[AXCAN PHARMA LOGO] AXCAN PHARMA INC.
597, boul. Laurier
Mont-Saint-Hilaire (Quebec)
Canada J3H 6C4
Tel (450) 467-5138
1 800 565-3255
Fax: (450) 464-9979
www.axcan.com
SOURCE: AXCAN PHARMA INC.
TSX SYMBOL (Toronto Stock Exchange): AXP
NASDAQ SYMBOL (NASDAQ National Market): AXCA
DATE: February 5, 2004
Press Release for immediate distribution
AXCAN REPORTS STRONG FIRST QUARTER 2004 RESULTS
REVENUE UP 52% TO $57.6 MILLION
MONT-SAINT-HILAIRE, QUEBEC - Axcan Pharma Inc. ("Axcan" or the "Company")
announced today operating results for the quarter ended December 31, 2003, the
Company's first quarter of the fiscal year ending September 30, 2004. The
Company reported revenue growth of 52% to $57.6 million and net income of $10.4
million, or $0.23 per share (fully diluted), representing 59% growth in net
income and 64% growth in diluted income per share, as compared to the first
quarter of fiscal 2003 (all amounts stated in U.S. dollars).
"We are pleased to announce that our first quarter financial results reflect
another period of strong and consistent performance," said Leon F. Gosselin,
President and Chief Executive Officer of Axcan. "These results demonstrate
Axcan's continued record of strong sales and income growth. During the quarter,
Axcan also made significant progress in advancing its development pipeline in
order to provide for the next phase of its growth," he concluded.
RECENT DEVELOPMENTS
Acquisition
In November 2003, Axcan acquired a group of gastrointestinal products from
Aventis. This acquisition is both strategic and accretive, and allows Axcan to
further expand its business in North America.
Product development
In December 2003, Axcan reported positive efficacy and safety data for ITAX, a
drug acquired from Abbott Laboratories for the treatment of gastrointestinal
symptoms caused by reduced gastrointestinal motility. Results of Phase II
studies conducted in both Caucasian and Japanese patients provided very
important data on the absence of cardiac toxicity.
Shortly after the end of the quarter, the U.S. Food and Drug Administration
("FDA") endorsed Axcan's proposal to progress ITAX directly to a Phase III
clinical trial. Axcan intends to initiate Phase III clinical studies to evaluate
the efficacy of ITAX in the treatment of functional dyspepsia (also known as non
ulcer dyspepsia), in the second half of fiscal 2004. Axcan believes that, if
approved by the FDA, ITAX has the potential to become its largest product ever,
generating annual revenue of approximately U.S. $200-300 million within 3-5
years after launch.
Research and development
Axcan will provide an update on its research and development pipeline at the
Company's Analyst/Investor Luncheons to be held in New York City on February 17,
2004, and Montreal on February 19, 2004.
INTERIM FINANCIAL REPORT
This release includes, by reference, the first quarter interim financial report
incorporating the financial statements in accordance with both U.S. and Canadian
GAAP as well as the full Management Discussion & Analysis ("MD&A") including the
reconciliation to Canadian GAAP of the U.S. GAAP presentation. The interim
report, including the MD&A and financial statements, is filed with applicable
U.S. and Canadian regulatory authorities.
CONFERENCE CALL
Axcan will host a conference call at 4:30 P.M. EST, on February 5, 2004.
Interested parties may also access the conference call by way of web cast at
www.axcan.com. The web cast will be archived for 90 days.
The telephone numbers to access the conference call are (800) 814-4859 (Canada
and United States) or (416) 640-4127 (international). A replay of the call will
be available until February 12, 2004. The telephone number to access the replay
of the call is (416) 640-1917 code: 21035576.
Axcan is a leading specialty pharmaceutical company involved in the field of
gastroenterology. Axcan markets a broad line of prescription products sold for
the treatment of symptoms in a number of gastrointestinal diseases and disorders
such as inflammatory bowel disease, irritable bowel syndrome, cholestatic liver
diseases and complications related to cystic fibrosis. Axcan's products are
marketed by its own sales force in North America and Europe. Its common shares
are listed on the Toronto Stock Exchange under the symbol "AXP" and on the
NASDAQ National Market under the symbol "AXCA".
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995.
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To the extent any statements made in this release contain information that is
not historical, these statements are essentially forward looking and are subject
to risks and uncertainties, including the difficulty of predicting FDA
approvals, acceptance and demand for new pharmaceutical products, the impact of
competitive products and pricing, new product development and launch, reliance
on key strategic alliances, availability of raw materials, the regulatory
environment, fluctuations in operating results and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission.
The name ITAX appearing in this press release is a trademark of Axcan Pharma
Inc. and its subsidiaries.
-30-
Management Discussion and Analysis (MD&A), Financial Statements
and Notes Attached
INFORMATION: David W. Mims
Executive Vice President and Chief Operating Officer
Axcan Pharma Inc.
Tel: (205) 991-8085 ext. 3223
or Isabelle Adjahi
Director, Investor Relations
Axcan Pharma Inc.
Tel: (450) 467-2600 ext. 2000
Web: www.axcan.com
AXCAN PHARMA INC. / 2
Management's discussion and analysis of financial condition and results
of operations
This discussion should be read in conjunction with the information contained in
Axcan's consolidated financial statements and the related notes thereto. All
amounts are in U.S. dollars.
Overview
Axcan is a leading specialty pharmaceutical company concentrating in the field
of gastroenterology, with operations in North America and Europe. Axcan markets
and sells pharmaceutical products used in the treatment of a variety of
gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, VIOKASE and
PANZYTRAT for the treatment of certain gastrointestinal symptoms related to
cystic fibrosis in the case of ULTRASE; URSO 250 and DELURSAN for the treatment
of certain cholestatic liver diseases; SALOFALK and CANASA for the treatment of
certain inflammatory bowel diseases; and PHOTOFRIN for the treatment of certain
types of gastrointestinal and other conditions. In addition, Axcan currently has
three products pending approval, one an additional indication in Europe for a
currently marketed product, one a new formulation for a product currently
marketed in the United States and the third one, an indication for a new product
in the United States. Axcan also has a number of pharmaceutical projects in all
phases of development. Axcan reported revenue of $57.6 million and operating
income of $17.0 million for the three-month period ended December 31, 2003.
Much of Axcan's recent sales growth is derived from sales in the United States
and from sales by its French subsidiary, following recent acquisitions. During
the first quarter of fiscal 2003, Axcan acquired the worldwide rights to the
PANZYTRAT enzyme product line from Abbott Laboratories (Abbott) and the rights
to DELURSAN, an ursodiol 250 mg tablet, from Aventis Pharma S.A. ("Aventis") for
the French market. During the first quarter of fiscal 2004, Axcan acquired the
rights to a group of products from Aventis for a cash purchase price of $145
million. These products are CARAFATE and BENTYL for the U.S. market and
SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market (collectively, "AVAX"
product line). Revenue from sales of Axcan's products in the United States was
$37.8 million (65.6% of total revenue) for the three-month period ended December
31, 2003, compared to $25.2 million (66.7% of total revenue) for the same period
of fiscal 2003. In Canada, revenue was $6.6 million (11.5% of total revenue) for
the three-month period ended December 31, 2003, compared to $4.9 million (13.0%
of total revenue) for the same period of fiscal 2003. In Europe, revenue was
$13.2 million (22.9% of total revenue) for the three-month period ended December
31, 2003, compared to $7.7 million (20.3% of total revenue) for the same period
of fiscal 2003.
Axcan's revenue historically has been and continues to be principally derived
from sales of pharmaceutical products, to large pharmaceutical wholesalers and
large chain pharmacies. Axcan utilizes a "pull-through" marketing approach that
is typical of pharmaceutical companies. Under this approach, Axcan's sales
representatives demonstrate the features and benefits of its products to
gastroenterologists who may write their patients prescriptions for Axcan's
products. The patients, in turn, take the prescriptions to pharmacies to be
filled. The pharmacies then place orders with the wholesalers or, in the case of
large chain pharmacies, their distribution centres, to whom Axcan sells its
products.
Axcan's expenses are comprised primarily of selling and administrative expenses
(including marketing expenses), cost of goods sold (including royalty payments
to those companies from whom Axcan licenses its products) and research and
development expenses.
AXCAN PHARMA INC. / 3
Axcan's annual and quarterly operating results are primarily affected by three
factors: wholesaler buying patterns; the level of acceptance of Axcan's products
by gastroenterologists and their patients; and the extent of Axcan's control
over the marketing of its products. Wholesaler buying patterns, including a
tendency to increase inventory levels prior to an anticipated or announced price
increase, affect Axcan's operating results by shifting revenue between quarters.
To maintain good relations with wholesalers, Axcan typically gives prior notice
of price increases. The level of patient and physician acceptance of Axcan's
products, as well as the availability of similar therapies, which may be less
effective but also less expensive than some of Axcan's products, impact Axcan's
revenues by driving the level and timing of prescriptions for its products.
Critical Accounting Policies
Axcan's consolidated financial statements are prepared in accordance with U.S.
GAAP, applied on a consistent basis. Axcan's critical accounting policies
include the use of estimates, revenue recognition, the recording of research and
development expenses and the determination of the useful lives or fair value of
goodwill and intangible assets. Some of our critical accounting policies require
the use of judgment in their application or require estimates of inherently
uncertain matters. Although our accounting policies are in compliance with U.S.
GAAP, a change in the facts and circumstances of an underlying transaction could
significantly change the application of our accounting policies to that
transaction, which could impact financial statements. Discussed below are those
policies that we believe are critical and require the use of complex judgment in
their application.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the recorded amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the disclosure of recognized amounts
of revenues and expenses during the year. Significant estimates and assumptions
made by management include the allowance for accounts receivable and
inventories, reserves for product returns, rebates and chargebacks, the
classification of intangible assets between finite and indefinite life, useful
lives of long-lived assets, expected cash flows used in evaluating long-lived
assets for impairment, contingency provisions and other accrued charges. These
estimates were made using the historical information available to management.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized when the product is shipped to the Company's customer,
provided the Company has not retained any significant risks of ownership or
future obligations with respect to the product shipped. Revenue from product
sales is recognized net of sales discounts, allowances, returns, rebates and
chargebacks. In certain circumstances, returns or exchanges of products are
allowed under the Company's policy and provisions are maintained accordingly.
Amounts received from customers as prepayments for products to be shipped in the
future are reported as deferred revenue.
AXCAN PHARMA INC. / 4
Goodwill and Intangible Assets
Axcan's goodwill and intangible assets are stated at cost, less accumulated
amortization. Prior to October 1, 2001, goodwill and intangible assets were
amortized using the straight-line method based on their estimated useful lives
from 7 to 25 years. Since October 1, 2001, the Company no longer amortizes
goodwill and intangible assets with an indefinite life. Management evaluates the
value of the unamortized portion of goodwill and intangible assets annually, by
comparing the carrying value to the future benefits of the Company's activities
or the expected sale of pharmaceutical products. Should there be a permanent
impairment in value or if the unamortized balance exceeds recoverable amounts, a
write-down will be recognized for the current year. To date, Axcan has not
recognized any permanent impairment in value. Intangible assets with finite life
are still amortized over their estimated useful lives.
Research and Development Expenses
Research and development expenses are charged to operations in the year they are
incurred. Acquired in-process research and development having no alternative
future use is written off at the time of acquisition. The cost of intangibles
that are acquired from others for a particular research and development project,
with no alternative use, are written off at the time of acquisition.
Acquisition of products
On November 18, 2003, the Company acquired the rights to a group of products
from Aventis. The acquired products are CARAFATE and BENTYL for the U.S. market
and SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market. The $145-million
purchase price was paid out of Axcan's cash on hand.
On December 3, 2002, the Company acquired the worldwide rights to the PANZYTRAT
enzyme product line from Abbott for a cash purchase price of $45 million.
During a transition period, the sellers in each of these acquisition
transactions may act as selling agents for the management of these products. For
the three-month period ended December 31, 2003, sales of these products were
still managed in part by the sellers. Axcan includes in its revenue the net
sales from such products less corresponding cost of goods sold and other
seller-related expenses. Consequently, although net sales of such products for
the three-month period ended December 31, 2003, were $2,892,231, the Company
included in its revenue an amount of $1,748,359 representing the net sales less
cost of goods sold and other seller-related expenses.
AXCAN PHARMA INC. / 5
Results of Operations
The following table sets forth, for the quarters indicated, the percentage of
revenue represented by items in Axcan's consolidated statements of earnings:
For the three-month period
ended December 31
--------------------------
2003 2002
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Revenue 100% 100%
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Cost of goods sold 25.3 24.0
Selling and administrative expenses 31.9 38.7
Research and development expenses 6.9 5.5
Amortization 6.5 5.4
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70.6 73.6
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Operating Income 29.4 26.4
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Financial expenses 2.9 0.4
Interest income (0.3) (0.8)
Loss on foreign exchange 0.1 0.6
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2.7 0.2
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Income before income taxes 26.7 26.2
Income taxes 8.6 8.9
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Net income 18.1 17.3
================================================================================
Quarter ended December 31, 2003 compared to quarter ended December 31, 2002
Revenue
Revenue increased $19.8 million (52.4%) to $57.6 million for the first quarter
ended December 31, 2003 from $37.8 million for the corresponding quarter of the
preceding fiscal year. This increase in revenue primarily resulted from
increased revenues from sales made by the French subsidiary, following the
acquisitions of DELURSAN as well as the PANZYTRAT product line. Also
contributing to the increase were strong sales of CANASA rectal suppositories
and ULTRASE in the U.S. and $5.6 million in U.S. and Canadian sales of the AVAX
product line which was acquired in November 2003.
Cost of goods sold
Cost of goods sold consists principally of costs of raw materials, royalties and
manufacturing costs. Axcan outsources most of its manufacturing requirements.
Cost of goods sold increased $5.5 million (60.4%) to $14.6 million for the
quarter ended December 31, 2003 from $9.1 million for the corresponding quarter
of the preceding fiscal year. As a percentage of revenue, cost of goods sold for
the quarter ended December 31, 2003 increased marginally as compared to the
corresponding quarter of the preceding fiscal year, at 25.3% and 24.0%,
respectively. This increase was due primarily to the newly acquired products
which have a slightly different margin than the products already sold by Axcan.
AXCAN PHARMA INC. / 6
Selling and administrative expenses
Selling and administrative expenses consist principally of salaries and other
costs associated with Axcan's sales force and marketing activities. Selling and
administrative expenses increased $3.8 million (26.0%) to $18.4 million for the
quarter ended December 31, 2003 from $14.6 million for the corresponding quarter
of the preceding fiscal year. This increase is mainly due to an increase in our
sales force as a result of the recent acquisition of additional products.
Research and development expenses
Research and development expenses consist principally of fees paid to outside
parties that Axcan uses to conduct clinical studies and to submit governmental
approval applications on its behalf as well as the salaries and benefits paid to
its personnel involved in research and development projects. Research and
development expenses increased $1.8 million (85.7%) to $3.9 million for the
quarter ended December 31, 2003 from $2.1 million for the corresponding quarter
of the preceding fiscal year.
Depreciation and amortization
Depreciation and amortization consists principally of intangible assets with
finite life. Intangible assets include trademarks, trademark licenses and
manufacturing rights. Amortization increased $1.7 million (85.0%) to $3.7
million for the quarter ended December 31, 2003 from $2.0 million for the
corresponding quarter of the preceding fiscal year. The increase is mainly due
to the amortization of the AVAX product line acquired from Aventis on November
18, 2003 and of TAGAMET, which was reclassified from intangible assets with an
indefinite life to intangible assets with a finite life on October 1, 2003.
Financial expenses
Financial expenses consist principally of interest and fees paid in connection
with money borrowed for acquisitions. Financial expenses increased $1.5 million
to $1.7 million for the quarter ended December 31, 2003 from $0.2 million for
the corresponding quarter of the preceding fiscal year. This increase is mainly
due to interest expense on the $125.0 million aggregate principal amount of
4 1/4% convertible subordinated notes due 2008, which were issued on March 5,
2003.
Income Taxes
Income taxes amounted to $5.0 million for the quarter ended December 31, 2003,
compared to $3.4 million for the quarter ended December 31, 2002. The effective
tax rates were 32.2% for the quarter ended December 31, 2003 and 33.9% for the
quarter ended December 31, 2002.
Net income
Net income was $10.4 million or $0.23 of basic and diluted income per share, for
the quarter ended December 31, 2003, compared to $6.6 million or $0.15 of basic
income per share and $0.14 of diluted income per share for the corresponding
quarter of the preceding year. The basic weighted average number of common
shares outstanding used to establish the per share amounts increased from 44.9
million for the quarter ended December 31, 2002 to 45.0 million for the quarter
ended December 31, 2003, following the exercise of options previously granted
pursuant to Axcan's stock option plan.
AXCAN PHARMA INC. / 7
Canadian GAAP
The differences (in thousands of dollars) between U.S. and Canadian GAAP which
affect net income for the three months ended December 31, 2003 and 2002 are
summarized in the following table:
For the three-month period
ended December 31
--------------------------
2003 2002
------------- ------------
$ $
Net income in accordance with U.S. GAAP 10,435 6,557
Implicit interest on convertible debt (1,026) --
Amortization of new products acquisition costs (13) (13)
Income tax impact of the above adjustments 5 5
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Net earnings in accordance with Canadian GAAP 9,401 6,549
================================================================================
On March 5, 2003, the Company closed an offering of $125,000,000 aggregate
principal amount of 4 1/4% convertible subordinated notes due April 15, 2008. As
a result of the terms of the notes, under Canadian GAAP, an amount of
$24,238,899 was included in shareholders' equity as equity component of the
convertible debt and an amount of $100,761,101 was included in long-term debt,
as the liability component of the convertible notes. For the three-month period
ended December 31, 2003, implicit interest in the amount of $1,025,603 was
accrued for and added to the liability component.
Under Canadian GAAP, research and development expenses are stated net of related
tax credits which generally constitute between 10% and 15% of the aggregate
amount of such expenses. Under U.S. GAAP, these tax credits are applied against
income taxes.
Under U.S. GAAP, acquired in-process research is included in operations as at
the date of acquisition if no alternative use is established. Under Canadian
GAAP, the acquired in-process research, including the new product acquisition
costs, is deferred and amortized from the date of commencement of commercial
production.
Liquidity and capital resources
Axcan's cash, cash equivalents and short-term investments decreased $148.5
million to $22.4 million at December 31, 2003 from $170.9 million at September
30, 2003. As of December 31, 2003, working capital was $42.2 million, compared
to $174.8 million at September 30, 2003. These decreases are mainly due to the
acquisition of the rights to the AVAX product line for a total cash purchase
price of $145.0 million plus transaction expenses. Total assets increased $24.9
million (4.6%) to $570.2 million as of December 31, 2003 from $545.3 million as
of September 30, 2003. Shareholders' equity increased $19.4 million (5.9%) to
$350.4 million as of December 31, 2003 from $331.0 million as of September 30,
2003.
Historically, Axcan has financed research and development, operations,
acquisitions, milestone payments and investments out of the proceeds of public
and private sales of its equity, cash flow from operations, and loans from joint
venture partners and financial institutions. Since it
AXCAN PHARMA INC. / 8
went public in Canada in December 1995, Axcan has raised approximately $243.0
million from sales of its equity and has borrowed from financial institutions to
finance the acquisition of Axcan Scandipharm, Inc. and from Schwarz Pharma,
Inc., a former joint venture partner, to finance the acquisition of Axcan URSO
(these amounts have since been repaid).
Axcan has credit facilities totalling $55.0 million with two Canadian chartered
banks. The facilities consist of a $15.0 million revolving operating facility
renewable annually and a $40.0 million 364-day, extendible revolving facility
with a three-year term-out option maturing on October 12, 2007.
The credit facilities are secured by a first priority security interest on all
present and future acquired assets of the Company and its material subsidiaries,
and provide for the maintenance of certain financial ratios. Cash dividends,
repurchase of shares (other than redeemable shares issued in connection with a
permitted acquisition) and similar distributions to shareholders are limited to
10 % of the Company's net income for the preceding fiscal year. As of December
31, 2003, Axcan was in compliance with all credit facilities' covenants.
The interest rate varies, depending on the Company's leverage between 25 basis
points and 125 basis points over Canadian prime rate or U.S. base rate, and
between 125 basis points and 225 basis points over the LIBOR rate or bankers
acceptances. The credit facilities may be drawn in U.S. dollar or in Canadian
dollar equivalent. As at December 31, 2003, there was no amount outstanding
under these credit facilities.
Cash Flows and Financial Resources
Cash flow from operating activities decreased $22.5 million (105.6%) from $21.3
million of cash provided by operating activities for the three-month period
ended December 31, 2002 to a $1.2 million use of cash for the three-month period
ended December 31, 2003. This decrease is mainly due to the increase in accounts
receivable and inventories during the quarter following the increase in sales
and the acquisition of new products. Cash flows used for financing activities
for the three-month period ended December 31, 2003 were $0.1 million. Cash flows
used for investment activities for the three-month period ended December 31,
2003 were $21.1 million mainly due to the net cash used for the acquisition of
intangible assets with the proceeds from the disposal of short-term investments.
Axcan's research and development spending totalled $12.1 million for fiscal 2003
and $8.9 million for fiscal 2002. Axcan believes that its cash and operating
cash flow will be adequate to support its existing ongoing operational
requirements for at least 12 months. However, Axcan regularly reviews product
and other acquisition opportunities and may therefore require additional debt or
equity financing. Axcan cannot be certain that such additional financing, if
required, will be available on acceptable terms, or at all.
Axcan believes that cash, cash equivalents and short-term investments, together
with funds provided by operations, will be sufficient to meet its operating cash
requirements, including the development of products through research and
development activities, capital expenditures and repayment of its debt. Assuming
regulatory approvals of future products and indications stemming from its
research and development efforts, Axcan believes that these expenditures will
also significantly contribute to the increase in funds provided by operations.
AXCAN PHARMA INC. / 9
Earnings coverage
The earnings coverage ratios are the following:
Under U.S. GAAP, for the twelve months ended December 31, 2003, our interest
requirements amounted to $5.9 million on a pro forma basis and our earnings
coverage ratio, defined as the ratio of earnings before interest and income
taxes to pro forma interest requirements, was 7.9 to one.
Under Canadian GAAP, for the twelve months ended December 31, 2003, our interest
requirements amounted to $10.2 million on a pro forma basis and our earnings
coverage ratio was 6.5 to one. The principal difference between the earnings
coverage ratios under Canadian GAAP and U.S. GAAP is attributable to the
inclusion of implicit interest of $4.3 million as required by Canadian GAAP.
Risk Factors
Axcan is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Axcan does not use derivative
financial instruments for speculative or trading purposes. Axcan does not use
off-balance sheet financing or similar special purpose entities.
Inflation has not had a significant impact on Axcan's results of operations.
Foreign Currency Risk
Axcan operates internationally; however, a substantial portion of the revenue
and expense activities and capital expenditures are transacted in US dollars.
Axcan's exposure to exchange rate fluctuation is reduced because, in general,
Axcan's revenues denominated in currencies other than the US dollar are matched
by a corresponding amount of costs denominated in the same currency. Axcan
expects this matching to continue.
Interest Rate Risk
The primary objective of Axcan's investment policy is the protection of
principal. Accordingly, investments are made in high-grade government and
corporate securities with varying maturities, but typically, less than 180 days.
Therefore, Axcan does not have a material exposure to interest rate risk and a
100 basis-point adverse change in interest rates would not have a material
effect on Axcan's consolidated results of operations, financial position or cash
flows. Axcan is exposed to interest rate risk on borrowings under the credit
facilities. The credit facilities bear interest based on LIBOR, US dollar base
rate, Canadian dollar prime rate, or Canadian dollar Bankers' Acceptances. Based
on projected advances under the credit facilities, a 100 basis-point adverse
change in interest rates would not have a material effect on Axcan's
consolidated results of operations, financial position, or cash flows.
Supply and Manufacture
Axcan depends on third parties for the supply of active ingredients and for the
manufacture of the majority of its products. Although Axcan looks to secure
alternative suppliers, Axcan may not be able to obtain the active ingredients or
products from such third parties, the active ingredients or products may not
comply with specifications, or the prices at which Axcan purchases them may
increase and Axcan may not be able to locate alternative sources of supply in a
reasonable time period, or at all. If any of these events occur, Axcan may not
be
AXCAN PHARMA INC. / 10
able to continue to market certain of its products and its sales and
profitability would be adversely affected.
Volatility of Share Prices
The market price of Axcan's shares is subject to volatility. Deviations in
actual financial or scientific results, as compared to expectations of
securities analysts who follow our activities can have a significant effect on
the trading price of Axcan's shares. Changes in accounting standards could have
an impact on the financial statements' presentation.
Forward-looking Statements
This document contains forward-looking statements, which reflect the Company's
current expectations regarding future events. These forward-looking statements
include the expected sales growth of the Company's products and the expected
increase in funds from operations resulting from the Company's research and
development expenditures. The forward-looking statements involve risks and
uncertainties. Actual events could differ materially from those projected herein
and depend on a number of factors, including the successful and timely
completion of clinical studies, the uncertainties related to the regulatory
process, commercialization of the drug or therapy thereafter, difficulty of
predicting acceptance and demand for pharmaceutical products, impact of
competitive products and pricing, new product development and launch,
availability of raw materials, and fluctuations in operating results. Investors
should consult the Company's ongoing quarterly filings, annual reports and 40-F
filings for additional information on risks and uncertainties relating to these
forward-looking statements. The reader is cautioned not to rely on these
forward-looking statements. The Company disclaims any obligation to update these
forward-looking statements.
On behalf of Management
(signed)
Jean Vezina
Vice President, Finance and Chief Financial Officer
AXCAN PHARMA INC. / 11
AXCAN PHARMA INC.
Consolidated Balance Sheets
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In accordance with U.S. GAAP
(in thousands of U.S. dollars)
December 31 September 30
2003 2003
------------ -------------
(unaudited)
ASSETS $ $
Current assets
Cash and cash equivalents 15,616 37,773
Short-term investments available for sale 6,752 133,112
Accounts receivable 28,503 19,685
Income taxes receivable 7,898 5,294
Inventories (Note 3) 28,505 20,163
Prepaid expenses and deposits 3,839 2,794
Deferred income taxes 6,147 6,214
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Total current assets 97,260 225,035
Investments 864 1,002
Property, plant and equipment, net 21,847 20,331
Intangible assets, net (Note 4) 416,435 265,423
Goodwill, net 27,550 27,550
Deferred debt issue expenses, net 3,975 4,233
Deferred income taxes 2,280 1,775
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Total assets 570,211 545,349
===================================================================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 42,007 43,418
Income taxes payable 10,130 4,821
Instalments on long-term debt 1,622 1,528
Deferred income taxes 1,287 494
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Total current liabilities 55,046 50,261
Long-term debt 129,282 129,474
Deferred income taxes 35,475 34,603
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Total liabilities 219,803 214,338
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SHAREHOLDERS' EQUITY
Series A preferred shares, without par value, shares authorized: 14,175,000; no shares issued. -- --
Series B preferred shares, without par value, shares authorized: 12,000,000; no shares issued. -- --
Common shares, without par value, unlimited shares authorized, 45,061,531 issued as at
December 31, 2003 and 45,004,320 as at September 30, 2003. 256,178 255,743
Retained earnings 74,069 63,634
Accumulated other comprehensive income 20,161 11,634
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 350,408 331,011
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 570,211 545,349
===================================================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 12
AXCAN PHARMA INC.
Consolidated Statements of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
For the three-month period
ended December 31
-----------------------------
2003 2002
------------ ---------------
Common shares (number)
Balance, beginning of period 45,004,320 44,863,198
Exercise of options 57,211 9,086
- ------------------------------------------------------------------------------------------------------
Balance, end of period 45,061,531 44,872,284
======================================================================================================
$ $
Common shares
Balance, beginning of period 255,743 254,640
Exercise of options 435 58
- ------------------------------------------------------------------------------------------------------
Balance, end of period 256,178 254,698
- ------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of period 63,634 43,709
Net income 10,435 6,557
- ------------------------------------------------------------------------------------------------------
Balance, end of period 74,069 50,266
- ------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of period 11,634 (3,562)
Foreign currency translation adjustments 8,527 4,167
- ------------------------------------------------------------------------------------------------------
Balance, end of period 20,161 605
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 350,408 305,569
======================================================================================================
Comprehensive income
Foreign currency translation adjustments 8,527 4,167
Net income 10,435 6,557
- ------------------------------------------------------------------------------------------------------
Total comprehensive income 18,962 10,724
======================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 13
AXCAN PHARMA INC.
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars)
(unaudited)
For the three-month period
ended December 31
-----------------------------
2003 2002
------------ ---------------
$ $
Operations
Net income 10,435 6,557
Non-cash items
Non-controlling interest -- (54)
Amortization of deferred debt issue expenses 258 25
Other depreciation and amortization 3,723 2,038
Loss on disposal of property, plant and equipment 87 --
Foreign currency fluctuation -- (5)
Deferred income taxes 1,303 2,467
Share in net loss of joint ventures -- 55
Changes in working capital items:
Accounts receivable (8,864) 8,107
Income taxes receivable (2,606) (657)
Inventories (8,376) 982
Prepaid expenses and deposits (1,049) (1,443)
Accounts payable and accrued liabilities (1,386) 3,787
Income taxes payable 5,323 (566)
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities (1,152) 21,293
- ------------------------------------------------------------------------------------------------------
Financing
Long-term debt -- 136
Repayment of long-term debt (542) (332)
Issue of shares 435 58
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities (107) (138)
- ------------------------------------------------------------------------------------------------------
Investment
Disposal of short-term investments 126,360 54,748
Disposal of investments 138 129
Acquisition of property, plant and equipment (2,363) (291)
Disposal of property, plant and equipment 326 --
Acquisition of intangible assets (145,590) (71,935)
- ------------------------------------------------------------------------------------------------------
Cash flows from investment activities (21,129) (17,349)
- ------------------------------------------------------------------------------------------------------
Foreign exchange gain on cash held in foreign currencies 231 248
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (22,157) 4,054
Cash and cash equivalents, beginning of period 37,773 19,977
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 15,616 24,031
======================================================================================================
Additional information
Interest received 220 256
Interest paid 66 86
Income taxes paid 952 2,375
======================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 14
AXCAN PHARMA INC.
Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars)
(unaudited)
For the three-month period
ended December 31
-----------------------------
2003 2002
------------ ---------------
$ $
REVENUE 57,565 37,846
- ------------------------------------------------------------------------------------------------------
Cost of goods sold 14,572 9,069
Selling and administrative expenses 18,367 14,630
Research and development expenses 3,933 2,101
Depreciation and amortization 3,723 2,038
- ------------------------------------------------------------------------------------------------------
40,595 27,838
- ------------------------------------------------------------------------------------------------------
Operating income 16,970 10,008
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Financial expenses 1,681 167
Interest income (191) (283)
Loss on foreign currency 84 209
- ------------------------------------------------------------------------------------------------------
1,574 93
- ------------------------------------------------------------------------------------------------------
Income before income taxes 15,396 9,915
Income taxes 4,961 3,358
- ------------------------------------------------------------------------------------------------------
NET INCOME 10,435 6,557
======================================================================================================
Income per common share
Basic 0.23 0.15
Diluted 0.23 0.14
======================================================================================================
Weighted average number of common shares
Basic 45,019,129 44,866,652
Diluted 45,542,094 45,569,591
======================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 15
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
1. Significant accounting policies
The accompanying unaudited financial statements are prepared in accordance with
U.S. GAAP for interim financial statements and do not include all the
information required for complete financial statements. They are consistent with
the policies outlined in the Company's audited financial statements for the year
ended September 30, 2003. The interim financial statements and related notes
should be read in conjunction with the Company's audited financial statements
for the year ended September 30, 2003. When necessary, the financial statements
include amounts based on informed estimates and best judgements of management.
The results of operations for the interim periods reported are not necessarily
indicative of results to be expected for the year. Consolidated financial
statements prepared in U.S. dollars and in accordance with Canadian GAAP are
available to shareholders and filed with regulatory authorities.
2. Product acquisition
On November 18, 2003, the Company acquired the rights to a group of products
from Aventis for a cash purchase price of $145,000,000. The acquired products
are CARAFATE and BENTYL for the U.S. market and SULCRATE, BENTYLOL and
PROCTOSEDYL for the Canadian market. On December 3, 2002, the Company acquired
the worldwide rights to the Panzytrat enzyme product line from Abbott
Laboratories ("Abbott").
During a transition period, the sellers may act as agents for the management of
the products sales. For the three-month period ended December 31, 2003, a
portion of the sales of these products is still managed by the sellers. Axcan
includes in its revenue the net sales from such products less corresponding cost
of goods sold and other seller related expenses. Consequently, although net
sales of such products for the three-month period ended December 31, 2003 were
$2,892,231 ($796,881 in 2002), the Company only included in its revenue an
amount of $1,748,359 ($541,836 in 2002) representing the net sales less cost of
goods sold and other seller related expenses.
3. Inventories
December 31 September 30
2003 2003
----------- ------------
$ $
Raw materials and packaging material 11,604 8,441
Work in progress 1,477 1,466
Finished goods 15,424 10,256
- --------------------------------------------------------------------------------
28,505 20,163
================================================================================
AXCAN PHARMA INC. / 16
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
4. Intangible assets
December 31, 2003
- --------------------------------------------------------------------------------
Accumulated
Cost amortization Net
- --------------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 280,016 22,477 257,539
Indefinite life 171,314 12,418 158,896
- --------------------------------------------------------------------------------
451,330 34,895 416,435
================================================================================
September 30, 2003
- --------------------------------------------------------------------------------
Accumulated
Cost amortization Net
- --------------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 111,327 19,998 91,329
Indefinite life 186,512 12,418 174,094
- --------------------------------------------------------------------------------
297,839 32,416 265,423
================================================================================
The cost of the product TAGAMET has been transferred from intangible assets with
an indefinite life to intangible assets with a finite life following changes in
the regulatory rules applicable to this product and resulting in the
modification of its useful life. The net cost of this product as of October 1,
2003, which amounted to $21,852,859, is therefore amortized over a 15-year
period.
AXCAN PHARMA INC. / 17
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
5. Segmented information
The Company considers that it operates in a single reportable segment, the
pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
$ $
Revenue
Canada
Domestic sales 6,552 4,877
Foreign sales -- --
United States
Domestic sales 37,811 25,210
Foreign sales -- --
Europe
Domestic sales 12,645 6,575
Foreign sales 529 1,137
Other 28 47
- ----------------------------------------------------------------------------------------------------
57,565 37,846
====================================================================================================
Operating income (loss)
Canada 2,289 1,633
United States 13,296 7,043
Europe 1,750 1,652
Other (365) (320)
- ----------------------------------------------------------------------------------------------------
16,970 10,008
====================================================================================================
Depreciation and amortization
Canada 724 361
United States 1,036 948
Europe 1,669 451
Other 294 278
- ----------------------------------------------------------------------------------------------------
3,723 2,038
====================================================================================================
December 31 September 30
2003 2003
----------- ------------
$ $
Property, plant, equipment, intangible assets and goodwill
Canada 33,125 14,622
United States 132,348 133,695
Europe 273,798 138,113
Other 26,561 26,874
- ----------------------------------------------------------------------------------------------------
465,832 313,304
====================================================================================================
AXCAN PHARMA INC. / 18
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
6. Financial information included in the consolidated statement of operations
a) Financial expenses
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
$ $
Interest on long-term debt 1,382 113
Bank charges 24 29
Financing fees 17 --
Amortization of deferred debt issue expenses 258 25
- ----------------------------------------------------------------------------------------------------
1,681 167
====================================================================================================
b) Other information
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
$ $
Non-controling interest -- (54)
Rental expenses 274 307
Depreciation of property, plant and equipment 1,250 854
Amortization of intangible assets 2,473 1,184
Share in net loss of joint ventures -- 55
c) Income per common share
The following is the detail of the denominators of the basic and diluted income
per common share computations:
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
Weighted average number of common shares outstanding 45,019,129 44,866,652
Effect of dilutive stock options 522,965 465,409
Effect of dilutive balance of purchase price -- 237,530
- ----------------------------------------------------------------------------------------------------
Adjusted weighted average number of common shares outstanding 45,542,094 45,569,591
====================================================================================================
Number of common shares outstanding as at January 30, 2004 45,105,523
====================================================================================================
Options to purchase 698,550 and 790,600 common shares were outstanding as at
December 31, 2003 and 2002 respectively but were not included in the computation
of diluted income per share because the exercise price of the options was
greater than the average market price of the common shares. As of December 31,
2003, the convertible debt has no effect on the diluted income per share.
AXCAN PHARMA INC. / 19
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
7. Stock options
The estimated fair value of stock options at the time of grant using the
Black-Scholes option pricing model was as follows:
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
Fair value per option $ 5.87 $ 5.00
Assumptions used in Black-Scholes option pricing model
Expected volatility 44% 46%
Risk-free interest rate 4.40% 4.44%
Expected option life (years) 6 6
Expected dividend -- --
The Company's net income, basic income per share and diluted income per share
would have been on a pro-forma basis as follows:
For the three-month period
ended December 31
--------------------------------------------------------------
2003 2002
----------------------------- ------------------------------
As reported Pro-forma As reported Pro-forma
-------------- ------------ ------------- --------------
$ $ $ $
Net income 10,435 9,465 6,557 5,778
Basic income per share 0.23 0.21 0.15 0.13
Diluted income per share 0.23 0.21 0.14 0.13
AXCAN PHARMA INC. / 20
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
8. Summary of Differences Between Generally Accepted Accounting Principles
in the United States and in Canada
The consolidated interim financial statements have been prepared in accordance
with U.S. GAAP which, in the case of the Company, conform in all materials
respects with Canadian GAAP, except as set forth below:
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ----------
Operations adjustments: $ $
Net income in accordance with U.S. GAAP 10,435 6,557
Implicit interest on convertible debt (1,026) --
Amortization of new product acquisition costs (13) (13)
Income tax impact of the above adjustments 5 5
- --------------------------------------------------------------------------------------------------------
Net earnings in accordance with Canadian GAAP 9,401 6,549
========================================================================================================
Earnings per share in accordance with Canadian GAAP
Basic 0.21 0.15
Diluted 0.21 0.14
December 31, 2003 September 30, 2003
---------------------------- ----------------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
------------ ------------ ------------ ------------
Balance sheet adjustments: $ $ $ $
Current assets 97,260 97,428 225,035 225,203
Investments 864 637 1,002 775
Property, plant and equipment 21,847 21,867 20,331 20,351
Intangible assets 416,435 428,836 265,423 277,837
Goodwill 27,550 29,342 27,550 29,342
Deferred debt issue expenses 3,975 3,975 4,233 4,233
Deferred income tax asset 2,280 2,280 1,775 1,775
Current liabilities 55,046 55,419 50,261 50,634
Long-term debt 129,282 108,361 129,474 107,527
Deferred income tax liability 35,475 36,609 34,603 35,742
Shareholders' equity
Equity component of convertible debt -- 24,239 -- 24,239
Capital stock 256,178 262,823 255,743 262,388
Retained earnings 74,069 72,612 63,634 63,211
Accumulated foreign currency translation
adjustments 20,161 24,302 11,634 15,775
AXCAN PHARMA INC. / 21
AXCAN PHARMA INC.
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
December 31 September 30
2003 2003
------------ -------------
ASSETS (unaudited)
$ $
Current assets
Cash and cash equivalents 15,729 37,886
Short-term investments 6,752 133,112
Accounts receivable 28,483 19,665
Income taxes receivable 7,919 5,315
Inventories (Note 3) 28,505 20,163
Prepaid expenses and deposits 3,893 2,848
Future income taxes 6,147 6,214
- -----------------------------------------------------------------------------------------------------
Total current assets 97,428 225,203
Investments 637 775
Property, plant and equipment 21,867 20,351
Intangible assets (Note 4) 428,836 277,837
Goodwill 29,342 29,342
Deferred debt issue expenses 3,975 4,233
Future income taxes 2,280 1,775
- -----------------------------------------------------------------------------------------------------
584,365 559,516
=====================================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 42,380 43,791
Income taxes payable 10,130 4,821
Instalments on long-term debt 1,622 1,528
Future income taxes 1,287 494
- -----------------------------------------------------------------------------------------------------
Total current liabilities 55,419 50,634
Long-term debt 108,361 107,527
Future income taxes 36,609 35,742
- -----------------------------------------------------------------------------------------------------
200,389 193,903
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Equity component of convertible debt (note 5) 24,239 24,239
Capital stock 262,823 262,388
Retained earnings 72,612 63,211
Accumulated foreign currency translation adjustments 24,302 15,775
- -----------------------------------------------------------------------------------------------------
383,976 365,613
- -----------------------------------------------------------------------------------------------------
584,365 559,516
=====================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 22
AXCAN PHARMA INC.
Consolidated Cash Flows
- -----------------------------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
$ $
Operations
Net earnings 9,401 6,549
Non-cash items
Implicit interest on convertible debt 1,026 --
Non-controlling interest -- (54)
Amortization of deferred debt issue expenses 258 25
Other depreciation and amortization 3,736 2,054
Loss on disposal of property, plant and equipment 87 --
Foreign currency fluctuation -- (5)
Future income taxes 1,298 2,462
Changes in working capital items:
Accounts receivable (8,864) 8,200
Income taxes receivable (2,606) (657)
Inventories (8,376) 988
Prepaid expenses and deposits (1,049) (1,441)
Accounts payable and accrued liabilities (1,386) 3,734
Income taxes payable 5,323 (556)
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities (1,152) 21,299
- -----------------------------------------------------------------------------------------------------
Financing
Long-term debt -- 136
Repayment of long-term debt (542) (332)
Issue of shares 435 58
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities (107) (138)
- -----------------------------------------------------------------------------------------------------
Investment
Disposal of short-term investments 126,360 54,748
Disposal of investments 138 129
Acquisition of property, plant and equipment (2,363) (291)
Disposal of property, plant and equipment 326 --
Acquisition of intangible assets (145,590) (71,935)
- -----------------------------------------------------------------------------------------------------
Cash flows from investment activities (21,129) (17,349)
- -----------------------------------------------------------------------------------------------------
Foreign exchange gain on cash held in foreign currencies 231 248
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (22,157) 4,060
Cash and cash equivalents, beginning of period 37,886 20,005
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 15,729 24,065
=====================================================================================================
Additional information
Interest received 220 256
Interest paid 66 86
Income taxes paid 952 2,375
=====================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 23
AXCAN PHARMA INC.
Consolidated Earnings
- ------------------------------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
For the three-month period
ended December 31
-----------------------------
2003 2002
------------ ---------------
$ $
REVENUE 57,715 38,030
- ------------------------------------------------------------------------------------------------------
Cost of goods sold 14,572 9,075
Selling and administrative expenses 18,517 14,787
Research and development expenses 3,715 1,861
Depreciation and amortization 3,736 2,054
- ------------------------------------------------------------------------------------------------------
40,540 27,777
- ------------------------------------------------------------------------------------------------------
Operating income 17,175 10,253
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Financial expenses 2,707 172
Interest income (191) (283)
Loss on foreign currency 84 209
- ------------------------------------------------------------------------------------------------------
2,600 98
- ------------------------------------------------------------------------------------------------------
Earnings before income taxes 14,575 10,155
Income taxes 5,174 3,606
- ------------------------------------------------------------------------------------------------------
NET EARNINGS 9,401 6,549
======================================================================================================
Earnings per common share
Basic 0.21 0.15
Diluted 0.21 0.14
======================================================================================================
Weighted average number of common shares
Basic 45,019,129 44,866,652
Diluted 45,542,094 45,569,591
======================================================================================================
AXCAN PHARMA INC.
Consolidated Retained Earnings
- ------------------------------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
(unaudited)
For the three-month period
ended December 31
-----------------------------
2003 2002
------------ ---------------
$ $
Balance, beginning of period 63,211 34,594
Net earnings 9,401 6,549
- ------------------------------------------------------------------------------------------------------
Balance, end of period 72,612 41,143
======================================================================================================
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the annual
Consolidated Financial Statements.
AXCAN PHARMA INC. / 24
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
1. Significant accounting policies
The accompanying unaudited financial statements are prepared in accordance with
Canadian GAAP for interim financial statements and do not include all the
information required for complete financial statements. They are consistent with
the policies outlined in the Company's audited financial statements for the year
ended September 30, 2003. The interim financial statements and related notes
should be read in conjunction with the Company's audited financial statements
for the year ended September 30, 2003. When necessary, the financial statements
include amounts based on informed estimates and best judgements of management.
The results of operations for the interim periods reported are not necessarily
indicative of results to be expected for the year. Consolidated financial
statements prepared in U.S. dollars and in accordance with U.S. GAAP are
available to shareholders and filed with regulatory authorities.
2. Product acquisition
On November 18, 2003, the Company acquired the rights to a group of products
from Aventis for a cash purchase price of $145,000,000. The acquired products
are CARAFATE and BENTYL for the U.S. market and SULCRATE, BENTYLOL and
PROCTOSEDYL for the Canadian market. On December 3, 2002, the Company acquired
the worldwide rights to Panzytrat enzyme product line from Abbott Laboratories
("Abbott").
During a transition period, the sellers may act as agents for the management of
the products sales. For the three-month period ended December 31, 2003, a
portion of the sales of these products is still managed by the sellers. Axcan
includes in its revenue the net sales from such products less corresponding cost
of goods sold and other seller related expenses. Consequently, although net
sales of such products for the three month period ended December 31, 2003 were
$2,892,231 ($796,881 in 2002), the Company only included in its revenue an
amount of $1,748,359 ($541,836 in 2002) representing the net sales less cost of
goods sold and other seller related expenses.
3. Inventories
December 31 September 30
2003 2003
----------- ------------
$ $
Raw materials and packaging material 11,604 8,441
Work in progress 1,477 1,466
Finished goods 15,424 10,256
- --------------------------------------------------------------------------------
28,505 20,163
================================================================================
AXCAN PHARMA INC. / 25
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
4. Intangible assets
December 31, 2003
- --------------------------------------------------------------------------------
Accumulated
Cost amortization Net
- --------------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 292,846 22,906 269,940
Indefinite life 171,314 12,418 158,896
- --------------------------------------------------------------------------------
464,160 35,324 428,836
================================================================================
September 30, 2003
- --------------------------------------------------------------------------------
Accumulated
Cost amortization Net
- --------------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 124,157 20,414 103,743
Indefinite life 186,512 12,418 174,094
- --------------------------------------------------------------------------------
310,669 32,832 277,837
================================================================================
The cost of the product TAGAMET has been transferred from intangible assets with
an indefinite life to intangible assets with a finite life following changes in
the regulatory rules applicable to this product and resulting in the
modification of its useful life. The net cost of this product as of October 1,
2003, which amounted to $21,852,859, is therefore amortized over a 15-year
period.
5. Equity component of convertible debt
The Company issued convertible subordinated notes for $125,000,000 on March 5,
2003. According to the features of this debt, an amount of $24,238,899,
representing the estimated value of the right of conversion, was included in the
shareholders' equity as equity component of convertible debt and an amount of
$100,761,101 was included in the long-term debt as liability component of
convertible debt. As of September 30, 2003, implicit interest of 9.17% and
totalling $2,292,478 was accounted for and added to the liability component. For
the three-month period ended December 31, 2003, implicit interest in the amount
of $1,025,603 was accounted for and added to the liability component.
AXCAN PHARMA INC. / 26
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
6. Segmented information
The Company considers that it operates in a single reportable segment, the
pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the three-month period
ended December 31
-----------------------------
2003 2002
------------ ---------------
$ $
Revenue
Canada
Domestic sales 6,552 4,877
Foreign sales -- --
United States
Domestic sales 37,811 25,210
Foreign sales -- --
Europe
Domestic sales 12,795 6,759
Foreign sales 529 1,137
Other 28 47
- --------------------------------------------------------------------------------------------------
57,715 38,030
==================================================================================================
Operating income (loss)
Canada 2,507 1,876
United States 13,283 7,030
Europe 1,750 1,667
Other (365) (320)
- --------------------------------------------------------------------------------------------------
17,175 10,253
==================================================================================================
Depreciation and amortization
Canada 724 361
United States 1,049 961
Europe 1,669 454
Other 294 278
- --------------------------------------------------------------------------------------------------
3,736 2,054
==================================================================================================
December 31 September 30
2003 2003
----------- ------------
$ $
Property, plant, equipment, intangible assets and goodwill
Canada 37,400 19,311
United States 132,749 133,695
Europe 274,216 138,530
Other 35,680 35,994
- --------------------------------------------------------------------------------------------------
480,045 327,530
==================================================================================================
AXCAN PHARMA INC. / 27
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
7. Financial information included in the consolidated statement of earnings
a) Financial expenses
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
$ $
Interest on long-term debt 2,408 113
Bank charges 24 34
Financing fees 17 --
Amortization of deferred debt issue expenses 258 25
- ----------------------------------------------------------------------------------------------------
2,707 172
====================================================================================================
b) Other information
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
$ $
Non-controling interest -- (54)
Rental expenses 274 307
Depreciation of property, plant and equipment 1,250 857
Amortization of intangible assets 2,486 1,197
Investment tax credits applied against research and development expenses 218 243
c) Earnings per common share
The following is the detail of the denominators of the basic and diluted
earnings per common share computations:
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
Weighted average number of common shares outstanding 45,019,129 44,866,652
Effect of dilutive stock options 522,965 465,409
Effect of dilutive equity component of purchase price -- 237,530
- ----------------------------------------------------------------------------------------------------
Adjusted weighted average number of common shares outstanding 45,542,094 45,569,591
====================================================================================================
Number of common shares outstanding at the end of the period 45,061,531 44,872,284
====================================================================================================
Number of common shares outstanding as at January 30, 2004 45,105,523
====================================================================================================
Options to purchase 698,550 and 790,600 common shares were outstanding as at
December 31, 2003 and 2002 respectively but were not included in the computation
of diluted earnings per share because the exercise price of the options was
greater than the average market price of the common shares. As of December 31,
2003, the convertible debt has no effect on the diluted earnings per share.
AXCAN PHARMA INC. / 28
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
8. Stock options
The estimated fair value of stock options at the time of grant using the
Black-Scholes option pricing model was as follows:
For the three-month period
ended December 31
------------------------------
2003 2002
----------- ---------------
Fair value per option $ 5.87 $ 5.00
Assumptions used in Black-Scholes option pricing model
Expected volatility 44% 46%
Risk-free interest rate 4.40% 4.44%
Expected option life (years) 6 6
Expected dividend -- --
The Company's net earnings, basic earnings per share and diluted earnings per
share would have been reduced on a pro-forma basis as follows:
For the three-month period
ended December 31
--------------------------------------------------------------
2003 2002
----------------------------- ------------------------------
As reported Pro-forma As reported Pro-forma
-------------- ------------ ------------- --------------
$ $ $ $
Net earnings 9,401 8,431 6,549 5,770
Basic earnings per share 0.21 0.19 0.15 0.13
Diluted earnings per share 0.21 0.19 0.14 0.13
AXCAN PHARMA INC. / 29