Aptalis Pharma 10Q 2010 Q2 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 March 31, 2010

[ ]	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

(State or Other Jurisdiction of Incorporation or organization)

74-3249870

(I.R.S. Employer Identification No.)

22 Inverness Center Parkway

Suite 310

Birmingham, AL

(Address of Principal Executive Offices)

35242

(Zip Code)

(205) 991-8085

(Registrant’s telephone number, including area code)

_______________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No [X] Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No [X] (Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time).

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

Large accelerated filer Accelerated filer Non-accelerated filer [X] Smaller reporting company

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

Yes No [X]

As of May 13, 2010, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Axcan MidCo Inc.

AXCAN INTERMEDIATE HOLDINGS INC.

INDEX

Forward-Looking Statements	3
PART I. FINANCIAL INFORMATION	4
Item 1.Financial Statements.	4
Consolidated Balance Sheets	4
Consolidated Statements of Operations	5
Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss)	6
Consolidated Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	32
Item 3.Quantitative And Qualitative Disclosure About Market Risk	49
Item 4T.Controls and Procedures	49
PART II. OTHER INFORMATION	50
Item 1 A. Risk Factors	50
SIGNATURES	51
EXHIBIT INDEX	52

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 t erminology.

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

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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Balance Sheets

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

	March 31, 2010			September 30, 2009
	(unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		160,414			126,435
Accounts receivable, net		53,114			57,124
Accounts receivable from the parent company (Note 15)		380			306
Income taxes receivable		1,266			3,391
Inventories, net of write-down of $28,059 related to unapproved pancreatic enzyme products (“PEPs)” (Note 4)		23,941			44,706
Prepaid expenses and deposits		2,628			2,868
Deferred income taxes, including tax benefits on adjustments of $3,904 and net of valuation allowance of $14,132 related to unapproved PEPs (Note 10)		2,270			15,852
Total current assets		244,013			250,682
Property, plant and equipment, net (Note 5)		37,216			39,344
Intangible assets, net of impairment of $15,758 related to unapproved PEPs (Note 6)		373,608			421,290
Goodwill, net of impairment of $91,400 related to unapproved PEPs (Note 6)		73,477			165,823
Deferred debt issue expenses, net of accumulated amortization of $11,651 ($9,168 as at September 30, 2009)		22,928			25,411
Deferred income taxes, including tax benefits on adjustments of $21,644 and net of valuation allowance of $30,840 related to unapproved PEPs (Notes 10 and 17)		5,413			12,052
Total assets		756,655			914,602
Liabilities
Current liabilities
Accounts payable and accrued liabilities, including adjustments of $25,348 related to unapproved PEPs		115,561			87,684
Income taxes payable (Note 10)		2,942			2,493
Installments on long-term debt (Note 8)		-			30,708
Deferred income taxes		-			137
Total current liabilities		118,503			121,022
Long-term debt (Note 8)		593,454			582,586
Other long-term liabilities		9,759			9,448
Deferred income taxes		39,069			37,782
Total liabilities		760,785			750,838
Shareholders’ Equity (Deficiency)
Capital Stock (Note 11)
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding as at March 31, 2010, and September 30, 2009		1			1
Deficit		(452,100	)		(297,658	)
9.05% Note receivable from the parent company (Note 15)		(133,154	)		(133,154	)
Additional paid-in capital, net of decrease in stock-based compensation of $4,918 related to unapproved PEPs		615,731			619,053
Accumulated other comprehensive loss		(34,608	)		(24,478	)
Total shareholders’ equity (deficiency)		(4,130	)		163,764
Total liabilities and shareholders’ equity (deficiency)		756,655			914,602

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

On behalf of the Board,

Director

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Statements of Operations

(in thousands of U.S. dollars)

(unaudited)

	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009			For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
	$			$			$			$
Net product sales, net of additional provision of $10,444 related to unapproved PEPs (Note 17)		94,365			120,631			204,497			224,739
Cost of goods sold (a), including additional charges of $42,964 related to unapproved PEPs (Note 17)		68,150			29,403			94,778			54,857
Selling and administrative expenses (a) , net of decrease in stock-based compensation of $4,918 related to unapproved PEPs (Notes 9 and 17)		28,406			31,839			60,645			63,844
Management fees (Note 15)		1,000			-			1,855			163
Research and development expenses (a)		7,683			9,089			16,109			16,139
Depreciation and amortization		13,999			14,479			30,692			28,952
Impairment of intangible assets and goodwill (Notes 6 and 17)		107,158			-			107,158			-
Total operating expenses		226,396			84,810			311,237			163,955
Operating income (loss)		(132,031	)		35,821			(106,740	)		60,784
Financial expenses (Note 9)		16,385			16,907			32,582			36,232
Interest income		(159	)		(36	)		(307	)		(259	)
Other income		(7,700	)		-			(7,700	)		-
Loss (gain) on foreign currencies		1,408			(385	)		1,393			(255	)
Total other expenses		9,934			16,486			25,968			35,718
Income (loss) before income taxes		(141,965	)		19,335			(132,708	)		25,066
Income taxes expense, including tax benefits on adjustments of $25,548 and net of valuation allowance of $44,972 related to unapproved PEPs (Notes 10 and 17)		21,795			2,226			21,606			2,824
Net income (loss)		(163,760	)		17,109			(154,314	)		22,242

(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.

AXCAN INTERMEDIATE HOLDINGS INC.

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

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

(unaudited)

	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009			For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
Common shares (number)	$			$			$			$
Balance, beginning and end of period		100			100			100			100

Common shares
Balance, beginning and end of period		1			1			1			1
Deficit
Balance, beginning of period		(288,340	)		(284,131	)		(297,658	)		(289,264	)
Dividends paid		-			-			(128	)		-
Net income (loss)		(163,760	)		17,109			(154,314	)		22,242
Balance, end of period		(452,100	)		(267,022	)		(452,100	)		(267,022	)
Additional paid-in capital
Balance, beginning of period		619,195			617,476			619,053			617,255
Stock-based compensation expense (recovery), net of adjustment related to unapproved PEPs		(2,367	)		2,631			(891	)		3,961
Stock-based compensation plans redemption		(57	)		-			(328	)		-
Foreign currency translation adjustments		-			21			-			(26	)
Provision on interest receivable from the parent company		(2,971	)		(2,972	)		(6,008	)		(6,009	)
Interest income from the parent company, net of taxes of [$1,040, $1,041, $2,103 and $2,103]		1,931			1,931			3,905			3,906
Balance, end of period		615,731			619,087			615,731			619,087
9.05% Note receivable from the parent company
Balance, beginning and end of period		(133,154	)		(133,154	)		(133,154	)		(133,154	)
Accumulated other comprehensive loss
Balance, beginning of period		(27,308	)		(23,581	)		(24,478	)		(29,168	)
Hedging contracts adjustments, net of taxes of [($38), $57, $4 and $187]		71			(106	)		(7	)		(348	)
Foreign currencies translation adjustments		(7,371	)		(12,863	)		(10,123	)		(7,034	)
Balance, end of period		(34,608	)		(36,550	)		(34,608	)		(36,550	)
Total shareholders' equity (deficiency)		(4,130	)		182,362			(4,130	)		182,362
Comprehensive income (loss)
Other comprehensive loss		(7,300	)		(12,969	)		(10,130	)		(7,382	)
Net income (loss)		(163,760	)		17,109			(154,314	)		22,242
Total comprehensive income (loss)		(171,060	)		4,140			(164,444	)		14,860
Accumulated other comprehensive loss
Amounts related to foreign currencies translation adjustments		(34,608	)		(36,497	)		(34,608	)		(36,497	)
Amounts related to hedging contracts fair value adjustments		-			(53	)		-			(53	)
Accumulated other comprehensive loss		(34,608	)		(36,550	)		(34,608	)		(36,550	)

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.

AXCAN INTERMEDIATE HOLDINGS INC.

Consolidated Cash Flows

(in thousands of U.S. dollars)

(unaudited)

	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009			For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
	$			$			$			$
Cash flows from operating activities
Net income (loss)		(163,760	)		17,109			(154,314	)		22,242
Non-cash items
Non-cash financial expenses		1,746			1,749			3,508			3,507
Depreciation and amortization		13,999			14,479			30,692			28,952
Stock-based compensation expenses (recovery), net of decrease of $4,918 related to unapproved PEPs (Notes 9 and 17)		(2,367	)		2,631			(891	)		3,961
Loss on disposal and write-down of assets		56			10			81			21
Impairment of intangible assets and goodwill (Notes 6 and 17)		107,158			-			107,158			-
Foreign currencies fluctuations		522			3,452			43			1,814
Change in fair value of derivatives		(105	)		(141	)		(621	)		873
Deferred income taxes, including benefits on adjustments of $25,548 and valuation allowance of $44,972 related to unapproved PEPs (Notes 10 and 17)		20,436			(4,686	)		19,066			(3,361	)
Other non-cash adjustments related to unapproved PEPs (Note 17)		53,407			-			53,407			-
Changes in working capital items
Accounts receivable		17,661			(18,371	)		2,760			(27,403	)
Accounts receivable from the parent company		(74	)		(891	)		(74	)		(1,604	)
Income taxes receivable		(63	)		7,396			1,671			17,140
Inventories		(3,065	)		(2,421	)		(7,933	)		(546	)
Prepaid expenses and deposits		466			763			202			761
Accounts payable and accrued liabilities		(15,822	)		(8,179	)		4,292			3,871
Income taxes payable		910			(2,920	)		572			(1,267	)
Net cash provided by operating activities		31,105			9,980			59,619			48,961
Cash flows from investing activities
Acquisition of property, plant and equipment		(2,333	)		(1,622	)		(3,462	)		(2,920	)
Acquisition of intangible assets		-			-			-			(10	)
Net cash used in investing activities		(2,333	)		(1,622	)		(3,462	)		(2,930	)
Cash flows from financing activities
Repayment of long-term debt		-			(2,187	)		(20,865	)		(4,375	)
Stock-based compensation plans redemption and adjustment		(57	)		-			(328	)		-
Dividends paid		-			-			(128	)		-
Net cash used in financing activities		(57	)		(2,187	)		(21,321	)		(4,375	)
Foreign exchange loss on cash held in foreign currencies		(692	)		(257	)		(857	)		(1,366	)
Net increase in cash and cash equivalents		28,023			5,914			33,979			40,290
Cash and cash equivalents, beginning of period		132,391			90,481			126,435			56,105
Cash and cash equivalents, end of period		160,414			96,395			160,414			96,395
Additional information
Interest received		159			62			307			311
Interest paid		27,172			27,807			29,119			30,944
Income taxes received		-			-			2,372			16,761
Income taxes paid		752			3,956			2,608			8,357

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.

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”), commenced active operations with the purchase, through a wholly-owned indirect subsidiary, of all of the outstanding common shares of Axcan Pharma Inc., a company incorporated under the Canada Business Corporation Act. 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. The Company is involved in the research, development, production and distribution of pharmaceutical products mainly in the field of gastroenterology.

The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency and prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the requirements of the Securities and Exchange Commission for reporting on Form 10Q. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended September 30, 2009. When necessary, the financial statemen ts 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.

2.	Significant Accounting Policies

The following policies are interim updates to those discussed in Note 2 to the Company’s audited financial statements for the fiscal year ended September 30, 2009.

Revenue recognition

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

The Company presents, on a net basis, taxes collected from customers and remitted to governmental authorities; that is, they are excluded from revenues.

ULTRASE® and VIOKASE®, the Company’s pancreatic enzyme products (“PEPs”) have historically accounted for approximately a 19% of the Company’s net sales in the last three years. Existing products to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there are currently marketed PEPs that have not been approved under the NDA process by the FDA. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of exocrine pancreatic insu fficiency drug products file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for exocrine pancreatic insufficiency drug products to April 28, 2010, for those companies that were (a) marketing unapproved pancreatic enzyme products as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval. The FDA has required all manufacturers with unapproved NDAs to cease distribution of unapproved products after April 28, 2010, until such time that NDA approval is granted. After this date, the unapproved products may still be available on pharmacy shelves for a short time until stock is depleted. The FDA will continue to review NDAs that have been submitted by manufacturers of unapproved PEPs, and will approve additional PEPs even after the April 28, 2010 deadline has pass ed, if they meet the required safety, effectiveness and product quality standards. The Company completed the submission for ULTRASE® in the fourth quarter of fiscal 2008. The submission of the Company’s rolling NDA for VIOKASE® was completed in the first quarter of fiscal 2010.

ULTRASE® and VIOKASE® did not receive NDA approval by the April 28, 2010 deadline and the Company has ceased distributing the two products after that date, in compliance with the FDA guideline. For the quarter ended March 31, 2010, the Company recorded a $10,444,000 returns provision which is an estimate of the Company’s liability for ULTRASE® and VIOKASE® that may be returned by the original purchaser in accordance with the Company&# 8217;s policy as a result of not receiving NDA approval by the April 28, 2010, deadline. This estimate is based on ULTRASE® and VIOKASE® inventory in the distribution channel and related expiration dates of this inventory, estimated erosion of ULTRASE® and VIOKASE® demand based on competition from approved PEP products and the resulting estimated sell-through of ULTRASE® and VIOKASE® and other factors.

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)

2.	Significant Accounting Policies (continued)

Inventory valuation

Inventories of raw materials and packaging material are valued at the lower of cost and replacement cost. Inventories of work in progress and finished goods are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. Cost for work in progress and finished goods include raw materials, direct labor, subcontracts and an allocation for overhead. Allowances are maintained for slow-moving inventories based on the remaining shelf life of products and estimated time required to sell such inventories. Obsolete inventory and rejected products are written off to cost of goods sold.

Inventory costs associated with products that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit. If future commercial use and future economic benefit are not considered probable, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. The Company could be required to expense previously capitalized costs related to pre-approval inventory if the probability of future commercial use and future economic benefit changes due to denial or delay of regulatory approval, a delay in commercialization, or other factors.

On a quarterly basis, the Company evaluates all inventory, including inventory capitalized for which regulatory approval has not yet been obtained, to determine if any lower of cost or market adjustment is required.

During the quarter ended March 31, 2010, a write-down of $28,059,000 has been recorded to reduce inventories to their net realizable value. The Company has recorded an inventory write-down for pre-launch inventory related to ULTRASE® and VIOKASE®, which the Company has recorded in light of the fact that these products did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA.

Impairment of long lived-assets

The goodwill impairment test is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit may be based on one or more faire value measures including present value technique of estimated future cash flows and estimated amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties. If the carrying amount of the reporting unit exceeds the fair value, step two requires the fair value of the reporting unit to be allocated to the underlying tangible and intangible assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the goodwill of the reporting unit exceeds the im plied fair value of that goodwill, an impairment loss equal to the excess is recorded in earnings.

The Company’s pancreatic enzyme products did not receive NDA approval from the FDA by the April 28, 2010 deadline. This is a change in circumstance that caused the Company to review the carrying value of its long lived assets including goodwill. Based on this review, an impairment charge of $107,158,000 was recorded for the quarter ended March 31, 2010. (Note 6)

3.	Recently Issued Accounting Standards

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

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

In January 2010, the FASB amended the existing authoritative guidance on disclosures of fair value measurements and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The disclosure of the roll forward of activity in Level 3 measurements on a gross basis is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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 October 2009, the FASB amended the existing guidance on revenue recognition related to accounting for multiple-element arrangements. This amendment addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In August 2009, the FASB amended the existing guidance on fair value measurements and disclosures to provide clarification in measuring the fair value of liabilities in circumstances when a quoted price in an active market for the identical liability is not available. In such circumstances, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets; and/or 2) a valuation technique that is consistent with the principles of fair value measurements (e.g. an income approach or market approach). This guidance is effective for reporting periods including interim periods beginning after August 28, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB amended the existing authoritative guidance on consolidation regarding 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. According to the revised guidance, 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. The guidance also requires an enterprise to assess whether it has an implicit financial responsibi lity 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. The guidance 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. The revised guidance 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 revised guidance on its consolidated financial statements.

In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance 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, the guidance 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. The guidance is effective for fiscal years and interim pe riods ended after June 15, 2009, and will be applied prospectively. In February 2010, the FASB amended the authoritative guidance on subsequent events to amend disclosures related to events occurring subsequent to year end. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events were evaluated in both issued and revised financial statements. The amendment removes potential conflicts with SEC guidance and is effective upon issuance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB amended the authoritative guidance on financial instruments to require disclosures about fair value of financial instruments in interim as well as in annual financial statements of publicly traded companies. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance 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 guidance.

In April 2009, the FASB issued additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. Guidance on identifying circumstances that indicate a transaction is not orderly was also issued and required additional disclosures. This guidance 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. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB amended the guidance for investments in debt and equity securities on determining whether impairment for investments in debt securities is other than temporary and requires additional interim and annual disclosure of other-than-temporary impairments in debt and equity securities. Pursuant to the new guidance, an other-than-temporary impairment has occurred if a company does not expect to recover the entire amortized cost basis of the security. In this situation, if the company does not intend to sell the impaired security prior to recovery and it is more likely than not that it will not be required to sell the security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to the credit loss. The remaining por tion of the other-than-temporary impairment is then recorded in other comprehensive income. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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, the FASB amended the guidance on business combinations previously revised in December 2007 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 guidance on accounting for contingencies to determine whether the contingency should be recognized at the acquisition date or after it. This guidance 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 Com pany will apply this guidance for future acquisitions.

In November 2008, the FASB issued guidance that clarifies the accounting for defensive intangible assets acquired in a business combination or an asset acquisition subsequent to their acquisition except for intangible assets that are used in research and development activities. A defensive intangible asset is defined as a separately identifiable intangible asset which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. This guidance requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting and assign a useful life in accordance with the guidance on the determination of useful life of intangible assets. Defensive intangible assets must be recognized at fair value in accordance with t he revised guidance on business combinations. This guidance is effective for intangible assets acquired on or after fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset determined in accordance with the guidance on intangible assets and the period of expected cash flows used to measure the fair value of the asset determined in accordance with the amended guidance for business combinations and other authoritative guidance. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB amended the guidance on disclosure requirements related to derivative instruments and hedging activities. The new guidance requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. Pursuant to the new guidance, enhanced disclosures are required 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. This guidance is effective for fi nancial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements (see Note 12).

In December 2007, the FASB revised the authoritative guidance for business combinations. The new guidance 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. Pursuant to the new guidance, all assets, liabilities, contingent considerations and contingencies of an acquired business are required to be recorded at fair value at the acquisition date. In addition, the guidance establishes requirements in the recognition of acquisition cost, restructuring costs and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties. This guidance is to be applied prospectively to business combinations for which the acquisition date is on or after the beginni ng of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will apply this guidance for future acquisitions.

In December 2007, the FASB issued guidance related to collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The guidance also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008, and shall be retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The adoption of this guidance did not have a materia l impact on the Company’s consolidated financial statements.

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 amended the guidance on consolidation to establish new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the new guidance 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. The guidance 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, the guidance requires that a parent recognize a gain or los s 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. The guidance also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. This guidance 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 guidance did not have a material impact on the Company’s consolidated financial statements, because the Company has wholly-owned subsidiaries.

In September 2006, the FASB issued guidance on 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 guidance for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued guidance, that deferred the effective date of the guidance for fair value measurement for one year 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 guidance which clarifies the application of the guidance on fair v alue measurements in determining the fair value of a financial asset when the market for that asset is not active. This guidance was effective upon issuance, including prior periods for which financial statements had not been issued. On October 1, 2008, the Company adopted the guidance on fair value measurements for financial assets and liabilities. The adoption of the guidance on fair value measurements for financial assets and liabilities carried at fair value did not have a material impact on the Company’s consolidated financial statements (see Note 14). On October 1, 2009, the Company adopted the guidance on fair value measurements for non-financial assets and liabilities. The adoption of the guidance on fair value measurements for non-financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements.

4.	Inventories

	March 31, 2010		September 30, 2009
	$		$
Raw material and packaging material, net of write-down of $739		11,434		8,416
Work in progress		727		886
Finished goods, net of write-down of $27,320 and net of reserve for obsolescence of $1,013 ($4,159 on September 30, 2009)		11,780		35,404
		23,941		44,706

As disclosed in Note 2, the Company’s PEPs did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA. As a result, during the three-month period ended March 31, 2010, the on-hand inventory was written down to net realizable value and was charged to cost of goods sold. In addition, a charge to cost of goods sold has also been recorded for purchase and other materials and supply commitments related to the PEPs.

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)

5.	Property, Plant and Equipment

			March 31, 2010
	Cost		Accumulated depreciation		Net
	$		$		$
Land		2,237		-		2,237
Buildings		22,669		3,651		19,018
Furniture and equipment		7,653		2,626		5,027
Computer equipment		16,979		7,066		9,913
Leasehold and building improvements		1,196		175		1,021
		50,734		13,518		37,216

			September 30, 2009
	Cost		Accumulated depreciation		Net
	$		$		$
Land		2,276		-		2,276
Buildings		22,739		2,931		19,808
Furniture and equipment		8,321		2,598		5,723
Computer equipment		15,218		4,805		10,413
Leasehold and building improvements		1,181		57		1,124
		49,735		10,391		39,344

6.	Impairment of Long-Lived Assets, Including Goodwill

Goodwill

As has been previously disclosed the Company’s SEC filings, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval for their products by April 28, 2010. On April 28, 2010, neither of the Company’s two pancreatic insufficiency drug products, ULTRASE® and VIOKASE®, had obtained FDA approval. The Company plans to continue to seek to obtain an NDA approval for these products. Management currently expects that the future cash flows that would be generated from these products will be negatively impacted by market sha re erosion that will occur between April 28, 2010 and the date of eventual re-launch of the products on the market, and management cannot provide any assurances that the Company will be able to re-launch the products. Management has considered the FDA April 28, 2010 approval deadline to be a triggering event which causes the Company to assess whether any portion of its recorded goodwill balance was impaired. As a result, an estimate of the impact of the above was reflected in certain valuation assumptions of the Company’s goodwill as at March 31, 2010.

The goodwill impairment test is a two step process. Step one of the impairment analysis consisted of a comparison of the fair value of the U.S. reporting unit with its net carrying value, including the goodwill. The Company performed extensive valuation analyses, utilizing both income and market-based approaches, in its goodwill assessment process. The following describes the valuation methodologies used to derive the estimated fair value of the reporting unit.

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.	Impairment of Long-Lived Assets, Including Goodwill (continued)

Income Approach

To determine the fair value, the Company discounted the expected future cash flows of the reporting unit, using a discount rate, which reflected the overall level of inherent risk and the rate of return an outside investor would have expected to earn. To estimate cash flows beyond the final year of its model, the Company used a terminal value approach. Under this approach, the Company used estimated operating income before interest, taxes, depreciation and amortization in the final year of its model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption, and discounted by a perpetuity discount factor to determine the terminal value. The Company incorporated the present value of the resulting terminal value into its estimate of the fair value.

Based on the “step one” analysis that was performed for the U.S. reporting unit, the Company determined that the carrying amount of the net assets of the reporting unit was in excess of its estimated fair value. As such, the Company was required to perform the “step two” analysis for its U.S. reporting unit, in order to determine the amount of any goodwill impairment. The “step two” analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill, based on a hypothetical allocation of the estimated fair value to the net assets. Based on the preliminary assessment second step analysis, the Company determined that the goodwill allocated to the U.S. reporting unit, in the amount of $91,400,000 was impaired. As a result, the Company recorded a preliminary goodwill impairment charge of $91,400,000 during the three-month period ended March 31, 2010, which represented the Company’s best estimate as of March 31, 2010. The Company expects to complete its assessment of goodwill impairment for its U.S. reporting unit during the next quarter. Any adjustment to the estimated loss recognized during the three-month period ended March 31, 2010, as a result of the completion of the measurement of the impairment loss shall be rec ognized in the next quarter.

The determination of the fair value of the reporting unit required the Company to make significant estimates and assumptions that affected the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization, and capital expenditure forecasts. Additionally, The Company has made assumptions relating to the expected amount of time required to eventually obtain FDA approval for the Company’s pancreatic enzyme products and the eventual market share of these products. Due to the inherent uncertainty involved in making these estimates, actual results could differ significantly from those estimates. In addition, changes in underlying assumptions could have a significant impact on ei ther the fair value of the reporting unit or the goodwill impairment charge.

The hypothetical allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also requires the Company to make significant estimates and assumptions. The hypothetical allocation required several analyses to determine the estimate of the fair value of assets and liabilities of the reporting unit.

The following table reflects the components of goodwill as at March 31, 2010:

Goodwill

	$
Balance as at September 30, 2009	165,823
Impairment	(91,400	)
Foreign exchange	(946	)
Balance as at March 31, 2010	73,477

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.	Impairment of Long-Lived Assets, Including Goodwill (continued)

Intangible assets

In conjunction with the goodwill impairment identified during the three-month period ended March 31, 2010, the Company completed its review of the impairment test for intangible assets with a finite life within the U.S. reporting unit for recoverability and recorded a non-cash charge for impairment of intangible assets other than goodwill of $15,758,000 relating to its finite-life assets related to PEPs. Management used a discounted cash flow based approach to value these assets.

The following table reflects the components of intangible assets as at March 31, 2010:

Trademarks, trademark licenses and manufacturing rights with a finite life

	Cost			Accumulated amortization			Net
	$			$			$
Balance as at September 30, 2009		491,411			70,121			421,290
Impairment		(23,694	)		(7,936	)		(15,758	)
Amortization		-			26,593			(26,593	)
Foreign exchange		(6,247	)		(916	)		(5,331	)
Balance as at March 31, 2010		461,470			87,862			373,608

7.	Segmented Information

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

The Company operates in the following geographic areas:

	For the three-month period ended March 31, 2010		For the three-month period ended March 31, 2009		For the six-month period ended March 31, 2010		For the six-month period ended March 31, 2009
	$		$		$		$
Revenue
United States
Domestic sales		68,371		97,113		152,147		175,208
Foreign sales		1,243		1,681		2,621		2,750
Canada
Domestic sales		7,862		6,698		16,729		15,471
Foreign sales		-		-		-		47
European Union
Domestic sales		14,691		13,344		28,715		26,928
Foreign sales		2,080		1,696		3,920		4,051
Other		118		99		365		284
		94,365		120,631		204,497		224,739

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)

7.	Segmented Information (continued)

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

	March 31, 2010		September 30, 2009
	$		$
Property, plant, equipment and intangible assets
Canada		316,456		333,001
United States		21,361		44,448
European Union		73,007		83,185
		410,824		460,634

	March 31, 2010		September 30, 2009
	$		$
Goodwill
Canada		61,887		61,887
United States		-		91,400
European Union		11,590		12,536
		73,477		165,823

8.	Long-term Debt

	March 31, 2010		September 30, 2009
	$		$
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		225,967		225,764
Term loans of $138,823 at March 31, 2010, ($159,688 at September 30, 2009), $138,823 ($50,000 at September 30, 2009) bearing interest at the three-month British Banker Association LIBOR (0.29% as at March 31, 2010, and 0.28% as at September 30, 2009), and $0 ($109,688 at September 30, 2009, bearing interest at the one-month British Banker Association LIBOR of 0.25%), 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 13		134,564		154,779
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016		232,923		232,751
		593,454		613,294
Installments due within one year		-		30,708
		593,454		582,586

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.	Long-term Debt (continued)

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 10% yield to March 1, 2015. The Senior Secured Notes rank pari passu with the Credit Facility.

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

	Senior Secured Notes
	%
2011		106.938
2012		104.625
2013		102.313
2014 and thereafter		100.000

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

The Company also obtained a Credit Facility for a total amount of $290,000,000 composed of available term loans totaling $175,000,000 and of a revolving credit facility of $115,000,000 (“Credit Facility”). The Credit Facility bears interest at a variable rate available composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014, with payments on the term loans beginning in fiscal year 2008. As at March 31, 2010, $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 13. The Credit Facility requires the Company to meet certain financial covenants, which were met as at March 31, 2010. The credit agreement governing the Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit Facility, (2) commencing with the fiscal year ended September 30, 2009, 50% (which percentage will be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Credit Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestments rights and certain other exceptions. Pursu ant to the annual excess cash flow requirements for the fiscal year 2009 defined in the credit agreement, the Company was required to prepay $17,583,000 of outstanding term loans in the first quarter of fiscal year 2010. As allowed by the credit agreement, the prepayment has been applied to the remaining scheduled installments of principal in direct order of maturity.

On 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.

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.	Long-term Debt (continued)

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

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

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

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

	$

2011	-
2012	16,323
2013	21,875
2014	100,625
2015	228,000
Thereafter	235,000
	601,823
Unamortized original issuance discount	8,369
	593,454

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)

9.	Financial Information Included in the Consolidated Operations

a)	Financial expenses

	For the three-month period ended March 31, 2010		For the three-month period ended March 31, 2009		For the six-month period ended March 31, 2010		For the six-month period ended March 31, 2009
	$		$		$		$
Interest on long-term debt (including amortization of original issuance discount of $508 and $1,024 ($511 and $1,027 in 2009)		14,568		15,389		29,379		31,915
Interest and bank charges		323		52		425		490
Interest rate swaps		113		26		17		973
Financing fees		143		202		278		374
Amortization of deferred debt issue expenses		1,238		1,238		2,483		2,480
		16,385		16,907		32,582		36,232

b)	Other information

	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009		For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
	$			$		$			$
Rental expenses		973			692		1,877			1,318
Shipping and handling expenses		1,678			1,580		3,294			4,121
Advertizing expenses		3,957			5,130		7,854			8,762
Depreciation of property, plant and equipment		2,095			1,597		4,099			2,964
Amortization of intangible assets		11,904			12,882		26,593			25,988
Stock-based compensation expenses (recovery), net of decrease in stock-based compensation of $4,918 related to unapproved PEPs		(2,367	)		2,631		(891	)		3,961
Transaction and integration costs		649			841		1,065			1,937

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 $186,000 for the three-month period and $402,000 for the six-month period ended March 31, 2010, ($155,000 for the three-month period and $251,000 for the six-month period ended March 31, 2009).

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.	Income Taxes

The Company establishes a valuation allowance against deferred tax assets in accordance with U.S. GAAP. As at March 31, 2010, the Company has recorded a valuation allowance of $44,972,000 against the Company’s net deferred tax assets generated in the U.S. reporting unit. In future periods, if the deferred tax assets are determined by management to be more likely than not to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded.

The Company’s effective tax rates for the three-month and six-month periods ended March 31, 2010 were minus 15.4% and minus 16.3%, respectively, as compared to 11.5% and 11.3% in the prior year periods, respectively. The effective tax rates for the three-month and six-month periods ended March 31, 2010, are affected by a number of elements, the most important being the establishment of the valuation allowance of $44,972,000 resulting from the unapproved status of the Company’s pancreatic enzyme products.

Effective October 1, 2007, the Company adopted the provisions of the guidance issued by the FASB related to accounting for uncertainty in income taxes. The guidance 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 this guidance 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 March 31, 2010, the Company had unrecognized tax benefits of $11,318,000 ($10,409,000 as at Septem ber 30, 2009).

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

	For the three-month period ended March 31, 2010		For the three-month period ended March 31, 2009			For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
	$		$			$			$
Balance, beginning of period		10,896		9,563			10,409			10,446
Additions based on tax positions related to the current year		8		-			15			8
Additions for tax positions of prior years		414		-			920			394
Reductions for tax positions of prior years		-		(590	)		(26	)		(1,875	)
Balance, end of period		11,318		8,973			11,318			8,973

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 March 31, 2010, the company had accrued $914,000 ($649,000 as at September 30, 2009) for interest relating to income tax matters. There were no amounts recorded for penalties as at March 31, 2010.

The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various states, local and foreign jurisdictions including Canada and France. In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is subject to federal and state income tax examination by U.S. tax authorities for fiscal years 2005 through 2009. The Company is subject to Canadian and provincial income tax examination for fiscal years 2005 through 2009. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant. The Company is currently being audited by Canada Revenue Agency for fiscal year 2005 to fiscal year 2008.

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

As at March 31, 2010, and September 30, 2009, the Company had a provision of $2,097,000 for income taxes on the undistributed earnings of the Company’s foreign subsidiaries that the Company does not intend to indefinitely reinvest.

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.	Stock Incentive Plans

Management equity incentive plan

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

Special equity grant

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

The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the indirect parent company. The RSUs and Penny Options entitle the holders to receive common shares of the indirect parent company at the end of a vesting period. The total number of RSUs and Penny Options granted were 1,343,348 with an initial fair value of $10, equal to the share price at the date of grant. As at March 31, 2010, there were 1,224,500 outstanding RSUs and Penny Options (1,275,220 as at September 30, 2009) of which 814,504 (851,490 as at September 30, 2009) were vested.

Annual grant

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

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

The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event was probable as of March 31, 2010, the value of the awards to be expensed by the Company would range between $5,530,000 and $6,636,000 depending on the level of return expected to be realized by the majority shareholders.

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.	Financial Instruments

Interest rate risk

The Company is exposed to interest rate risk on its variable interest bearing term loans. The term loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 13, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.

Currencies risk

The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company does not use derivative instruments to reduce its exposure to foreign currencies risk. As at March 31, 2010, the financial assets totaling $213,341,000 ($183,252,000 as at September 30, 2009) include cash and cash equivalents and accounts receivable for CAN$3,368,000, 18,337,000 Euros and 1,040,000 Swiss francs (CAN$3,525,000, 19,014,000 Euros and 2,000,000 Swiss francs as at September 30, 2009). As at March 31, 2010, the financial liabilities totaling $709,015,000 ($700,978,000 as at September 30, 2009) include accounts payable and accrued liabilities and lo ng-term debt of CAN$9,104,000 and 7,224,000 Euros (CAN$11,432,000 and 8,044,000 Euros as at September 30, 2009).

Currency risk

As at March 31, 2010, the Company had $134,419,000 ($98,630,000 as at September 30, 2009) of cash with one financial institution.

Fair value of the financial instruments on the balance sheet

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

	March 31, 2010		September 30, 2009
	Fair value	Carrying amount	Fair value	Carrying amount
	$	$	$	$
Assets
Cash and cash equivalents	160,414	160,414	126,435	126,435
Accounts receivable from the parent company	380	380	306	306
Accounts receivable, net	52,547	52,547	56,511	56,511
Liabilities
Accounts payable and accrued liabilities	115,561	115,561	87,684	87,684
Long-term debt	636,403	593,454	649,689	613,294

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

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

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

b)	Long-term debt

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

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.	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 duratio n of the Company’s known or expected cash payments principally related to the Company’s borrowings.

Cash flow hedges of interest rate risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three-month and six-month periods ended March 31, 2010, 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. 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 its debt capital repayment schedule, hedge accounting was discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge accounting. 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 a n 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. The Company’s two interest rate swaps with a combined notional amount of $63,000,000 that were designated as cash flow hedges of interest rate risk matured during the three month ended March 31, 2010, and the Company has not entered into new derivative agreements.

Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

The 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 March 31, 2010, and September 30, 2009.

Tabular disclosure of fair values of derivative instruments

		Liability Derivatives
		March 31, 2010	September 30, 2009
	Balance sheet location	Fair value	Fair value
Derivatives designated as hedging instruments		$	$
Interest rate swaps	Other long-term liabilities	-	610
Total derivatives designated as hedging instruments		-	610

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.	Derivates and Hedging Activities (continued)

Cash flow hedges of interest rate risk (continued)

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Operations as at March 31, 2010, and 2009.

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

	Location in the Consolidated Financial Statements	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009
Interest rate swaps in cash flow hedging relationships		$			$
Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $1 ($67 in 2009)	OCI		(3	)		(125	)
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)	Financial expenses		(113	)		(26	)
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Financial expenses		-			-
Interest rate swaps not designated as hedging instruments			-
Loss recognized in income on derivatives	Financial expenses					-

	Location in the Consolidated Financial Statements	For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
Interest rate swaps in cash flow hedging relationships		$			$
Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $166 ($167 in 2009)	OCI		(309	)		(309	)
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)	Financial expenses		(464	)		59
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Financial expenses		447			-
Interest rate swaps not designated as hedging instruments
Loss recognized in income on derivatives	Financial expenses		-			(1,032	)

14.	Fair Value Measurements

Effective October 1, 2008, the Company adopted the authoritative guidance for fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

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

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

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

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

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.	Fair Value Measurements (continued)

Financial assets and liabilities measured at fair value on a recurring basis as at March 31, 2010, and September 30, 2009, are summarized below:

	Quoted prices in active markets for identical assets and liabilities (Level 1)	Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)	Balance at March 31, 2010
	$	$	$	$
Liabilities
Derivative financial instruments	-	-	-	-

	Quoted prices in active markets for identical assets and liabilities (Level 1)	Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)	Balance at September 30, 2009
	$	$	$	$
Liabilities
Derivative financial instruments	-	610	-	610

Derivative financial instruments consist of interest rate swap agreements as more fully described in Note 13 and are measured at fair value based on observable market interest rate curves as of the measurement date.

During the three-month period ended March 31, 2010, the Company recorded a goodwill impairment charge of $91,400,000 and an intangible assets impairment charge of $15,758,000. The fair value measurement method used in the Company’s impairment analysis utilized a discounted cash flow model and market approach that incorporates significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of the Company’s future operating results, the implied fair value using an income approach by preparing a discounted cash flow analysis and other subjective assumptions.

15.	Related Party Transactions

As at March 31, 2010, and September 30, 2009, the Company had a note receivable from its parent company amounting to $133,154,000. During the three-month period ended March 31, 2010, the Company earned interest income on the note amounting to $1,931,000 net of taxes amounting to $1,040,000 and $3,905,000 net of taxes amounting to $2,103,000 for the six-month period ended March 31, 2010, ($1,931,000 net of taxes amounting to $1,040,000 during the three-month period ended March 31, 2009, and $3,906,000 net of taxes amounting to $2,103,000 during the six-month period ended March 31, 2009) and related interest receivable from the parent company amounting to $21,088,000 as at March 31, 2010, ($15,078,000 as at September 30, 2009) has been recorded in the shareholder’s equity section of the consolidated balance sheet. As at March 31, 2010, the Company also recorded an account receivable from the parent company amounting to $380,000 ($306,000 as at September 30, 2009).

The Company recorded management fees from a controlling shareholding company amounting to $1,000,000 for the three-month period ended March 31, 2010, and $1,855,000 for the six-month period ended March 31, 2010, ($163,000 during the six-month period ended March 31, 2009). As at March 31, 2010, the Company accrued fees payable to a controlling shareholding company amounting to $867,000 ($436,000 as at September 30, 2009).

During the six-month period ended March 31, 2010, the Company paid a dividend to its parent company amounting to $128,000.

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.	Condensed Consolidating Financial Information

As of March 31, 2010, the Company had outstanding $228,000,000 aggregate principal amount of the Senior Secured Notes. The Secured Notes are fully and unconditionally guaranteed, jointly and severally by certain of the Company’s wholly-owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors and non-guarantors as at March 31, 2010, and September 30, 2009, the condensed consolidating statements of operations for the three-month and six-month periods ended March 31, 2010, and the three-month and six-month periods ended March 31, 2009, and the condensed consolidating statement of cash flows for the six-month period ended March 31, 2010, and the six-month period ended March 31, 2009.

Condensed Consolidating Balance Sheet as at March 31, 2010

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non- guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		68			122,491			37,855			-			160,414
Accounts receivable, net		-			38,178			14,936			-			53,114
Accounts receivable from the parent company		50			330			-			-			380
Intercompany receivables		30,344			1,344			261			(31,949	)		-
Income taxes receivable		-			1,266			-			-			1,266
Inventories, net		-			17,204			7,289			(552	)		23,941
Prepaid expenses and deposits		106			2,104			418			-			2,628
Deferred income taxes		(15,284	)		16,552			836			166			2,270
Total current assets		15,284			199,469			61,595			(32,335	)		244,013
Property, plant and equipment, net		-			28,956			8,260			-			37,216
Intangible assets, net		-			308,860			64,748			-			373,608
Investment in subsidiaries		(331,086	)		803,856			78,175			(550,945	)		-
Intercompany advances		852,481			128,627			669,281			(1,650,389	)		-
Goodwill		-			61,887			11,590			-			73,477
Deferred debt issue expense, net		20,199			2,729			-			-			22,928
Deferred income taxes		(8,022	)		9,970			3,465			-			5,413
Total assets		548,856			1,544,354			897,114			(2,233,669	)		756,655
Liabilities
Current liabilities
Accounts payable and accrued liabilities		5,213			100,832			9,516			-			115,561
Income taxes payable		18,091			(16,551	)		1,402			-			2,942
Short-term intercompany payables		716			30,636			597			(31,949	)		-
Deferred income taxes		(1,152	)		1,152			-			-			-
Total current liabilities		22,868			116,069			11,515			(31,949	)		118,503
Long-term debt		515,556			77,898			-			-			593,454
Intercompany advances		38,094			1,528,034			84,261			(1,650,389	)		-
Other long-term liabilities		40			9,719			-			-			9,759
Deferred income taxes		(23,572	)		65,159			(2,518	)		-			39,069
Total liabilities		552,986			1,796,879			93,258			(1,682,338	)		760,785
Shareholders’ Equity (Deficiency)
Capital stock
Common shares		1			21,020			735,742			(756,762	)		1
Preferred shares		-			78,175			-			(78,175	)		-
Retained earnings (deficit)		(452,100	)		(329,969	)		71,785			258,184			(452,100	)
9.05% Note receivable from the parent company		(133,154	)		-			-			-			(133,154	)
Additional paid-in capital		615,731			12,857			617			(13,474	)		615,731
Accumulated other comprehensive loss		(34,608	)		(34,608	)		(4,288	)		38,896			(34,608	)
Total shareholders’ equity (deficiency)		(4,130	)		(252,525	)		803,856			(551,331	)		(4,130	)
Total liabilities and shareholders’ equity (deficiency)		548,856			1,544,354			897,114			(2,233,669	)		756,655

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.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Balance Sheet as at September 30, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		702			41,859			83,874			-			126,435
Accounts receivable, net		-			41,151			15,973			-			57,124
Accounts receivable from the parent company		42			264			-			-			306
Short-term intercompany receivables		5,857			5,803			364			(12,024	)		-
Income taxes receivable		-			3,383			8			-			3,391
Inventories, net		-			39,162			5,688			(144	)		44,706
Prepaid expenses and deposits		-			2,289			579			-			2,868
Deferred income taxes		588			14,960			304			-			15,852
Total current assets		7,189			148,871			106,790			(12,168	)		250,682
Property, plant and equipment, net		-			29,846			9,498			-			39,344
Intangible assets, net		-			347,604			73,686			-			421,290
Investments in subsidiaries		(231,940	)		782,206			-			(550,266	)		-
Intercompany advances		898,272			128,793			669,195			(1,696,260	)		-
Goodwill		-			153,287			12,536			-			165,823
Deferred debt issue expense, net		23,371			2,040			-			-			25,411
Deferred income taxes		3,962			4,653			3,437			-			12,052
Total assets		700,854			1,597,300			875,142			(2,258,694	)		914,602
Liabilities
Current liabilities
Accounts payable and accrued liabilities		5,091			71,305			11,432			(144	)		87,684
Income taxes payable		3,425			(940	)		8			-			2,493
Installments on long-term debt		12,939			17,769			-			-			30,708
Short-term intercompany payables		4,795			6,206			1,023			(12,024	)		-
Deferred income taxes		588			257			(708	)		-			137
Total current liabilities		26,838			94,597			11,755			(12,168	)		121,022
Long-term debt		510,755			71,831			-			-			582,586
Intercompany advances		19,224			1,593,115			83,921			(1,696,260	)		-
Other long-term liabilities		262			9,186			-			-			9,448
Deferred income taxes		(19,989	)		60,511			(2,740	)		-			37,782
Total liabilities		537,090			1,829,240			92,936			(1,708,428	)		750,838
Shareholders’ Equity (Deficiency)
Capital stock
Common shares		1			21,034			745,398			(766,432	)		1
Retained earnings (deficit)		(297,658	)		(242,700	)		37,332			205,368			(297,658	)
9.05% Note receivable from the parent company		(133,154	)		-			-			-			(133,154	)
Additional paid-in capital		619,053			14,204			611			(14,815	)		619,053
Accumulated other comprehensive loss		(24,478	)		(24,478	)		(1,135	)		25,613			(24,478	)
Total shareholders’ equity (deficiency)		163,764			(231,940	)		782,206			(550,266	)		163,764
Total liabilities and shareholders’ equity (deficiency)		700,854			1,597,300			875,142			(2,258,694	)		914,602

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.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Operations for the three-month period ended March 31, 2010

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$

Net product sales		-			77,560			17,114			(309	)		94,365
Cost of goods sold		-			61,535			6,586			29			68,150
Selling and administrative expenses		1,002			20,902			6,502			-			28,406
Management fees		1,000			-			-			-			1,000
Research and development expenses		-			6,063			1,620			-			7,683
Depreciation and amortization		-			12,045			1,954			-			13,999
Impairment of intangible assets and goodwill		-			107,158			-			-			107,158
Total operating expenses		2,002			207,703			16,662			29			226,396
Operating income (loss)		(2,002	)		(130,143	)		452			(338	)		(132,031	)
Financial expenses		14,946			27,856			1,805			(28,222	)		16,385
Interest income		(12,067	)		(1,935	)		(14,379	)		28,222			(159	)
Other income		-			(7,700	)		-			-			(7,700	)
Loss (gain) on foreign currencies		16,148			(9,604	)		117			(5,253	)		1,408
Total other expenses (income)		19,027			8,617			(12,457	)		(5,253	)		9,934
Income (loss) before income taxes		(21,029	)		(138,760	)		12,909			4,915			(141,965	)
Income taxes expense (benefit)		37,612			(15,169	)		(546	)		(102	)		21,795
Equity in earnings (loss) in subsidiaries		(105,119	)		18,472			-			86,647			-
Net income (loss)		(163,760	)		(105,119	)		13,455			91,664			(163,760	)

Condensed Consolidating Operations for the three-month period ended March 31, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		-			107,290			15,652			(2,311	)		120,631
Cost of goods sold		-			23,688			4,857			858			29,403
Selling and administrative expenses		540			24,042			7,257			-			31,839
Research and development expenses		-			9,197			(108	)		-			9,089
Depreciation and amortization		-			11,598			2,881			-			14,479
Total operating expenses		540			68,525			14,887			858			84,810
Operating income (loss)		(540	)		38,765			765			(3,169	)		35,821
Financial expenses		15,629			27,506			413			(26,641	)		16,907
Interest income		(10,435	)		(2,077	)		(14,165	)		26,641			(36	)
Gain on foreign currencies		-			(352	)		(33	)		-			(385	)
Total other expenses (income)		5,194			25,077			(13,785	)		-			16,486
Income (loss) before income taxes		(5,734	)		13,688			14,550			(3,169	)		19,335
Income taxes expense (benefit)		20,428			(17,862	)		(340	)		-			2,226
Equity in earnings (loss) in subsidiaries		46,693			15,145			-			(61,838	)		-
Net income (loss)		20,531			46,695			14,890			(65,007	)		17,109

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.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Operations for the six-month period ended March 31, 2010

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$

Net product sales		-			172,583			33,220			(1,306	)		204,497
Cost of goods sold		-			84,084			11,662			(968	)		94,778
Selling and administrative expenses		1,345			45,303			13,997			-			60,645
Management fees		1,855			-			-			-			1,855
Research and development expenses		-			13,770			2,339			-			16,109
Depreciation and amortization		-			26,656			4,036			-			30,692
Impairment of intangible assets including goodwill		-			107,158			-			-			107,158
Total operating expenses		3,200			276,971			32,034			(968	)		311,237
Operating income (loss)		(3,200	)		(104,388	)		1,186			(338	)		(106,740	)
Financial expenses		29,903			56,517			3,765			(57,603	)		32,582
Interest income		(24,536	)		(3,930	)		(29,444	)		57,603			(307	)
Other income		-			(7,700	)		-			-			(7,700	)
Loss (gain) on foreign currencies		22,865			(14,268	)		(22	)		(7,182	)		1,393
Total other expenses (income)		28,232			30,619			(25,701	)		(7,182	)		25,968
Income (loss) before income taxes		(31,432	)		(135,007	)		26,887			6,844			(132,708	)
Income taxes expense (benefit)		33,971			(11,328	)		(935	)		(102	)		21,606
Equity in earnings (loss) in subsidiaries		(88,911	)		34,768			-			54,143			-
Net income (loss)		(154,314	)		(88,911	)		27,822			61,089			(154,314	)

Condensed Consolidating Operations for the six-month period ended March 31, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		-			195,274			33,102			(3,637	)		224,739
Cost of goods sold		-			41,617			13,456			(216	)		54,857
Selling and administrative expenses		1,839			47,280			14,725			-			63,844
Management fees		163			-			-			-			163
Research and development expenses		-			16,065			74			-			16,139
Depreciation and amortization		-			24,542			4,410			-			28,952
Total operating expenses		2,002			129,504			32,665			(216	)		163,955
Operating income (loss)		(2,002	)		65,770			437			(3,421	)		60,784
Financial expenses		31,765			60,277			2,094			(57,904	)		36,232
Interest income		(27,245	)		(2,233	)		(28,685	)		57,904			(259	)
Loss (gain) on foreign currencies		-			(323	)		68			-			(255	)
Total other expenses (income)		4,520			57,721			(26,523	)		-			35,718
Income (loss) before income taxes		(6,522	)		8,049			26,960			(3,421	)		25,066
Income taxes expense (benefit)		(8,694	)		13,945			(2,427	)		-			2,824
Equity in earnings in subsidiaries		23,492			29,388			-			(52,880	)		-
Net income		25,664			23,492			29,387			(56,301	)		22,242

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.	Condensed Consolidating Financial Information (continued)

Condensed Consolidating Cash Flows for the six-month period ended March 31, 2010

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(56,048	)		92,699			22,968			-			59,619
Cash flows from investing activities
Acquisition of property, plant and equipment		-			(3,089	)		(373	)		-			(3,462	)
Intercompany advances		45,791			166			(86	)		(45,871	)		-
Investments in subsidiaries		-			-			(68,000	)		68,000			-
Net cash provided by (used in) investing activities		45,791			(2,923	)		(68,459	)		22,129			(3,462	)
Cash flows from financing activities
Repayment of long-term debt		(8,791	)		(12,074	)		-			-			(20,865	)
Stock-based compensation plans redemption		(328	)		-			-			-			(328	)
Intercompany advances		18,870			(65,081	)		340			45,871			-
Dividends paid		(128	)		-			-			-			(128	)
Issue of shares		-			68,000			-			(68,000	)		-
Net cash provided by (used in) financing activities		9,623			(9,155	)		340			(22,129	)		(21,321	)
Foreign exchange gain (loss) on cash held in foreign currencies		-			11			(868	)		-			(857	)
Net increase (decrease) in cash and cash equivalents		(634	)		80,632			(46,019	)		-			33,979
Cash and cash equivalents, beginning of period		702			41,859			83,874			-			126,435
Cash and cash equivalents, end of period		68			122,491			37,855			-			160,414

Condensed Consolidating Cash Flows for the six-month period ended March 31, 2009

	Axcan Intermediate Holdings Inc.			Subsidiary guarantors			Subsidiary non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(53,291	)		183,907			(81,655	)		-			48,961
Cash flows from investing activities
Acquisition of property, plant and equipment		-			(2,296	)		(624	)		-			(2,920	)
Acquisition of intangible assets		-			-			(10	)		-			(10	)
Intercompany advances		16,662			(94,502	)		12,078			65,762			-
Net cash provided by (used in) investing activities		16,662			(96,798	)		11,444			65,762			(2,930	)
Cash flows from financing activities
Repayment of long-term debt		(1,111	)		(3,264	)		-			-			(4,375	)
Intercompany advances		38,547			(60,215	)		87,430			(65,762	)		-
Net cash provided by (used in) financing activities		37,436			(63,479	)		87,430			(65,762	)		(4,375	)
Foreign exchange loss on cash held in foreign currencies		-			(308	)		(1,058	)		-			(1,366	)
Net increase in cash and cash equivalents		807			23,322			16,161			-			40,290
Cash and cash equivalents, beginning of period		21			26,181			29,903			-			56,105
Cash and cash equivalents, end of period		828			49,503			46,064			-			96,395

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)

17.	Subsequent Events

On April 29, 2010, the Company announced that it had taken steps to cease the distribution of ULTRASE® MT and VIOKASE® effective April 28, 2010, in accordance with FDA guidance. Although these measures were taken after March 31, 2010, in accordance with U.S. GAAP, the Company has included the estimated effects of this decision in its current quarter results because it relates to an event that provided additional evidence that was relevant in the determination of March 31, 2010 estimates that are inherently used in the preparation of the Company’s financial statements at the balance sheet date.

The following table summarizes the preliminary assessment by the Company’s management of the impacts of ceasing to distribute ULTRASE® MT and VIOKASE® on the condensed consolidated interim financial statements of operations for the three-month and six-month periods ended March 31, 2010:


	For the three-month and six-month periods ended March 31, 2010
	$
Net product sales		(10,444	)
Cost of goods sold		42,964
Preliminary impairment of intangible assets and goodwill		107,158
Selling and administrative expenses		(4,918	)
		145,204
Operating loss		(155,648	)
Income taxes expense		19,424
Net loss		(175,072	)

The Company entered into an asset purchase and license agreement to acquire rights in and to the intellectual property, assigned contracts, permits and inventories related to a compound to be used in the development of an undisclosed product in the field of gastroenterology. Certain other rights were licensed under the agreement. Pursuant to the agreement, The Company will make an upfront payment of $8,000,000 on closing and additional payments of up to $86,000,000 based on the achievement of certain development, regulatory and commercialization milestones. In addition, the Company will pay royalties on the basis of net sales. The Company completed the asset acquisition in April 2010 and will record an expense of $8,000,000 for the payment of acquired in-process research and development in the third quarter of fiscal year 2010.

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 six-month periods ended March 31, 2010, and March 31, 2009, reflect the results of operations for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

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

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in Part 2, Item 1A of this Quarterly Report and “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Actual results may differ materially from those contained in any forward-looking statements.

Overview

Our Business

We are a specialty pharmaceutical company focused on marketing and selling pharmaceutical products used in the treatment of a variety of gastrointestinal, or GI, diseases and disorders, which are those affecting the digestive tract. Our mission is to improve the quality of care and health of patients suffering from gastrointestinal diseases and disorders by providing effective therapies for patients and specialized caregivers.

In addition to our marketing activities, we carry out research and development activities on products at various stages of development. These activities are carried out primarily with respect to products we currently market in connection with lifecycle management initiatives, as well as product candidates acquired or licensed from third parties. By combining our marketing capabilities with our research and development experience, we distinguish ourselves from other specialty pharmaceutical companies that focus solely on product distribution and we offer licensors the prospect of rapidly expanding the potential market for their products on a multinational basis. As a result, we are presented with opportunities to acquire or in-license products that have been advanced to the later stages of development by other companies. Our focus on pr oducts in late-stage development enables us to reduce risks and expenses typically associated with new drug 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 a development pipeline; and 5) expanding internationally.

Business Environment

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

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

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

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

Since 2005, some U.S. 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. As a consequence of the new model, manufacturers now realize the benefit of price increases more rapidly in return fo r 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 had DSAs in place with our three largest U.S. wholesalers since the first quarter of fiscal year 2009.

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

On April 29, 2010, we announced that we had taken steps to cease the distribution of ULTRASE® MT and VIOKASE®, effective April 28, 2010, in response to FDA guidance related the continued distribution of unapproved pancreatic enzyme products, or PEPs. The effects of ceasing to distribute these product lines on our financial statements are summarized in the section “Unapproved pancreatic enzyme products (“PEPs”) event” below. We have reflected certain adjustments in our financial statements for the quarter ended March 31, 2010 in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), including the appropriate treatment of a rec ognized subsequent event of this nature.

FINANCIAL OVERVIEW FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 31, 2010

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

For the three-month period ended March 31, 2010, net product sales were $94.4 million ($120.6 million for the three-month period ended March 31, 2009), operating loss was $132.1 million (operating income of $35.8 million for the three-month period ended March 31, 2009) and net loss was $163.7 million (net income of $17.1 million for the three-month period ended March 31, 2009). For the six-month period ended March 31, 2010, net product sales were $204.5 million ($224.7 million for the six-month period ended March 31, 2009), operating loss was $106.8 million (operating income of $60.7 million for the corresponding period of fiscal year 2009) and net loss was $154.3 million (net income of $22.2 million for the corresponding period of fiscal year 2009). Net product sales in the United States were $69.6 million (73.7% of net product sales) for the three-month period ended March 31, 2010, compared to $98.8 million (81.9% of net product sales) for the corresponding period of the preceding fiscal year. In the European Union, net product sales were $16.8 million (17.8% of net product sales) for the three-month period ended March 31, 2010, compared to $15.0 million (12.4% of net product sales) for the corresponding period of the preceding fiscal year. In Canada, net product sales were $7.9 million (8.4% of net product sales) for the three-month period ended March 31, 2010, compared to $6.7 million (5.6% of net product sales) for the corresponding period of the preceding fiscal year. Net product sales in the United States were $154.8 million (75.7 % of net product sales) for the six-month period ended March 31, 2010, compared to $178.0 million (79.2% of net product sales) for the corresponding period of the preceding fiscal year. In the European Union, net product sales were $32.6 million (15.9% of net product sales) for the six-month pe riod ended March 31, 2010, compared to $31.0 million (13.8% of net product sales) for the corresponding period of the preceding fiscal year. In Canada, net product sales were $16.7 million (8.2% of net product sales) for the six-month period ended March 31, 2010, compared to $15.5 million (6.9% of net product sales) for the corresponding period of the preceding fiscal year.

Unapproved pancreatic enzyme products (“PEPs”) event

ULTRASE® MT and VIOKASE® have accounted for approximately 19% of our total net sales in the last three fiscal years. PEPs to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, companies have historically marketed PEPs that have not been approved by the Food and Drug Administration, or FDA, including ULTRASE® MT and VIOKASE®, our PEPs. In 1995, the FDA issued a final rule requiring t hat these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of PEPs file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for PEPs until April 28, 2010, for those companies that (a) were marketing unapproved PEPs as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) continued diligent pursuit of regulatory approval.

We completed the submission of our NDA for ULTRASE® MT and, in the fourth quarter of fiscal 2008, received a first complete response letter (formerly known as an “approvable letter’’ prior to recent amendments of the Food Drug and Cosmetics Act, or FDCA) citing only certain chemistry, manufacturing and control data, or CMC, work requirements to which we responded. Further to the filing of our response, we received a second complete response letter in the fourth quarter of fiscal 2009, again citing certain CMC work the FDA requested we complete in order to obtain approval. This request was addressed in a complete response letter we prepared in collaboration with our manufacturing partners and filed with the FDA. The submission of our ro lling NDA for VIOKASE® was completed in the first quarter of fiscal 2010. At the time we completed this submission we requested a priority review and the FDA advised us in the second quarter of fiscal 2010 that it would not grant a priority review of this NDA.

On April 12, 2010, the FDA issued a press release concerning its approval of an NDA for an additional PEP and also posted on its website questions and answers for healthcare professionals and the public regarding the use of approved PEPs and the implications for PEPs that are not approved by April 28, 2010. In its communication, the FDA confirmed that following April 28, 2010, marketers of unapproved PEPs must suspend distributing unapproved PEPs. The FDA stated that, after this date, the unapproved products may still be available on pharmacy shelves for a short time until stock is depleted. Because we did not receive FDA approval of the NDAs we submitted for both ULTRASE® MT and VIOKASE®, we took steps to cease the distribution of both these product lines, effective April 28, 2010.

In the April 12 communication, the FDA also stated that it will continue to review NDAs that have been submitted by manufacturers of unapproved PEPs, and will approve additional PEPs even after the April 28, 2010 deadline has passed, if they meet the required safety, effectiveness, and product quality standards.

On May 5, 2010, the Prescription Drug User Fee Act, or PDUFA, date for our ULTRASE® MT NDA, the FDA issued an additional complete response with respect to our NDA for ULTRASE® MT for the treatment of exocrine pancreatic insufficiency. This letter requires that deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient of ULTRASE® MT be addressed before approval can be granted. The PDUFA date for VIOKASE® is August 30, 2010. ;We and the manufacturer of the active pharmaceutical ingredient of ULTRASE® MT and VIOKASE® are in ongoing discussions with the FDA to address the remaining open issues identified by the FDA.

Although we ceased distribution of ULTRASE® MT and VIOKASE®, previously shipped product remains on hand at the wholesaler and retail levels. As a result of taking steps to cease distribution and in accordance with U.S. GAAP, including the appropriate treatment of a recognized subsequent event of this nature, for the three-month period ended March 31, 2010, we recorded an additional $10.4 million returns provision which is an estimate of our liability for ULTRASE® MT and VIOKASE® that may b e returned by the original purchaser under our DSAs or applicable returns policies. This provision is based on management estimates of ULTRASE® MT and VIOKASE® inventory in the distribution channel, assumptions on related expiration dates of this inventory, estimated erosion of ULTRASE® MT and VIOKASE® demand, based on competition from approved PEPs and the resulting estimated sell-through of ULTRASE® MT and VIOKASE® and other factors.

During the three-month period ended March 31, 2010, we recorded a write-down of $28.1 million to reduce inventories to their net realizable value. We recorded this inventory write-down for inventory related to ULTRASE® MT and VIOKASE®, in light of the fact that these products did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA. An additional charge to cost of goods sold of $14.9 million has also been recorded for estimated loss for purchase and other materials and supply commitments related to ULTRASE® MT and VIOKASE® products incurred in the quarter.

This event has also resulted in a change in circumstance that caused us to review the carrying value of our long lived intangible assets, including goodwill. Based on this review, a preliminary impairment charge of $107.2 million was recorded for the quarter ended March 31, 2010.

The income tax benefits of the above changes were estimated and $25.6 million has been recorded in income taxes expense. In addition, an increase in valuation allowance on deferred tax assets of $45.0 million was also recorded.

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

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

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

c)	Assumptions regarding the probability of obtaining an eventual NDA for our PEPs and the time required for approval;

d)	Assumptions regarding market share growth after an eventual re-launch of our PEPs; and

e)	Other factors

In future quarters, we will monitor and review the assumptions and estimates and will prospectively record changes to provisions reflected in the current quarter. This process will include finalizing the goodwill impairment test.

The following table summarizes the preliminary assessment by management of the impacts of our ceasing to distribute ULTRASE® MT and VIOKASE®, or the “unapproved PEPs event’’ as it is sometimes referred to herein, on our condensed consolidated interim financial statements of operations for the three-month and six-month periods ended March 31, 2010:

(in millions of U.S. dollars)	For the three-month and six-month periods ended March 31, 2010
		$
Net product sales			(10.4	)
Cost of goods sold			43.0
Preliminary impairment of intangible assets and goodwill			107.2
Selling and administrative expenses			(4.9	)
			145.3
Operating loss			(155.7	)
Income taxes expense			19.4
Net loss			(175.1	)

Financial highlights

(in millions of U.S. dollars)	March 31, 2010			September 30, 2009
	$			$
Total assets		756.7			914.6
Long-term debt (a)		593.5			613.3
Shareholders’ equity (deficiency)		(4.1	)		163.8

(a)	Including the current portion

(in millions of U.S. dollars)	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009		For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
	$			$		$			$
Net product sales		94.4			120.6		204.5			224.7
EBITDA (1)		(111.8	)		50.7		(69.8	)		90.0
Adjusted EBITDA (1)		50.0			54.1		96.2			96.0
Net income		(163.7	)		17.1		(154.3	)		22.2

(1) 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 six-month periods ended March 31, 2010, and 2009 is as follows:

(in millions of U.S. dollars)	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009		For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009
	$			$		$			$
Net income (loss)		(163.7	)		17.1		(154.3	)		22.2
Financial expenses		16.3			16.9		32.5			36.3
Interest income		(0.2	)		-		(0.3	)		(0.3	)
Income taxes expense		21.8			2.2		21.6			2.8
Depreciation and amortization		14.0			14.5		30.7			29.0
EBITDA f)		(111.8	)		50.7		(69.8	)		90.0
Transaction, integration, refinancing costs and nonrecurring payments to third parties a)		2.6			0.8		4.4			1.9
Management fees b)		1.0			-		1.9			0.2
Stock-based compensation expense excluding impact of the unapproved PEPs event c)		2.5			2.6		4.0			3.9
Preliminary impairment of intangible assets and goodwill related to the unapproved PEPs event d)		107.2			-		107.2			-
Adjustments related to the unapproved PEPs event e)		48.5			-		48.5			-
Adjusted EBITDA f)		50.0			54.1		96.2			96.0

a)	Represents integration and refinancing costs related to non-recurring transactions, 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.

c)	Represents stock-based employee compensation expense under the provisions of FASB guidance, excluding the impact of the unapproved PEPs event.

d)	Intangible assets and goodwill write-downs related to the unapproved PEPs event.

Adjustments and other write-downs related to the unapproved PEPs event, including an additional returns provision of $10.4 million, inventory write-down of $28.1 million, an accrual for purchases and other materials and supply commitments of $14.9 million and a stock-based compensation recovery of $4.9 million.

EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are presented in this report because our management considers them important supplemental measures of our performance and believes that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income before financial expenses, interest income, income taxes and depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. We believe that EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items and other adjustments set forth 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 our indentures and credit facility. Adjusted EBITDA is no t 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.

Overview of results of operations

(in millions of U.S. dollars)	For the three-month period ended March 31, 2010			For the three-month period ended March 31, 2009			Change
	$			$			$			%
Net product sales (b)		94.4			120.6			(26.2	)		(21.7	)
Cost of goods sold (a) (b)		68.2			29.4			38.8			132.0
Selling and administrative expenses (a) (b)		28.4			31.8			(3.4	)		(10.7	)
Management fees		1.0			-			1.0			-
Research and development expenses (a)		7.7			9.1			(1.4	)		(15.4	)
Depreciation and amortization		14.0			14.5			(0.5	)		(3.4	)
Preliminary impairment of intangible assets and goodwill (b)		107.2			-			107.2			-
		226.5			84.8			141.7			167.1
Operating income (loss)		(132.1	)		35.8			(167.9	)		(469.0	)
Financial expenses		16.3			16.9			(0.6	)		(3.6	)
Interest income		(0.2	)		-			(0.2	)		-
Other income		(7.7	)		-			(7.7	)		-
Loss (gain) on foreign currencies		1.4			(0.4	)		1.8			450.0
		9.8			16.5			(6.7	)		(40.6	)
Income (loss) before income taxes		(141.9	)		19.3			(161.2	)		(835.2	)
Income taxes expense (b)		21.8			2.2			19.6			890.9
Net income (loss)		(163.7	)		17.1			(180.8	)		(1,057.3	)

(a)	Exclusive of depreciation and amortization

(b)	Including one time charges related to the unapproved PEPs event

(in millions of U.S. dollars)	For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009			Change
	$			$			$			%
Net product sales (b)		204.5			224.7			(20.2	)		(9.0	)
Cost of goods sold (a) (b)		94.8			54.9			39.9			72.7
Selling and administrative expenses (a) (b)		60.6			63.8			(3.2	)		(5.0	)
Management fees		1.9			0.2			1.7			850.0
Research and development expenses (a)		16.1			16.1			-			-
Depreciation and amortization		30.7			29.0			1.7			5.9
Preliminary impairment of intangible assets and goodwill (b)		107.2			-			107.2			100.0
		311.3			164.0			147.3			89.8
Operating income (loss)		(106.8	)		60.7			(167.5	)		(275.9	)
Financial expenses		32.5			36.3			(3.8	)		(10.5	)
Interest income		(0.3	)		(0.3	)		-			-
Other income		(7.7	)		-			(7.7	)		-
Loss (gain) on foreign currencies		1.4			(0.3	)		1.7			566.7
		25.9			35.7			(9.8	)		(27.5	)
Income (loss) before income taxes		(132.7	)		25.0			(157.7	)		(630.8	)
Income taxes expense (b)		21.6			2.8			18.8			671.4
Net income (loss)		(154.3	)		22.2			(176.5	)		(795.0	)

(a)	Exclusive of depreciation and amortization

(b)	Including one-time charges due to the unapproved PEPs event

Net product sales

For the three-month period ended March 31, 2010, net product sales were $94.4 million compared to $120.6 million for the corresponding period of the preceding year, a decrease of 21.7%. For the six-month period ended March 31, 2010, net product sales were $204.5 million compared to $224.7 million for the corresponding period of the preceding year, a decrease of 9.0%.

This decrease was primarily derived from lower sales in the United States, which amounted to $69.6 million for the three-month period ended March 31, 2010, compared to $98.8 million for the corresponding period of the preceding fiscal year, a decrease of 29.6% and $154.8 million for the six-month period ended March 31, 2010, compared to $178.0 million for the corresponding period of the preceding fiscal year, a decrease of 13.0%. The decrease in sales in the United States is mainly due to the product returns provision of $10.4 million taken related to the unapproved PEPs event and to the continued decrease in sales of certain of our URSO® branded products resulting from the entry on the U.S. market of a generic version of URSO® 250 and URSO® FORTE following their approval by the Office of Generic Drugs on May 13, 2009, combined with increases in sales deductions discussed hereafter in the gross-to-net product sales analysis.

Net product sales in the European Union increased 12.0%, from $15.0 million for the corresponding period of the preceding fiscal year, to $16.8 million for the three-month period ended March 31, 2010, and increased 5.2% from $31.0 million for the six-month period ended March 31, 2009, to $32.6 million for the six-month period ended March 31, 2010. The increase in sales resulted principally from the positive impact of currency fluctuations compared to the preceding year, as the value of the Euro against the U.S. dollar improved by 11.3% for the three-month period and by 8.7% for the six-month period. This increase was partially offset by a decrease in sales of our LACTEOL® products as a result of seasonal fluctuations in the infant diarrheal m arket.

Net product sales in Canada increased 17.9%, from $6.7 million for the three-month period ended March 31, 2009, to $7.9 million for the three-month period ended March 31, 2010, and increased 7.7% from $15.5 million for the six-month period ended March 31, 2009, to $16.7 million for the six-month period ended March 31, 2010. The increase in sales resulted mostly from the positive impact of currency fluctuations compared to the corresponding period of the preceding year, as the value of the Canadian dollar improved against the U.S. dollar by 15.2% for the three-month period and by 7.5% for the six-month period.

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 March 31, 2010		For the three-month period ended March 31, 2009		Change
	$		$		$			%
Gross product sales		133.7		145.6		(11.9	)		(8.2	)
Gross-to-net product sales adjustments
Product returns		2.8		3.1		(0.3	)		(9.7	)
Product returns related to the unapproved PEPs event		10.4		-		10.4			-
Chargebacks		10.7		9.2		1.5			16.3
Contract rebates		11.3		9.0		2.3			25.6
DSA fees		1.8		1.1		0.7			63.6
Discounts and other allowances		2.3		2.6		(0.3	)		(11.5	)
Total gross-to-net product sales adjustments		39.3		25.0		14.3			57.2
Total net product sales		94.4		120.6		(26.2	)		(21.7	)

(in millions of U.S. dollars)	For the six-month period ended March 31, 2010		For the six-month period ended March 31, 2009		Change
	$		$		$			%
Gross product sales		279.0		267.9		11.1			4.1
Gross-to-net product sales adjustments
Product returns		4.1		4.2		(0.1	)		(2.4	)
Product returns related to the unapproved PEPs event		10.4		-		10.4			-
Chargebacks		25.5		14.4		11.1			77.1
Contract rebates		25.9		17.6		8.3			47.2
DSA fees		3.6		2.0		1.6			80.0
Discounts and other allowances		5.0		5.0		-			-
Total gross-to-net product sales adjustments		74.5		43.2		31.3			72.5
Total net product sales		204.5		224.7		(20.2	)		(9.0	)

Product returns, chargebacks, contract rebates, DSA fees, discounts and other allowances totalled $39.3 million (29.4% of gross product sales) for the three-month period ended March 31, 2010, and $25.0 million (17.2% of gross product sales) for the corresponding period of the preceding fiscal year. The increase in total deductions as a percentage of gross product sales was mostly due to an increase of 7.8% in product returns, 2.3% in contract rebates and 1.7% in chargebacks. Product returns, contract rebates, DSA fees, discounts and other allowances totalled $74.5 million (26.7% of gross product sales) for the six-month period ended March 31, 2010, and $43.2 million (16.1% of gross product sales) for the six-month period ended March 31, 2009. The increase in total deductions as a percentage of gross product sales was mostly due to an i ncrease of 3.6% in product returns, 3.8% in chargebacks and 2.7% in contract rebates. The increases in product returns are mainly due to the unapproved PEPs event ($10.4 million). The increases in chargebacks and contract rebates are primarily due to the fact that we have fixed price contracts with certain third-party payors which, as a result of price increases announced during the preceding fiscal year, resulted in a greater rebate as a percentage of sales being awarded under those contracts. Furthermore, we recorded an additional reserve of $1.5 million for the three-month period and $5.4 million for the six-month period ended March 31, 2010, for chargebacks and rebates associated liabilities related to our URSO® franchise to reflect the estimated impact of updated pricing and contracting activities. Estimated chargebacks and rebates are recorded at the time revenue is recognized and are based on the latest info rmation available at that time, including estimated inventory levels in the distribution channel.

In addition, in May 2009, we entered into an agreement with the Department of Defense, or DOD, to remain eligible for inclusion on the DOD’s formulary and pursuant to which we agreed to pay rebates under the TRICARE retail pharmacy program. We began accounting for these rebates in the third quarter of fiscal year 2009. Under the contracting process it initiated in 2009, the DOD further sought to claim rebates from a large number of pharmaceutical manufacturers, including us, on all prescriptions of covered drugs filled under TRICARE for prior periods, starting as and from January 28, 2008. The DOD’s right to claim rebates for these periods prior to its rulemaking and contracting initiative was challenged in a lawsuit instituted on behalf of pharmaceutical manufacturers. During the first quarter of fiscal year 2010, an additional provision of $1.6 million was recorded to account for the potential unfavourable judicial decision in this lawsuit.

Deductions also increased due to increases in DSA fees resulting from new DSAs signed with two additional major U.S. wholesalers during the previous fiscal year.

Healthcare Reform

In March 2010, the Health Care and Education Reconciliation Act of 2010 was enacted in the U.S. This healthcare reform legislation contains several provisions that impact our business.

Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the three-month and six-month periods ended March 31, 2010. These include (1) an increase in the minimum Medicaid rebate to States participating in the Medicaid program on our branded prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340(B) Public Health Service Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain children’s hospitals, free standing cancer hospitals, critical access hospitals, and rural referral centers.

In addition, beginning in 2011, the new law requires drug manufacturers to provide a 50% discount to Medicare beneficiaries for any covered prescription drugs purchased during a Medicare Part D coverage gap (i.e. the “donut hole”). Also, beginning in 2011, we will be assessed our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and Department of Veterans Affairs and Department of Defence programs and TRICARE) made during the previous year. The aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Further, the new law also imposes a 2.3 % excise tax on sales of certain taxable medical devices, including our FLUTTER® mucus clearance device, that are made after December 31, 2012.

Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. For example, we do not yet know when and how discounts will be provided to the additional hospitals eligible to participate under the 340(B) program. In addition, determinations as to how the Medicare Part D coverage gap will operate and how the annual fee on branded prescription drugs will be calculated and allocated remain to be clarified, though, as noted above, these programs will not be effective until 2011. We have made several estimates with regard to important assumptions relevant to determining the financial impact of this legislation on our business due to the lack of availability of both certain information and a complete understanding of how the pr ocess of applying the legislation will be implemented.

In 2010, we expect that the new legislation will reduce our revenues by approximately $2.0 million as a result of the higher rebates and discounts on our products. We are still assessing the full extent of this legislation’s longer-term impact on our business. While certain aspects of the new legislation implemented in 2010 are expected to reduce our revenues in 2010 and in future years, other provisions of this legislation may offset, at some level, any reduction in revenues when these provisions become effective. In future years, based on our understanding, these other provisions are expected to result in higher revenues due to an increase in the total number of patients covered by health insurance and an expectation that existing insurance coverage will provide more comprehensive consumer protections. This would include a fede ral subsidy for a portion of a beneficiary’s out-of-pocket cost under Medicare Part D. However, these higher revenues will be negatively impacted by the branded prescription drug manufacturers’ fee. Consequently, a provision of $0.8 million has been recorded in contract rebates in the three-month and six-month periods ended March 31, 2010, including $0.3 million as an initial adjustment and $0.5 million to reflect the impact on the current sales.

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 March 31, 2010, cost of goods sold increased $38.8 million (132.0%) to $68.2 million from $29.4 million for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the three-month period ended March 31, 2010, increased compared to the three-month period ended March 31, 2009, from 24.4% to 72.2% mostly due to the unapproved PEPs event. For the six-month period ended March 31, 2010, cost of goods sold increased $39.9 million (72.7%) to $94.8 million from $54.9 million for the corresponding period of the preceding fiscal y ear. As a percentage of net product sales, cost of goods sold for the six-month period ended March 31, 2010, increased from 24.4% to 46.4% as compared to the six-month period ended March 31, 2009. The increases in cost of goods sold are mostly due to inventory write-down and purchase commitments reserves totalling $43.0 million related to the unapproved PEPs event. Without the impacts related to the unapproved PEPs event, cost of goods sold as a percentage of net product sales would have been 24.0% for the three-month period ended March 31, 2010, and 24.1% for the six-month period ended March 31, 2010, compared to 24.4% and 24.4% for the corresponding periods 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 March 31, 2010, selling and administrative expenses decreased $3.4 million (10.7%) to $28.4 million from $31.8 million for the corresponding period of the preceding fiscal year. For the six-month period ended March 31, 2010, selling and administrative expenses decreased $3.2 million (5.0%) to $60.6 million from $63.8 million for the corresponding period of the preceding fiscal year. The decreases in selling and administrative expenses are mainly due to the adjustment of $4.9 million for stock-based compensation further to changes in assumptions affecting our valuation of these expenses due to the impact of the unapproved PEPs event on our bus iness. This decrease was partially offset by an increase in our patient support programs as well as an increase in the sales force headcount in May 2009.

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 company of Axcan Intermediate Holdings Inc. As of March 31, 2010, they were allocated from the closing date of February 2008 Transactions based on revenue. For the three-month period ended March 31, 2010, management fees amounted to $1.0 million from $0.0 million for the corresponding period of the preceding fiscal year. For the six-month period ended March 31, 2010, management fees increased $1.7 million to $1.9 million from $0.2 million for the corresponding period of the preceding fiscal year as these fees were previously not allocated to the subsidiaries of Axcan Holdings Inc.

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 March 31, 2010, research and development expenses decreased $1.4 million (15.4%) to $7.7 million, from $9.1 million for the corresponding period of the preceding fiscal year. For the six-month period ended March 31, 2010, and 2009, research and development expenses amounted to $16.1 million. The research and development expenses include a decrease related to the diminishing of expenses related to the development work on PEPs and European clinical trial costs for PYLERA® as compared to the previous fiscal year. This decrease was offset by the effect of foreign currency on some of our expenses denominated in Canadian dollars and in Euros.

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 March 31, 2010, depreciation and amortization decreased $0.5 million (3.4%) to $14.0 million from $14.5 million for the corresponding period of the preceding fiscal year. For the six-month period ended March 31, 2010, depreciation and amortization increased $1.7 million (5.9%) to $30.7 million from $29.0 million. The changes are due to the reduction of the remaining amortizable life of some intangible assets to periods ranging from 6 months to 14 years, in the third quarter of fiscal year 2009.

Impairment of intangible assets and goodwill

The value of goodwill and intangible assets with an indefinite life are subject to an annual impairment test unless events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. The intangible assets with a finite life and property, plant and equipment are subject to an impairment test whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. As a result of the unapproved PEPs event, we compared the carrying value of the intangible assets with a finite life affected by the unapproved PEPs event to estimated future undiscounted cash flows. The change in circumstances associated with the unapproved PEPs event also caused us to review the carrying value of our lo ng lived intangible assets including goodwill. Based on this review, a preliminary impairment charge of $107.2 million was recorded for the three-month and six-month periods ended March 31, 2010, reflecting charges of $91.4 million for the goodwill allocated to our U.S. reporting unit and of $15.8 million related to finite life intangible assets.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed for acquisitions. For the three-month period ended March 31, 2010, financial expenses decreased $0.6 million (3.6%) to $16.3 million from $16.9 million for the corresponding period of the preceding fiscal year. The decrease in financial expenses is mainly due to the reduction of the interest on long-term debt of $0.8 million partially offset by an increase of $0.2 in interest and bank charges. For the six-month period ended March 31, 2010, financial expenses decreased $3.8 million (10.5%) to $32.5 million from $36.3 million for the corresponding period of the preceding fiscal year. The decrease in financial expenses is mainly due to the reduction of interest on long-term debt of $2.5 million as a result of the decrease in interest rates a nd the change in the fair value of derivatives of $1.0 million. Our two interest rate swaps with a combined notional amount of $63.0 million that were designated as cash-flow hedges of interest rate risk which matured during the three-month period ended March 31, 2010, and were not renewed.

Interest income

For the three-month period ended March 31, 2010, total interest income increased to $0.2 million from $0.0 million for the corresponding period of the preceding fiscal year. The increase is mainly due to the increase in interest rates on our cash and cash equivalent investments. For the six-month period ended March 31, 2010, and the six-month period ended March 31, 2009, total interest income amounted $0.3 million.

Other income

In June 2007, we initiated a lawsuit under the U.S. Lanham Act against a number of defendants alleging they falsely advertised their products to be similar or equivalent to ULTRASE® MT. During the three-month and six-month periods ended March 31, 2010, an amount of $7.7 million was paid to us pursuant to settlement arrangements entered into with the defendants in these matter.

Income taxes

For the three-month period ended March 31, 2010, income tax expense amounted to $21.8 million, compared to $2.2 million for the corresponding period of the preceding fiscal year. For the six-month period ended March 31, 2010, income tax expense amounted to $21.6 million compared to $2.8 million for the corresponding period of the preceding fiscal year. The effective tax rate was minus 15.4% for the three-month period ended March 31, 2010, compared to 11.5% for the three-month period ended March 31, 2009. For the six-month period ended March 31, 2010, the effective tax rate was minus 16.3%, compared to 11.3% for the six-month period ended March 31, 2009. The effective tax rates for the three-month and six-month periods ended March 31, 2010, are affected by a number of elements, the most important being the non-deductible charges related to the unapproved PEPs event and the valuation allowance taken against deferred tax assets attributable to the U.S. reporting unit. As at March 31, 2010, the Company has recorded a valuation allowance of $45.0 million against our net deferred tax assets attributable to the U.S. reporting unit. If, in future periods, the deferred tax assets are determined by management to be more likely than not to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded.

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

(in millions of U.S. dollars)	For the three-month period ended March 31, 2010						For the three-month period ended March 31, 2009
	%			$			%			$
Combined statutory rate applied to pre-tax income (loss)		35.00			(49.7	)		35.00			6.8
Increase (decrease) in taxes resulting from:
Change in promulgated rates		0.07			(0.1	)		-			-
Difference with foreign tax rates		0.56			(0.8	)		2.74			0.5
Valuation allowance		(31.71	)		45.0			-			-
Tax benefit arising from a financing structure		2.40			(3.4	)		(38.62	)		(7.5	)
Non-deductible items		(23.96	)		33.9			0.99			0.2
Investment tax credits		0.28			(0.4	)		(1.51	)		(0.3	)
State taxes		2.61			(3.6	)		4.52			0.9
Other		(0.61	)		0.9			8.39			1.6
		(15.36	)		21.8			11.51			2.2

(in millions of U.S. dollars)	For the six-month period ended March 31 2010						For the six-month period ended March 31 2009
	%			$			%			$
Combined statutory rate applied to pre-tax income (loss)		35.00			(46.4	)		35.00			8.8
Increase (decrease) in taxes resulting from:
Difference with foreign tax rates		1.13			(1.5	)		(0.61	)		(0.2	)
Valuation allowance		(33.91	)		45.0			-			-
Tax benefit arising from a financing structure		5.73			(7.6	)		(44.9	)		(11.3	)
Non-deductible items		(25.92	)		34.4			2.49			0.6
Investment tax credits		0.45			(0.6	)		(2.19	)		(0.5	)
State taxes		2.56			(3.3	)		5.67			1.4
Other		(1.32	)		1.6			15.8			4.0
		(16.28	)		21.6			11.26			2.8

Net income (loss)

For the three-month period ended March 31, 2010, net income decreased $180.8 million (1,057.3%) to a net loss of $163.7 million from net income of $17.1 million for the corresponding period of the preceding fiscal year. For the six-month period ended March 31, 2010, net income decreased $176.5 million (795.0%) to a net loss of $154.3 million from net income of $22.2 million for the corresponding period of the preceding fiscal year. The decreases in net income are mainly due to the impacts of the unapproved PEPs event amounting to $175.1 million.

Balance sheets as at March 31, 2010, and September 30, 2009

The following table summarizes balance sheet information as at March 31, 2010, compared to September 30, 2009.

	March 31,			September 30,
(in millions of U.S. dollars)	2010			2009		Change
	$			$		$			%
Cash and cash equivalents		160.4			126.4		34.0			26.9
Current assets		244.0			250.7		(6.7	)		(2.7	)
Total assets		756.7			914.6		(157.9	)		(17.3	)
Current liabilities		118.5			121.0		(2.5	)		(2.1	)
Long-term debt		593.5			582.6		10.9			1.9
Total liabilities		760.8			750.8		10.0			1.3
Shareholders’ equity (deficiency)		(4.1	)		163.8		(167.9	)		(102.5	)
Working capital		125.5			129.7		(4.2	)		(3.2	)

Working capital decreased by $4.2 million (3.2%) to $125.5 million as at March 31, 2010, from $129.7 million at September 30, 2009. This decrease was mainly due to net working capital adjustments of $63.6 million related to the unapproved PEPs event. This decrease was partially offset by an increase in cash and cash equivalents of $34.0 million and the reduction in instalments on long-term debt of $30.7 million. Pursuant to our credit agreement we are required to annually prepay amounts equal to a portion of our annual excess cash flow, as defined under our credit agreement. For fiscal year 2009, we were required to prepay $17.6 million on outstanding term loans under these provisions in the first quarter of fiscal year 2010. The prepayment was made in December 2009. As allowed by the credit agreement, the prepayment has bee n applied to the remaining scheduled installments of principal in direct order of maturity and the current portion of long-term debt has been reduced accordingly.

Total assets decreased $157.9 million (17.3%) to $756.7 million as at March 31, 2010, from $914.6 million as at September 30, 2009. This decrease was mainly due to the write-down of intangible assets and goodwill, of $107.2 million, inventory write-down of $28.1 million and deferred tax asset adjustments of $19.4 million related to the unapproved PEPs event. Long-term debt increased $10.9 million (1.9%) to $593.5 million as at March 31, 2010, from $582.6 million as at September 30, 2009, mostly due to the reclassification of $13.1 million from short-term debt to long-term debt pursuant to the allocation of the prepayment made in December 2009 to the remaining scheduled installments of principal in direct order of maturity.

Liquidity and Capital Resources

Cash Requirements

As at March 31, 2010, working capital was approximately $125.5 million and $129.7 as at September 30, 2009. Cash generated from operations, which will be negatively affected by the unapproved PEPs event, is used to fund working capital, capital expenditures, milestone payments, debt service and business development activities. We regularly review product and other acquisition opportunities and may therefore require additional debt or equity financing. We cannot be certain that such additional financing, if required, will be available on acceptable terms, or at all.

A significant portion of our sales are attributable to the ULTRASE® MT and VIOKASE® product lines. We reported net sales of $37.2 million for ULTRASE® and $14.3 million for VIOKASE® for the six-month period ended March 31, 2010. Total six-month net sales for these two products, which amounted to $51.5 million, are net of the additional reserve of $10.4 million taken due to the effect of the unapproved PEPs event.

On April 14, 2010, following the announcement that the FDA would require manufacturers of unapproved PEPs to cease distribution, effective April 28, 2010, one of the Company’s bond rating agencies put our credit ratings “under review”. This could negatively impact on future borrowing capacity and cost.

Contractual Obligations and Other Commitments

The following table summarizes our significant contractual obligations as at March 31, 2010, and the effect such obligations are expected to have on our liquidity and cash flows in future years. This table excludes the payment of amounts already recorded on the balance sheet as current liabilities at March 31, 2010, and certain other purchase obligations as discussed below:

	For the twelve-month periods ending March 31,
(in millions of U.S. dollars)	2011		2012		2013		2014		2015 and thereafter
	$		$		$		$		$
Long-term debt		-		16.3		21.9		100.6		463.0
Operating leases		2.7		1.7		1.2		1.0		0.2
Other commitments		15.8		1.4		0.1		0.1		0.1
Interest on long-term debt		57.6		57.4		56.5		53.9		76.8
		76.1		76.8		79.7		155.6		540.1

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.

As more fully described in Note 10 to the Consolidated Financial Statements, effective October 1, 2007, we adopted the provisions of the guidance issued by the FASB related to accounting for uncertainty in income taxes. As at March 31, 2010, we had unrecognized tax benefits of $11.3 million ($10.4 million as at September 30, 2009) of which $9.5 million would be treated as a reduction of goodwill and $1.8 million would favourably impact our effective tax rate if subsequently recognized. Due to the nature and timing of the ultimate outcome of these uncertain tax positions, we cannot make a reasonably reliable estimate of the amount and period of related future payments. Therefore, our unrecognized tax benefits with respect to our uncertain tax positions has been excluded from the above contractual obligations table.

Long-term debt and credit facility

On November 29, 2007, we entered into an Arrangement Agreement with Axcan Pharma Inc., pursuant to which we agreed to, through an indirect wholly-owned subsidiary, acquire all of the common stock of Axcan Pharma Inc. and enter into various other transactions in accordance with the Plan of Arrangement (the “Arrangement”). On February 25, 2008, we obtained various types of financing in connection with the Arrangement. We issued $228.0 million aggregate principal amount of Senior Secured Notes. The Senior Secured Notes were priced at $0.98737 with a yield to March 1, 2015, of 10%. The Senior Secured Notes rank pari passu with our credit facility.

We 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, we 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:

Year	%
2011	106.938
2012	104.625
2013	102.313
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 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 notes, we 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.

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 quarterly payments over the term. As at March 31, 2010, $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 disclo sed in our Consolidated Financial Statements. The Credit Facility requires us to meet certain financial covenants, which were met as at March 31, 2010. 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 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. Based on these requirements, for the fiscal year 2009, we were requ ired to prepay $17.6 million of outstanding term loans in the first quarter of fiscal year 2010.

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 Unsecured Notes. The senior notes were priced at $0.9884 with a yield to March 1, 2016, of 13.16%. The Senior Unsecured Notes are subordinate to the new senior secured credit facility 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 Unsecured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2012, we may redeem some or all of the Senior Unsecured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Unsecured Notes to be redeemed) set forth below:

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 Secured 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 credit facility, the Senior Secured Notes and the Senior Unsecured Notes. Our obligations under, and each of the guarantors’ obligations under its guarantee of, the credit facility and the Senior Secured 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 2015.

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 March 31, 2010, and September 30, 2009, we had a note receivable from our parent company amounting to $133.2 million. During the three-month period ended March 31, 2010, we have earned interest income on the note amounting to $1.9 million net of taxes amounting to $1.0 million and $3.9 million net of taxes amounting to $2.1 million for the six-month period ended March 31, 2010 ($1.9 million net of taxes amounting to $1.0 million during the three-month period ended March 31, 2009, and $3.9 million net of taxes amounting to $2.1 million during the six-month period ended March 31, 2009). We have also recorded a related interest on the note receivable from our parent company amounting to $21 .1 million as at March 31, 2010 ($15.1 million as at September 30, 2009, which has been recorded in the shareholder’s equity section of the consolidated balance sheet. As at March 31, 2010, we also recorded an account receivable from our parent company amounting to $0.4 million ($0.3 million as at September 30, 2009).

We recorded management fees from a controlling shareholding company amounting to $1.0 million for the three-month period ended March 31, 2010, and $1.9 million for the six-month period ended March 31, 2010 (for the six-month period ended March 31, 2009, the management fees was not allocated except for an amount of $0.2 million). As at March 31, 2010, we accrued fees payable to a controlling shareholding company amounting to $0.9 million ($0.4 million as at September 30, 2009).

During the six-month period ended March 31, 2010, we paid a dividend to our parent company amounting to $0.1 million to allow for the payment of certain group expenses.

Balance sheet arrangements

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

Cash flows

Our cash flows from operating, investing and financing activities for the three-month periods ended March 31, 2010, and 2009 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 March 31, 2010			For the three-month period ended March 31, 2009			Change
	$			$			$
Net cash provided by operating activities		31.1			10.0			21.1
Net cash used by investing activities		(2.3	)		(1.6	)		(0.7	)
Net cash used by financing activities		(0.1	)		(2.2	)		2.1

Our cash flows from operating, investing and financing activities for the six-month periods ended March 31, 2010, and 2009 as reflected in the consolidated statements of cash flows, are summarized in the following table:

(in millions of U.S. dollars)	For the six-month period ended March 31, 2010			For the six-month period ended March 31, 2009			Change
	$			$			$
Net cash provided by operating activities		59.6			49.0			10.6
Net cash used by investing activities		(3.5	)		(2.9	)		(0.6	)
Net cash used by financing activities		(21.3	)		(4.4	)		(16.9	)

Cash flows provided by operating activities increased $21.1 million from $10.0 million for the three-month period ended March 31, 2009, to $31.1 million for the three-month period ended March 31, 2010. Cash flows provided by operating activities increased $10.6 million from $49.0 million for the six-month period ended March 31, 2009, to $59.6 million for the six-month period ended March 31, 2010. The increases in net cash provided by operating activities are mainly due to the decreases in accounts receivable of $36.0 million during the three-month period ended March 31, 2010, and $30.2 million during the six-month period ended March 31, 2010, compared to the corresponding period of the preceding fiscal year. These increases are partially offset by a decrease in net product sales of $15.7 million during the three-month period ended March 31, 2010, and $9.7 million during the six-month period ended March 31, 2010 (excluding the additional provision in product returns related to the unapproved PEPs event), compared the corresponding period of the preceding fiscal year.

Cash flows used by investing activities increased by $0.7 million from $1.6 million of cash used in the three-month period ended March 31, 2009, to $2.3 million of cash used in the three-month period ended March 31, 2010. Cash flows used by investing activities increased by $0.6 million from $2.9 million of cash used in the six-month period ended March 31, 2009, to $3.5 million of cash used in the six-month period ended March 31, 2010.

Cash flows used by financing activities decreased $2.1 million from $2.2 million of cash used in the three-month period ended March 31, 2009, to $0.1 million of cash used in the three-month period ended March 31, 2010. Cash flows used by financing activities increased $16.9 million from $4.4 million of cash used in the six-month period ended March 31, 2009, to $21.3 million of cash used in the six-month period ended March 31, 2010. The increase in cash used by financing activities in the six-month period ended March 31, 2010, is mainly due to the prepayment of $17.6 million of outstanding term-loans, based on the annual excess cash flow requirements for the fiscal year 2009, as defined in the credit agre ement.

Significant Accounting Policies

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

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and also affect the recognized amounts of revenues and expenses during the year. Significant estimates and assumptions made by management include the allocation of the purchase price of acquired assets and businesses, allowances for accounts receivable and inventories, reserves for product returns, rebates, chargebacks and DSA fees, the classification of intangible assets between finite life and indefinite life, the useful lives of long-lived assets, the expected cash flows used in evaluating long-lived assets, goodwill and investments for impairment, stock ba sed compensation costs, pending legal settlements and the establishment of provisions for income taxes including the realizability of deferred tax assets. The estimates are made using the historical information and various other relevant factors available to management. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any adjustments when necessary. Actual results could differ from those estimates based upon future events, which could include, among other risks, changes in regulations governing the manner in which we sell our products, changes in the healthcare environment, foreign exchange and managed care consumption patterns.

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

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

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

c)	Assumptions regarding the probability of obtaining an eventual NDA for our PEPs and the time required for approval;

d)	Assumptions regarding market share growth after an eventual re-launch of our PEPs; and

e)	Other factors

In future quarters, management will monitor and review the assumptions and estimates and will prospectively record changes to provisions reflected in the current quarter. This process will include finalizing the goodwill impairment test.

Revenue Recognition

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

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

(in millions of U.S. dollars)	Product returns			Contract rebates			Charge- backs			DSA fees			Discounts and other			Total
	$			$			$			$			$			$
Balance as at September 30, 2009		17.2			9.8			9.0			1.0			0.7			37.7
Provisions		4.1			25.9			25.5			3.6			5.0			64.1
Provisions related to the unapproved PEPs event		10.4			-			-			-			-			10.4
Settlements		(7.2	)		(18.7	)		(22.8	)		(3.0	)		(5.1	)		(56.8	)
Balance as at March 31, 2010		24.5			17.0			11.7			1.6			0.6			55.4

Product returns

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

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

a)	past product returns activity;

b)	the duration of time taken for products to be returned;

c)	the estimated level of inventory in the distribution channels;

d)	product recalls and discontinuances;

e)	the shelf life of products;

f)	the launch of new drugs or new formulations; and

g)	the loss of patent protection or new competition

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

Returns for new products are more difficult to estimate than for established products. For shipments made to support the commercial launch of a new product under standard terms, our estimate of sales return accruals are primarily based on the historical sales returns experience of similar products.

Once sufficient historical data on actual returns of the product are available, the returns provision is based on this data and any other relevant factors as noted above.

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

The accrued liabilities include reserves of $24.5 million as at March 31 2010, and $17.2 million as at September 30, 2009, for estimated product returns.

As at March 31, 2010, the product return reserve was increased by $10.4 million due to the unapproved PEPs event, which represent the management’s estimates of the balance of ULTRASE® MT and VIOKASE® inventory in the distribution channel. Due to the subjectivity of this estimate, we prepared various sensitivity analyses to ensure our final estimate is within a reasonable range. A change in assumptions that resulted in a 10% change in the quantity of ULTRASE® MT and VIOKASE® inventory in th e distribution channel would have resulted in a change in the return reserve of approximately $2.5 million.

Rebates, Chargebacks and other sales deductions

In the United States, we establish and maintain reserves for amounts payable to managed care organizations, state Medicaid and other government programs for the reimbursement of portions of the retail price of prescriptions filled that are covered by these programs. We also establish and maintain reserves for amounts payable to wholesale distributors for the difference between their regular sale price and the contract price for the products sold to our contract customers.

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

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

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

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

Accrued liabilities include reserves of $17.0 million and $11.7 million as at March 31, 2010, and $9.8 million and $9.0 million as at September 30, 2009, respectively, for estimated contract rebates and chargebacks.

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

Intangible Assets and Goodwill

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

The following table summarizes the changes to the carrying value of the intangible assets and goodwill from September 30, 2009, to March 31, 2010:

(in millions of U.S. dollars)	Intangible assets			Goodwill
	$				$
Balance as at September 30, 2009		421.3			165.8
Depreciation and amortization		(26.6	)		-
Preliminary impairment of intangible assets and goodwill due to the unapproved PEPs event		(15.8	)		(91.4	)
Foreign exchange translation adjustment		(5.3	)		(0.9	)
Balance as at March 31, 2010		373.6			73.5

Research and Development Expenses

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

Income taxes

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

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

Changes in Accounting Standards

See Note 3 to our Consolidated Financial Statements in Item 1 of Part 1 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.

Subsequent Events

As further disclosed above, on April 29, 2010, we announced that we have taken steps to cease the distribution of ULTRASE® MT and VIOKASE®, effective April 28, 2010, in accordance with FDA guidance. Although these measures were taken after March 31, 2010, in accordance with U.S. GAAP, we have included the estimated effects of this decision in our current quarter results because it relates to an event that provided additional evidence that was relevant in the determination estimates that are inherently used in the preparation of our financial statements at the balance sheet date.

We entered into an asset purchase and license agreement to acquire rights in and to the intellectual property, assigned contracts, permits and inventories related to a compound to be used in the development of an undisclosed product in the field of gastroenterology. Certain other rights were licensed under the agreement. Pursuant to the agreement, we will make an upfront payment of $8.0 million on closing and additional payments of up to $86.0 million based on the achievement of certain development, regulatory and commercialization milestones. In addition, we will pay royalties on the basis of net sales. We completed the asset acquisition in April 2010 and will record an expense of $8.0 million for the payment of acquired in-process research and development in the third quarter of fiscal year 2010.

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, 2009, which is incorporated herein by reference. As of March 31, 2010, our exposure to market risk has not changed materially since September 30, 2009.

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 March 31, 2010, 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 Securit ies and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

Item 1A.

Risk Factors

Except for the updated risk factors set forth 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, 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.

RISKS RELATED TO OUR BUSINESS

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

Some of our key products, including products from our ULTRASE®, URSO® and CANASA® lines, currently face competition from generic or unbranded products (such as ACTIGALL™, its generics and the recently launched generic in the case of URSO®, other branded and unbranded PEPs, in the case of ULTRASE® and other rectal dosage forms of mesalamine in the case of CANASA®). Third-party payors and pharmacists can substitute generic or unbranded products for our products even if physicians prescribe our products by name. Particularly in the U.S., government agencies and third-party payors often put pressure on patients to purchase generic products instead of brand-name products as a way to reduce health-care costs.

Products which are no longer protected by marketing exclusivity or patent are subject to generic competition. For example, a recent public filing by K-V Pharmaceutical Company indicated that it had submitted an Abbreviated New Drug Application to the U.S. Food and Drug Administration for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension, the active pharmaceutical ingredient in our CARAFATE® and SULCRATE® products. We do not have any information on the status of this ANDA. Generic competition against any of our products would lower prices and unit sales and could therefore have a material adverse effect on our results of operations and financial condition.

RISKS RELATED TO OUR PANCREATIC ENZYME PRODUCTS (PEPs)

We have taken steps to cease distribution of ULTRASE® MT and VIOKASE® in response to regulatory requirements and will require FDA approval before resuming sales of these products.

Existing products to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there are currently marketed PEPs that have not been approved by the FDA, including ULTRASE® MT and VIOKASE®. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for exocrine pancreatic insufficiency dr ug products until April 28, 2010 for those companies that were (a) marketing unapproved pancreatic enzyme products as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval.

Because we did not receive FDA approval of the NDAs we submitted for both ULTRASE® MT and VIOKASE® by FDA’s April 28, 2010 deadline, we ceased distribution of both these product, effective April 28, 2010. We reported net sales of $75.9 million, $58.6 million and $47.5 million for ULTRASE® MT in fiscal 2009, 2008, and 2007, respectively, and $37.2 million for the six-month period ended March 31, 2010. We reported net sales of $22.7 million, $15.1 million and $11.2 million for VIOKASE® in fiscal 2009, 2008, and 2007, respectively, and $14.3 million for the six-month period ended March 31, 2010. Total six-month net sales for these two products, which amounted to $51.5 million, are net of the additional reserve of $10.4 million taken due to the effect of the unapproved PEPs event. We expect our revenue and cash generated by operations to be adversely affected by our ceasing distribution of these products.

On May 5th, 2010, the Prescription Drug User Fee Act, or PDUFA, date for our ULTRASE® MT NDA, the FDA issued an additional complete response letter with respect to our NDA for ULTRASE® MT for the treatment of exocrine pancreatic insufficiency. This letter requires that deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient of ULTRASE® MT be addressed before approval can be granted. The submission of our rolling NDA for VIOKASE® was completed in the first quarter of fiscal 2010 and the PDUFA date for our NDA for VIOKASE® is August 30, 2010. We use the same manufacturer of active pharmaceutical ingredient as ULTRASE® MT for VIOKASE®. Our revenues and results of operations will be adversely affected unless we are able to receive regulatory approval to market these two products, and we cannot provide any assurances as to the receipt of this regulatory approval or the timing of such approval. In addition, delays in receiving regulatory approval will likely permit our competitors to gain market share in patients using these products, and we expect to face increased competition with respect to these products in the event we receive approval.

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.

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: May 14, 2010	BY:	/s/
		Steve Gannon
		Senior Vice President, Finance, Chief Financial Officer and Treasurer

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.

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Aptalis Pharma Inactive 10-Q2010 Q2 Quarterly report

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