring payments to third parties a)		5.0			3.5
Management fees b)		4.7			-
Stock-based compensation expense c)		1.6			5.6
Inventory stepped-up value expensed		-			15.1
Partial write-down of intangible assets d)		55.7			-
Adjusted EBITDA e)		55.6			38.3

33

(in millions of U.S. dollars)	For the nine-month period ended June 30, 2009			For the nine-month period ended June 30, 2008			For the four-month period ended June 30, 2008			For the five-month period ended February 25, 2008
	Successor			Combined Predecessor/ Successor			Successor			Predecessor
	$			$			$			$
Net income (loss)		0.8			(275.4	)		(292.5	)		17.1
Financial expenses		53.0			24.4			24.1			0.3
Interest income		(0.3	)		(5.8	)		(0.4	)		(5.4	)
Depreciation and amortization		43.8			31.2			21.6			9.6
Income tax expense (benefit)		(18.7	)		(1.9	)		(13.9	)		12.0
EBITDA		78.6			(227.5	)		(261.1	)		33.6
Transaction, integration, refinancing costs and nonrecurring payments to third parties a)		6.9			36.1			9.6			26.5
Management  fees b)		4.9			-			-			-
Stock-based compensation expense c)		5.5			15.6			5.6			10.0
Acquired in-process research		-			272.4			272.4			-
Inventory stepped-up value expenses		-			22.7			22.7			-
Partial write-down of intangible assets d)		55.7			-			-			-
Adjusted EBITDA e)		151.6			119.3			49.2			70.1

a) Represents investment banking and other professional fees associated with the February 2008 Transactions, as well as integration and refinancing costs. It also includes costs related to non recurring transactions and payments to third parties in respect of research and development milestones and other progress payments as defined within our credit agreement.

b) Represents management fees and other charges associated with the Management Services Agreement with TPG further described in the “Related party transactions section” below. As of June 30, 2009 the amount of those charges incurred since the date of the February 2008 Transactions was allocated among the subsidiaries of Axcan Holdings Inc., our indirect parent, on the basis of revenue.

c) Represents stock-based employee compensation expense under the provisions of Statement of Financial Accounting Standards, or SFAS, No.123(R), “Share-based Payments”.

d) As explained in note 8 of the Consolidated Interim Financial Statements.

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

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

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

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

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

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

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

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

34

Overview of results of operations

(in millions of U.S. dollars)	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008			Change
	Successor			Successor
	$			$			$			%
Net product sales		100.9			96.5			4.4			4.6
Other revenue		5.2			-			5.2			-
Total revenue		106.1			96.5			9.6			9.9
Cost of goods sold (a)		22.1			38.1			(16.0	)		(42.0	)
Selling and administration expenses (a)		28.6			38.0			(9.4	)		(24.7	)
Management  fees		4.7			-			4.7			-
Research and development expenses(a)		10.7			6.3			4.4			69.8
Depreciation and amortization		14.8			16.5			(1.7	)		(10.3	)
Partial write-down of intangible assets		55.7			-			55.7			-
		136.6			98.9			37.7			38.1
Operating loss		(30.5	)		(2.4	)		(28.1	)		1,170.8
Financial expenses		16.7			16.9			(0.2	)		(1.2	)
Interest income		-			(0.3	)		0.3			(100.0	)
Other income		(3.5	)		-			(3.5	)		-
Gain on foreign currency		(0.8	)		(0.1	)		(0.7	)		700.0
		12.4			16.5			(4.1	)		(24.8	)
Loss before income taxes		(42.9	)		(18.9	)		(24.0	)		127.0
Income taxes benefits		(21.5	)		(10.3	)		(11.2	)		108.7
Net loss		(21.4	)		(8.6	)		(12.8	)		148.8

(a)Exclusive of depreciation and amortization

(in millions of U.S. dollars)	For the nine-month period ended June 30, 2009			For the nine-month period ended June 30, 2008			For the four-month period ended June, 2008			For the five-month period ended February 25, 2008			Change
	Successor			Combined Predecessor/ Successor			Successor			Predecessor
	$			$			$			$			$			%
Net product sales		325.6			285.3			126.7			158.6			40.3			14.1
Other revenue		5.2			-			-			-			5.2			-
Total revenue		330.8			285.3			126.7			158.6			45.5			15.9
Cost of goods sold (a)		77.0			92.0			53.3			38.7			(15.0	)		(16.3	)
Selling and administration expenses (a)		92.4			129.9			53.7			76.2			(37.5	)		(28.9	)
Management  fees		4.9			-			-			-			4.9			-
Research and development expenses(a)		26.8			19.1			8.8			10.3			7.7			40.3
Acquired in-process research		-			272.4			272.4			-			(272.4	)		(100.0	)
Depreciation and amortization		43.8			31.2			21.6			9.6			12.6			40.4
Partial write-down of intangible assets		55.7			-			-			-			55.7			-
		300.6			544.6			409.8			134.8			(244.0	)		(44.8	)
Operating income (loss)		30.2			(259.3	)		(283.1	)		23.8			289.5			(111.6	)
Financial expenses		53.0			24.4			24.1			0.3			28.6			117.2
Interest income		(0.3	)		(5.8	)		(0.4	)		(5.4	)		5.5			(94.8	)
Other income		(3.5	)		-			-			-			(3.5	)		-
Gain on foreign currency		(1.1	)		(0.7	)		(0.5	)		(0.2	)		(0.4	)		57.1
		48.1			17.9			23.2			(5.3	)		30.2			168.7
Income (loss) before income taxes		(17.9	)		(277.2	)		(306.3	)		29.1			259.3			(93.5	)
Income taxes expenses (benefits)		(18.7	)		(1.8	)		(13.8	)		12.0			(16.9	)		938.9
Net income (loss)		0.8			(275.4	)		(292.5	)		17.1			276.2			(100.3	)

(a)Exclusive of depreciation and amortization

35

Net product sales

For the three-month period ended June 30, 2009, net product sales were $100.9 million compared to $96.5 million for the corresponding period of the preceding fiscal year, an increase of 4.6%. For the nine-month period ended June 30, 2009, net product sales were $325.6 million compared to $285.3 for the corresponding period of the preceding fiscal year, an increase of 14.1%. These increases were primarily derived from higher sales in the United States, which amounted to $80.6 million for the three-month period ended June 30, 2009, compared to $70.6 million for the corresponding period of the preceding fiscal year, an increase of 14.2% and $258.6 million for the nine-month period ended June 30, 2009 compared to $206.1 million for the corresponding period of the preceding fiscal year, an increase of 25.5%. The increase in sales in the United States is mainly due to the combined effect of price increases on our products announced in previous quarters and a change in prescription rates for these products compared to the previous year partially offset by the decrease in sale of certain of URSO branded products resulting from the recently announced entry of a generic Ursodiol on the United State’s market. On May 13, 2009, the Office of Generic Drugs approved a generic to our ursodiol tablet products. On July 2, 2009, Axcan and Prasco Laboratories announced that they had entered into an agreement under which Prasco will market and sell an authorized generic of URSO 250 and URSO FORTE in the United States. In addition, we also announced a price increase for our URSO products in the United States. Despite measures taken to defend our URSO franchise, we expect future sales to continue to decline. The remaining increase in United States sales was due to a change in the timing of wholesaler purchases.

Net product sales in the European Union decreased 26.2%, from $16.8 million for the three-month period ended June 30, 2008 to $12.4 million for the three-month period ended June 30, 2009 and decreased 16.1%, from $51.7 million for the nine-month period ended June 30, 2008 to $43.4 million for the nine-month period ended June 30, 2009. The decline in sales resulted from the negative impact of currency fluctuations compared to the corresponding period of the preceding fiscal year as the value of the Euro depreciated against the U.S. dollar by 15.5% for the three-month period ended June 30, 2009 and by 12.8% for the nine-month period ended June 30, 2009. The remaining decrease is explained by the reduction in sales volumes of certain products, particularly within export markets.

Net product sales in Canada decreased 15.6%, from $9.0 million for the three-month period ended June 30, 2008, to $7.6 million for the three-month period ended June 30, 2009 and decreased 15.1%, from $27.2 million for the nine-month period ended June 30, 2008, to $23.1 million for the nine-month period ended June 30, 2009. The decline in sales resulted from the negative impact of currency fluctuations compared to the corresponding period of the preceding fiscal year as the value of the Canadian dollar depreciated  against the U.S. dollar by 17.2% for the three-month period ended June 30, 2009 and 20.3% for the nine-month period ended June 30, 2009.

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

(in millions of U.S. dollars)	For the three-month period ended June 30, 2009		For the three-month period ended June 30, 2008		Change
	Successor		Successor
	$		$		$			%
Gross product sales		123.7		112.4		11.3			10.1
Gross-to-net product sales adjustments
Product returns		2.5		1.1		1.4			127.3
Chargebacks		8.8		5.6		3.2			57.1
Contract rebates		8.5		6.7		1.8			26.9
DSA fees		0.9		0.3		0.6			200.0
Discounts and other allowances		2.1		2.2		(0.1	)		(4.5	)
Total gross-to-net product sales adjustments		22.8		15.9		6.9			43.4
Total net product sales		100.9		96.5		4.4			4.6

(in millions of U.S. dollars)	For the nine-month period ended June 30, 2009		For the nine-month period ended June 30, 2008		Change
	Successor		Combined Predecessor/ Successor
	$		$		$		%
Gross product sales		391.6		332.6		59.0		17.7
Gross-to-net product sales adjustments
Product returns		6.7		6.4		0.3		4.7
Chargebacks		23.2		14.9		8.3		55.7
Contract rebates		26.1		18.4		7.7		41.8
DSA fees		2.9		1.4		1.5		107.1
Discounts and other allowances		7.1		6.2		0.9		14.5
Total gross-to-net product sales adjustments		66.0		47.3		18.7		39.5
Total net product sales		325.6		285.3		40.3		14.1

36

Product returns, chargebacks, contract rebates, DSA fees, discounts and other allowances totalled $22.8 million (18.4% of gross product sales) for the three-month period ended June 30, 2009, and $15.9 million (14.1% of gross product sales) for the three-month period ended June 30, 2008. The increase in total deductions as a percentage of gross product sales for the three-month period ended June 30, 2009, was primarily due to an increase of 2.1% in chargebacks and 0.9% in contract rebates. This increase in chargebacks and contract rebates is due to the fact that we have fixed price contracts with certain payers which, as a result of price increases announced during the previous quarter, result in a greater rebate as a percentage of sales being awarded under those contracts. Deductions also increased due to increases in DSA fees resulting from new DSA agreements signed with two additional U.S. wholesalers during the past quarters. Product returns, contracts rebates, DSA fees, discounts and other allowances totalled $66.0 million (16.9% of gross product sales) for the nine-month period ended June 30, 2009 and $47.3 million (14.2% of gross product sales) for the nine-month period ended June 30, 2008. The increase in total deductions as a percentage of gross product sales for the nine-month period ended June 30, 2009 was primarily due to an increase of contract rebates and chargebacks as previously discussed.

Other revenue

During the quarter, we entered into a license agreement with a leading multi-national company (the “Licensee”) whereby we granted the Licensee the right to use the active ingredient contained in one of our commercialized products, LACTEOL, to develop and commercialize new food products that will contain this active ingredient. Under the terms of the agreement, the Licensee will have exclusive rights to commercialize these new products. We will continue to own all other rights related to the active ingredient, including the right to use the active ingredient and develop, manufacture and commercialize non-food products containing the active ingredient, including pharmaceutical products. For the three-month period ended June 30, 2009, we receivedan initial milestone payment of $5.2 million (CHF 6 million).

Cost of goods sold

Cost of goods sold consists principally of the costs of raw materials, royalties and manufacturing costs. We outsource most of our manufacturing requirements. For the three-month period ended June 30, 2009, cost of goods sold decreased $16.0 million (42.0%) to $22.1 million from $38.1 million for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the three-month period ended June 30, 2009 decreased as compared to the corresponding period of the preceding fiscal year from 39.5% to 21.9%. For the nine-month period ended June 30, 2009, cost of goods sold decreased $15.0 million (16.3%) to $77.0 million from $92.0 million for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the nine-month period ended June 30, 2009 decreased as compared to the corresponding period of the preceding fiscal year from 32.3% to 23.6%. As part of the purchase price allocation for the Acquisition, the book value of inventory acquired was stepped-up to fair value by $22.7 million as of February 25, 2008. The stepped-up value was recorded in fiscal year 2008 as a charge to cost of goods sold until acquired inventory was sold. During the three-month period ended June 30 2008, $15.1 million of this stepped-up value was expensed and the total amount of $22.7 was expensed during the nine-month period ended June 30, 2008. Without this additional charge, cost of goods sold as a percentage of net productsales would have been 23.8% for the three-month period ended June 30, 2008, and 24.3% for the nine-month period ended June 30, 2008, compared to 21.9% and 23.6% for the same periods of corresponding period of fiscal year 2009.

Selling and administrative expenses

Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other costs associated with our sales force and marketing activities. For the three-month period ended June 30, 2009, selling and administrative expenses decreased $9.4 million (24.7%) to $28.6 million from $38.0 million for the corresponding period of the preceding fiscal year. This decrease in selling and administrative expenses is largely attributable to the portion of investment banking and other professional fees charged to operations amounting to $2.9 million in relation to the Acquisition, the selling and administrative portion of stock-based compensation expenses amounting to $4.0 million incurred in relation to the Acquisition and the impact of foreign currency fluctuations on expenses denominated in foreign currencies compared to the previous year’s rates for the same period partially offset by an increase in sales force and direct marketing expenses related to the expansion of our sales force in the United States. For the nine-month period ended June 30, 2009, selling and administrative expenses decreased $37.5 million (28.9%) to $92.4 million from $129.9 million. This decrease in selling and administrative expenses is largely attributable to the portion of investment banking and other professional fees charged to operations amounting to $33.6 million and, the selling and administrative portion of stock-based compensation expenses amounting to $10.0 million both incurred in relation to the Acquisition partially offset by an increase in sales force and direct marketing expenses and foreign exchange as discussed above.

Management fees

Management fees consist of fees and other charges associated with the Management Services Agreement with TPG. These fees were previously unallocated to subsidiaries of Axcan Holdings Inc., the indirect parent of Axcan Intermediate Holdings Inc. As of June 30, 2009, they were allocated from the closing date of February 2008 Transactions based on revenue. For the three-month period ended June 30, 2009, management fees amounted to $4.7 million, an increase of $4.7 million for the corresponding period of the preceding fiscal year. For the nine-month period ended June 30, 2009, management fees amounted to $4.9 million, an increase of $4.9 million for the corresponding period of the preceding fiscal year.

Research and development expenses

Research and development expenses consist principally of fees paid to outside parties that we use to conduct clinical studies and to submit governmental approval applications on our behalf, as well as the salaries and benefits paid to personnel involved in research and development projects. For the three-month period ended June 30, 2009, research and development expenses increased $4.4 million (69.8%) to $10.7 million, from $6.3 million for the corresponding period of the preceding fiscal year. For the nine-month period ended June 30, 2009, research and development expenses increased $7.7 million (40.3%) to $26.8 million from $19.1 million. These increases are mainly due to the development work and regulatory submission costs on pancreatic enzyme products and European clinical trial costs for PYLERA and professional fees related to strategic portfolio analysis. The increase is partially offset by the effect of foreign currency fluctuations on some of our expenses incurred in Canadian dollars and in Euros.

Acquired in-process research

The acquired in-process research of $272.4 million for the nine-month period ended June 30, 2008, relates to the intangible assets acquired in the Acquisition. The acquired in-process research represents the estimated fair value of acquired in-process R&D projects that had not yet reached technological feasibility at the time of the Acquisition and had no alternative future use. Accordingly, this amount was immediately expensed upon the Acquisition date. The value assigned to purchased in-process technology is mainly attributable to the following projects: CANASA-MAX002, pancreatic enzymes, PYLERA in the European Union and Cx401.

37

Depreciation and amortization

Depreciation and amortization consists principally of the amortization of intangible assets with a finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For the three-month period ended June 30, 2009, depreciation and amortization decreased $1.7 million (10.3%) to $14.8 million from $16.5 million for the corresponding period of the preceding fiscal year. For the nine-month period ended June 30, 2009, depreciation and amortization increased $12.6 million (40.4%) to $43.8 million from $31.2 million. The increase for the nine-month period is due to the amortization of the stepped-up value of the intangible assets which were classified as intangible assets with a finite life, following the February 2008 Transactions.

Partial write-down of intangible assets

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, the Company assesses the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value might not be recoverable. As a result of certain factors related to the ongoing marketing of certain of our products including the approval of a generic formulation of URSO 250 and URSO FORTE, we reviewed the carrying amount of our intangible assets specifically related to our products. Based on a discounted cash-flow analysis and market prices, we concluded that a $55.7 million reduction to the carrying value of our intangible assets totalling $83.7 million prior to the write-down was required. In addition, the remaining amortizable life of these intangible assets was reduced to periods ranging from 6 months to 14 years.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed for acquisitions. For the three-month period ended June 30, 2009, financial expenses decreased $0.2 million (1.2%) to $16.7 million from $16.9 million for the corresponding period of the preceding fiscal year. For the nine-month period ended June 30, 2009, financial expenses increased $28.6 million (117.2%) to $53.0 million from $24.4 million for the corresponding period of the preceding fiscal year. This increase is mainly due to an increase in the interest on long-term debt of $26.2 million to $46.9 million from $20.7 million for the preceding fiscal year due to the length of time the debt was outstanding in the comparable period last year.

Interest income

For the three-month period ended June 30, 2009, total interest income decreased $0.3 million (100.0%) from the corresponding period of the preceding fiscal year. For the nine-month period ended Jun 30, 2009, total interest income decreased $5.5 million (94.8%) to $0.3 million from $5.8 million for the corresponding period of the preceding fiscal year. This decrease is mainly due to the reduction in short-term investments resulting from the use of cash on hand for the February 2008 Transactions as well as lower rates paid on short-term investments compared to the previous fiscal year.

Other income

With respect to a product-related dispute initiated by Axcan, we have reached during this quarter a global settlement with certain concerned third parties, where it was agreed that we would be paid a global confidential amount in several instalments; the first instalment, in the amount of $3.5 million, was paid to us at the execution by the parties of the settlement agreement.

Income taxes

For the three-month period ended June 30, 2009, income taxes benefits amounted to $21.5 million, compared to $10.3 million for the corresponding period of the preceding fiscal year. For the nine-month period ended June 30, 2009, income tax benefit amounted $18.7 million compared to $1.8 million for the corresponding period of the preceding fiscal year. The effective tax rate was 50.1% for the three-month period ended June 30, 2009, compared to 54.6% for the three-month period ended June 30, 2008. For the nine-month period ended June 30, 2009, the effective tax rate was 104.5%, compared to 0.7% for the nine-month period ended June 30, 2008. The effective tax rate for the three-month and nine-month periods ended June 30, 2009 are affected by a number of elements, the most important being the tax benefit arising from the financing structure. The effective tax rate for the nine-month period ended June 30, 2008 was also greatly affected by the non-deductible nature of the acquired in-process research expense amounting to $272.4 million resulting from the Acquisition. If the effect of the acquired in-process research was removed, the effective tax rate would have been 37.5% for the nine-month period ended June 30, 2008.

Net income

For the three-month period ended June 30, 2009, net loss was $21.4 million compared to a net loss of $8.6 million for the corresponding period of the preceding fiscal year. The increase of $12.8 million in net loss resulted mainly from an increase in operating expenses of $37.7 million, largely comprised of the partial write-down of intangible assets of $55.7 million, partially offset by an increase in revenue of $9.6 million and an increase of income taxes benefits of $11.2 million. For the nine-month period ended June 30, 2009 net income was $0.8 million compared to a net loss of $275.4 million for the corresponding period of the preceding fiscal year. The increase of $276.2 million in net income resulted mainly from a decrease in operating expenses of $244.0 million largely comprised of the acquired in-process research expenses of $272.4 million for the nine-month period ended June 30, 2008 offset by the partial write-down of intangible assets of $55.7 million, and an increase in total revenue of $45.5 million and an increase of income taxes benefits of $16.9 million which were partly offset by an increase in financial expenses of $28.6 million.

Balance sheets as at September 30, 2008 and June 30, 2009

The following table summarizes balance sheet information as at June 30, 2009, compared to September 30, 2008.

(in millions of U.S. dollars)	June 30, 2009		September 30, 2008		Change
	$		$		$			%
Cash, cash equivalents and short-term investments		139.8		56.1		83.7			149.2
Current assets		267.4		177.0		90.4			51.1
Total assets		938.3		944.8		(6.5	)		(0.7	)
Current liabilities		117.5		99.3		18.2			18.3
Long-term debt		602.9		611.2		(8.3	)		(1.4	)
Total liabilities		770.9		779.1		(8.2	)		(1.1	)
Shareholders’ equity		167.4		165.7		1.7			1.0
Working capital		149.9		77.7		72.2			92.9

38

Our cash, cash equivalents and short-term investments increased by $83.7 million (149.2%) to $139.8 million as at June 30, 2009, from $56.1 million at September 30, 2008.  As at June 30, 2009, working capital was $149.9 million, compared to $77.7 million at September 30, 2008, an increase of $72.2 million (95.2%). These increases were mainly derived from cash flow generated from operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements

Our research and development expenses totalled $10.7 million for the three-month period ended June 30, 2009, compared to $6.3 million for the corresponding period of the preceding fiscal year. We regularly review product and other acquisition opportunities and may therefore require additional debt or equity financing. We cannot be certain that such additional financing, if required, will be available on acceptable terms, or at all.

Contractual obligations and other commitments

The following table summarizes our significant contractual obligations as at June 30, 2009, and the effect such obligations are expected to have on our liquidity and cash flows in future years. This table excludes amounts already recorded on the balance sheet as current liabilities at June 30, 2009, and certain other purchase obligations as discussed below:

	For the twelve-month periods ending June 30,
(in millions of U.S. dollars)	2010		2011		2012		2013		2014 and thereafter
	$		$		$		$		$
Long-term debt		13.1		14.2		18.6		41.6		538.5
Operating leases		2.7		1.8		1.3		1.1		0.9
Other commitments		10.7		0.6		0.3		-		-
		26.5		16.6		20.2		42.7		539.4

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

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

Long-term debt and credit facility

On February 25, 2008, we obtained various types of financing in connection with the Arrangement. We issued $228.0 million aggregate principal amount of secured notes. The secured notes were priced at $0.98737 with a yield to March 1, 2015, of 10%. The secured notes rank pari passu with our new senior secured credit facilities.

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

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

39

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

We also obtained a Credit Facility for a total of $290.0 million composed of term loans totalling $175.0 million and a revolving credit facility of $115.0 million (“Credit Facility”). The Credit Facility bears interest at a variable rate composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at our option, plus the applicable rate based on our consolidated total leverage ratio and certain of our subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014, with payments on the term loans beginning in fiscal year 2008. As at June 30, 2009, $175.0 million of term loans had been issued and no amounts had been drawn against the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of 8.75% before the effect of the interest rate swaps as further disclosed in our Consolidated Financial Statements. The Credit Facility requires us to meet certain financial covenants, which were met as at June 30, 2009. The credit agreement governing the Credit Facility requires us to prepay outstanding term loans contingent upon the occurrence of these events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit Facility, (2) commencing with the fiscal year ending September 30, 2009, 50% (which percentage will be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Credit Facility), and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by us or by our subsidiaries, subject to reinvestments rights and certain other exceptions.

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

We may redeem some or all of the senior notes prior to March 1, 2012 at a redemption price equal to 100% of the principal amount of the senior 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 notes at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below:

Year
2012	106.375%
2013	103.188%
2014 and thereafter	100.000%

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

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

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

Operating leases

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

Other commitments

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

Related party transactions

As at June 30, 2009 and September 30, 2008, we had a note receivable from our parent company amounting to $133.1 million. During the three-month period ended June 30, 2009, we have earned interest income amounting to $1.9 million net of taxes amounting to $1.1 million and, for the nine-month period ended June 30, 2009, we have earned interest income amounting to $5.9 million net of taxes amounting to $3.2 million ($1.9 million net of taxes amounting to $1.1 million during the three-month period ended June 30, 2008 and $2.7 million net of taxes amounting to $1.5 million during the four-month period ended June 30, 2008) and related interest receivable from our parent company amounting to $12.0 million as at June 30, 2009 ($3.1 million as at September 30, 2008) which have been recorded in the shareholder’s equity section of the consolidated balance sheet. As at June 30, 2009, we also recorded an account receivable from our parent company amounting $0.3 million ($1.0 million as at September 30, 2008).

During the three-month period ended June 30, 2009, the Company recorded fees from a controlling shareholding company amounting to $4.8 million accounted for as management fees, and, for the nine-month period ended June 30, 2009, the Company recorded fees from a controlling shareholding company amounting to $4.9 million accounted for as management fees. The Company recorded fees paid to a controlling shareholding company amounting to $0.01 million accounted for as selling and administrative expense for the three-month period ended June 30, 2008 and recorded fees amounting to $12.9 million, of which $4.8 million was accounted for as debt issue expenses, $6.1 million as transaction costs and $2.0 million was expensed and included in selling and administrative expenses during the four-month period ended June 30, 2008. As at June 30, 2009, the Company had on its balance sheet accrued fees payable to a controlling shareholding company amounting to $1.1 million.

40

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, as reflected in the consolidated statements of cash flows, are summarized in the following table:

(in millions of U.S. dollars)	For the three-month period ended June 30, 2009			For the three-month period ended June 30, 2008			Change
	Successor			Successor
	$			$			$
Cash provided by operating activities		48.9			28.7			20.2
Cash used by investing activities		(2.5	)		(1.1	)		(1.4	)
Cash used by financing activities		(3.9	)		(4.2	)		0.3

(in millions of U.S. dollars)	For the nine-month period ended June 30, 2009			For the nine-month period ended June 30, 2008			For the four-month period ended June 30, 2008			For the five-month period ended February 25, 2008			Change
	Successor			Combined Predecessor/ Successor			Successor			Predecessor
	$			$			$			$			$
Cash provided (used) by operating activities		97.9			24.3			(48.9	)		73.2			73.6
Cash provided (used) by investing activities		(5.4	)		(833.7	)		(960.3	)		126.6			828.3
Cash provided (used) by financing activities		(8.3	)		1,037.0			1,068.3			(31.3	)		(1,045.3	)

Cash flows provided by operating activities increased $20.2 million from $28.7 million for the three-month period ended June 30, 2008 to $48.9 million for the three-month period ended June 30, 2009. Cash flows from operating activities increased $73.6 million from $24.3 million for the nine-month period ended June 30, 2008, to $97.9 million for the nine-month period ended June 30, 2009. The cash provided by operating activities is mainly due to the increase in net income affected by price increases and the transaction costs related to the Acquisition in 2008.

Cash flows used by investing activities increased by $1.4 million from $1.1 million of cash used in the three-month period ended June 30, 2008 to $2.5 million of cash used in the three-month period ended June 30, 2009. Cash flows used by investing activities decreased by $828.3 million from $833.7 million of cash used  in the nine-month period ended June 30, 2008, to $5.4 million of cash used in the nine-month period ended June 30, 2009. Cash flows used by investing activities decreased mainly due to the net cash used to fund the Acquisition in the nine-month period ended June 30, 2008.

Cash flows provided by financing activities decreased $0.3 million from $4.2 million of cash used in the three-month period ended June 30, 2008 to $3.9 million of cash used in the three-month period ended June 30, 2009. Cash flows provided by financing activities decreased $1,045.3 million from $1,037.0 million of cash provided in the nine-month period ended June 30, 2008 to $8.3 million of cash used in the nine-month period ended June 30, 2009. Cash flows provided by financing activities were significantly higher in prior periods, mainly due to the issue of common shares for cash consideration of $475.0 million and the proceeds from the issuance of long-term debt for an amount of $634.1 million to fund the Acquisition less the debt issue expenses amounting to $31.4 million in the nine-month period ended June 30, 2008.

Significant accounting policies

Accounting policies that we consider to be significant in determining our results of operations and financial condition have been disclosed in “Item 8 Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. There has been no material changes to those policies that we consider to be significant since the filing of our Annual Report on Form 10-K. The accounting principles utilized by us in preparing our consolidated financial statements conform in all material respects to U.S. GAAP.

Changes in accounting standards

See note 3 to our consolidated financial statements in Item 1 of Part I 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.

41

Subsequent event

On August 14, 2009, AGI Therapeutics plc (“AGI”) and Axcan announced that their co-development/co-fund and licensing agreement for AGI-010 has been terminated by mutual agreement. As a consequence, AGI regained full control of AGI-010 and neither party has any outstanding or future obligations to the other.

42

Item 3. Quantitative and Qualitative Disclosure About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, which is incorporated herein by reference. As of June 30, 2009, our exposure to market risk has not changed materially since September 30, 2008.

Item 4T. Controls and Procedures

Evaluation of disclosure controls and procedures.

We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of June 30, 2009, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

There have been no changes in internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

43

PART II. OTHER INFORMATION

Item 1A. Risk Factors

Except for the updated risk factors related to impact of the U.S. launch of a generic to our URSO product lines described below, there have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 aside from those disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may, in the future, materially adversely affect our business, financial condition or results.

We currently depend on four categories of products for a large portion of our revenues; any material decline in the sales of any of them would have an adverse impact on our business.

Any factor that adversely affects the sale or price of our key products could significantly decrease our sales and profits. Our key products include ursodiol products (URSO 250 / URSO DS / URSO FORTE and DELURSAN), that accounted for 26.9% of our total revenues for year ended 2007 and for 24.2% of our total revenues for fiscal year 2008. As announced in the Form 10-Q for the quarter ended March 31, 2009 and filed with the SEC on May 15, 2009, on May 14, 2009, Teva announced that the U.S. Food and Drug Administration had approved its aNDA for a generic formulation of URSO 250 and URSO Forte that was launched in the United States. As a result, we anticipate this could have a material adverse effect on our results of operations and financial condition.

Some of our key products face competition from generic or unbranded products.

As announced in the Form 10Q for the quarter ended March 31, 2009 and filed on May 15, 2009, on May 14, 2009, Teva announced that the U.S. Food and Drug Administration had approved its aNDA for a generic formulation of URSO 250 and URSO Forte that was launched in the United States. We anticipate generic competition against URSO 250 and URSO Forte could have a material adverse effect on our results of operations and financial condition.

Item 6. Exhibits.

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

44

SIGNATURES

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

AXCAN INTERMEDIATE HOLDINGS INC.

Date:  August 14, 2009	BY:	/S/
		Steve Gannon
		Senior Vice President, Finance, Chief Financial Officer and Treasurer

45

EXHIBIT INDEX

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

46