Exhibit 99.1
AXCAN PHARMA 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 9, 2006
Press release for immediate distribution
AXCAN ANNOUNCES RECORD REVENUE OF $70.6 MILLION
FOR THE FIRST QUARTER OF FISCAL 2006
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o RECORD REVENUE OF $70.6 MILLION
o NET INCOME PER SHARE INCREASES TO $0.19 VERSUS $0.16 A YEAR
EARLIER
o PATIENT RANDOMIZATION FOR ITAX PIVOTAL PHASE III TRIALS COMPLETED
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MONT-SAINT-HILAIRE, QUEBEC - Axcan Pharma Inc. (NASDAQ: AXCA - TSX: AXP) today
announced financial results for the first quarter of fiscal 2006, ended December
31, 2005 (all amounts are stated in U.S. dollars). Highlights for the first
quarter were:
o Record revenue of $70.6 million reported
o Fully diluted income per share increased 18.8%, compared to the same
period a year earlier
o Patient randomization for both ITAX Phase III trials is now completed
Total revenue for the three months ended December 31, 2005, was $70.6 million,
compared with $61.6 million for the first quarter of fiscal 2005, an increase of
14.6%.
Net income for the first quarter of 2006 was $9.2 million, compared with net
income of $7.8 million for the corresponding 2005 period. Diluted income per
share for the first quarter of 2006 was $0.19, versus diluted income per share
of $0.16 for the same period in 2005. This was the first quarter that
stock-based compensation was expensed, which had a negative impact on income per
share of $0.02 for this quarter.
"As we begin fiscal 2006, we are pleased with the progress we have made so far.
Our record revenues reflect the strength of our current product portfolio. We
estimate that increases in wholesaler inventory levels positively impacted our
revenue by less than $1.5 million, which confirms our previous assumptions that
wholesaler inventory levels have stabilized in our
currently desired eight-to-twelve-week target range," stated Frank Verwiel,
M.D., President and Chief Executive Officer of Axcan.
"On the research and development front, we reached another important milestone
by completing randomization for the Itopride North American pivotal Phase III
trial with more than 600 patients randomized in this study," Dr. Verwiel
concluded.
PRODUCT DEVELOPMENT PIPELINE UPDATE
An update on Axcan's major projects follows:
ITAX
As previously announced, randomization for both pivotal Phase III trials for
Itopride is now complete, with more than 500 patients in the International trial
and more than 600 patients in the North American trial. The Company expects to
release the overall outcome of the International Phase III trial during the
first half of calendar 2006, followed shortly afterwards by that of the North
American Phase III trial. Detailed results of the studies will most likely be
subsequently presented at a major scientific gastroenterology conference. The
clinical work on all of the additional Phase I studies needed to complement the
New Drug Application to be submitted to the Food and Drug Administration is now
complete.
HELIZIDE
Axcan finalized qualification of a new manufacturer of bismuth salt, a component
of the HELIZIDE combination therapy for the eradication of the Helicobacter
pylori bacterium. The final results of stability tests performed on the bismuth
salts were positive. Further, the Food and Drug Administration has accepted
Axcan's answers to all questions concerning the Chemistry, Manufacturing and
Control portion of the file that was previously submitted to the FDA. As
previously disclosed, the Company plans to submit an amendment to its New Drug
Application by the end of the second quarter of fiscal 2006.
CANASA / SALOFALK RECTAL GEL
Axcan recently completed Phase III studies to confirm the efficacy and safety of
a new mesalamine rectal gel in the treatment of distal ulcerative colitis. The
Company plans to submit regulatory filings for approvals in the United States
and Canada in the second half of calendar 2006.
SALOFALK 750 MILLIGRAM TABLETS
Axcan submitted a New Drug Submission in Canada for the use of SALOFALK 750 mg
tablets for the treatment of ulcerative colitis. The Therapeutic Products
Directorate of Health Canada has indicated that additional clinical information
would be needed prior to potential approval of SALOFALK 750 milligram tablets in
Canada. In light of these requirements, the Company has decided to withdraw its
New Drug Submission for SALOFALK 750 milligram tablets in Canada, and will
continue to focus efforts in Canada on the currently marketed SALOFALK 500
milligram tablets.
NCX-1000
Axcan and its partner, NicOx S.A., are developing NCX-1000, a patented, nitric
oxide donating derivative of ursodiol, for the treatment of portal hypertension,
a late-stage complication of chronic, advanced liver disease. The Phase I
clinical development program, which is designed to demonstrate the tolerability
and safety of NCX-1000, has been completed, and the Company is pleased to report
that results confirmed the safety profile of this drug. A therapeutic
proof-of-concept Phase IIa study is currently underway.
AXCAN PHARMA INC.
URSODIOL DISULFATE
Axcan completed a proof-of-concept study in rats to evaluate the effect of
ursodiol disulfate on the development of colonic tumors. Acute and subchronic
toxicity studies confirmed that the compound is safe and has no toxicity effect.
As previously announced, a clinical, single ascending dose Phase I study has
recently been initiated to evaluate the safety, tolerability and preliminary
pharmacokinetics of this new molecule. This study should be completed in the
second half of fiscal 2006.
ULTRASE-VIOKASE
In April 2004, the Food and Drug Administration formally notified manufacturers
of pancreatic insufficiency products that these drugs must receive approval
before April 2008 in order to remain on the market. The Food and Drug
Administration decided to require New Drug Applications for all pancreatic
extract drug products after reviewing data that showed substantial variation
among currently marketed products. Axcan has completed a Phase III study of
VIOKASE that will serve as the basis of the New Drug Application. The Company
expects to submit a New Drug Application by spring of 2007. Data is currently
being analyzed. Additional studies on ULTRASE are in process and anticipated to
be completed and submitted along with other clinical and CMC data in the form of
a New Drug Application by spring 2007.
NMK 150
Axcan and Nordmark GmbH, a German pharmaceutical firm, are collaborating in the
development of NMK 150, a new high protease pancrelipase preparation developed
for the relief of pain in small duct chronic pancreatitis. As previously
announced, dose-ranging preclinical studies were initiated in the first quarter
of fiscal 2006 to assess the toxicity, with special attention to duodenal
irritation of NMK 150, administered daily by oral capsule administration. A
Phase I clinical trial will begin in the second quarter of fiscal 2006.
REVENUE GUIDANCE FOR 2006
Axcan reiterates its previously announced revenue guidance for 2006. Based on
its best estimates, Axcan believes that overall revenue for fiscal 2006 will be
in the range of $260 to $270 million, which represents growth of approximately
4% to 8% relative to fiscal 2005. Axcan's fiscal 2006 guidance does not include
any potential new product launches, licensing or acquisitions; nor does it
provide for revenue from the completion of any potential partnering agreement
for ITAX.
The revenue guidance consists of projections, based upon various assumptions,
all of which are subject to uncertainties and risks. Our assumptions include,
but are not limited to: wholesaler inventory levels in fiscal 2006 remaining in
the range of eight to twelve weeks; the absence of any changes to GAAP
applicable to revenue recognition; foreign currency rates remaining stable
throughout the year; reimbursement amounts and policies, related to our
products, in all markets not changing materially during the year; the absence of
any material change in the regulatory status of the Company's current products
and the absence of new competitive products and generic entries.
AXCAN PHARMA INC.
INTERIM FINANCIAL REPORT
This release includes, by reference, the first quarter interim financial report
incorporating the financial statements in accordance with U.S. GAAP as well as
the full Management Discussion & Analysis ("MD&A"). 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 8:30 A.M. EST, on February 10, 2006.
Interested parties may also access the conference call by way of a webcast at
www.axcan.com. The webcast will be archived for 90 days. The telephone numbers
to access the conference call are (866) 250-4910 (Canada and United States) or
(416) 644-3425 (international). A replay of the call will be available until
February 17, 2006. The telephone number to access the replay of the call is
(416) 640-1917 code 21174075.
ABOUT AXCAN PHARMA
Axcan is a leading specialty pharmaceutical company specialized in the field of
gastroenterology. Axcan markets a broad line of prescription products sold for
the treatment of symptoms in a number of gastrointestinal diseases and disorders
such as inflammatory bowel disease, irritable bowel syndrome, cholestatic liver
diseases and complications related to cystic fibrosis. Axcan's products are
marketed by its own sales force in North America and Europe. Its common shares
are listed on the Toronto Stock Exchange under the symbol "AXP" and on the
NASDAQ National Market under the symbol "AXCA".
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995.
This release contains forward-looking statements, which reflect the Company's
current expectations regarding future events. To the extent any statements made
in this release contain information that is not historical, these statements are
essentially forward-looking and are often identified by words such as
"anticipate," "expect," "estimate," "intend," "project," "plan" and "believe."
Forward-looking statements are subject to risks and uncertainties, including the
difficulty of predicting FDA and other regulatory approvals, acceptance and
demand for new pharmaceutical products, the impact of competitive products and
pricing, new product development and launch, reliance on key strategic
alliances, availability of raw materials, the regulatory environment,
fluctuations in operating results, the protection of our intellectual property
and other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission and the Canadian Securities Regulators,
including under the Canadian Multijurisdictional Disclosure System.
The names CANASA, CARAFATE, DELURSAN, HELIZIDE, ITAX, LACTEOL, PANZYTRAT,
SALOFALK, SULCRATE, ULTRASE and URSO appearing in this press release are
trademarks of Axcan Pharma Inc. and its subsidiaries.
-30-
INFORMATION: Isabelle Adjahi
Director, Investor Relations
Axcan Pharma Inc.
Tel: (450) 467-2600 ext. 2000
www.axcan.com
AXCAN PHARMA INC.
KEY PRODUCT INFORMATION
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Sales(1)($US M) Sales Growth(2) Rx(3)Growth(2)
(U.S.)
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NORTH AMERICA
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CANASA 36.8 13.0% 8.9%
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SALOFALK 15.0 18.1% n/a
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ULTRASE 36.4 14.6% 2.0%
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URSO 250/FORTE/DS 51.0 6.5% 15.0%
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CARAFATE 34.9 -17.5% 3.1%
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EUROPE
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LACTEOL 19.3 7.8% n/a
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PANZYTRAT 16.1 34.4% n/a
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DELURSAN 13.1 12.6% n/a
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(1)Sales for the 12-month period ended December 31, 2005
(2)Compared with the 12-month period ended December 31, 2004
(3) Based on IMS Prescription Data for products sold in the United States
PRODUCTS IN NORTH AMERICA
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CANASA
U.S. prescriptions for the 12-month period ended December 31, 2005, were up 8.9%
compared to the same period in 2004.
Sales for the 12-month period ended December 31, 2005, increased 13.0%, compared
to the 12-month period ended December 31, 2004, mainly due to the stabilization
of the impact of wholesaler reductions in inventory levels that occurred in
fiscal 2005.
ULTRASE
U.S. prescriptions for the 12-month period ended December 31, 2005, increased
2.0% compared to the same period in 2004.
U.S. sales for ULTRASE for the 12-month period ended December 31, 2005,
increased 14.6%, compared to the 12-month period ended December 31, 2004, mainly
due to the stabilization of the impact of wholesaler reductions in inventory
levels that occurred in fiscal 2005, as well as price increases that occurred in
2005.
AXCAN PHARMA INC.
URSO 250/URSO FORTE
In the U.S., prescriptions for the 12-month period ended December 31, 2005, were
up 15.0% compared with the same period a year earlier. During fiscal 2005, Axcan
launched URSO Forte, a 500-mg dosage form of Ursodiol, which contributed to
overall prescription growth.
For the 12-month period ended December 31, 2005, total sales in North America
were up 6.5% compared to the 12-month period ended December 31, 2004.
CARAFATE
U.S. prescriptions for the 12-month period ended December 31, 2005, increased
3.1% compared to the same period in 2004.
For the 12-month period ended December 31, 2005, U.S. sales decreased 17.5%
compared to the 12-month period ended December 31, 2004.
PRODUCTS IN EUROPE
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LACTEOL
For the 12-month period ended December 31, 2005, sales of LACTEOL increased 7.8%
compared to the prior year. In local currency, the increase was 7.6%.
PANZYTRAT
For the 12-month period ended December 31, 2005, sales of PANZYTRAT increased
34.4% compared to the prior year, as most of PANZYTRAT sales have now been
transferred to Axcan from Abbott Laboratories. In local currency, the increase
was 32.9%.
DELURSAN
For the 12-month period ended December 31, 2005, sales of DELURSAN increased
12.6% compared to the prior year. In local currency, the increase was 11.2%.
AXCAN PHARMA INC.
Management's discussion and analysis of financial condition and results of
operations
This discussion should be read in conjunction with the information contained in
Axcan's consolidated financial statements and the related notes thereto. All
amounts are in U.S. dollars.
Overview
Axcan is a leading speciality pharmaceutical company concentrating in the field
of gastroenterology, with operations in North America and Europe. Axcan markets
and sells pharmaceutical products used in the treatment of a variety of
gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO/URSO 250, URSO
FORTE/URSO DS and DELURSAN for the treatment of certain cholestatic liver
diseases; SALOFALK and CANASA for the treatment of certain inflammatory bowel
diseases; and CARAFATE/SULCRATE for the treatment gastric duodenal ulcers. Axcan
has a number of pharmaceutical projects in all phases of development, including
ITAX for the treatment of functional dyspepsia.
For the three-month period ended December 31, 2005, revenue was $70.6 million,
operating income was $14.2 million and net income was $9.2 million. Revenue from
sales of Axcan's products in the United States was $46.2 million (65.5% of total
revenue) for the three-month period ended December 31, 2005, compared to $38.2
million (62.0% of total revenue) for the corresponding period of fiscal 2005. In
Canada, revenue was $10.2 million (14.4% of total revenue) for the three-month
period ended December 31, 2005, compared to $9.2 million (14.9% of total
revenue) for the corresponding period of fiscal 2005. In Europe, revenue was
$14.2 million (20.1% of total revenue) for the three-month period ended December
31, 2005, compared to $14.2 million (23.1% of total revenue) for the
corresponding period of fiscal 2005.
Axcan's revenue historically has been and continues to be principally derived
from sales of pharmaceutical products to large pharmaceutical wholesalers and
large chain pharmacies. Axcan utilizes a "pull-through" marketing approach that
is typical of pharmaceutical companies. Under this approach, Axcan's sales
representatives demonstrate the features and benefits of its products to
gastroenterologists who may write their patients prescriptions for Axcan's
products. The patients, in turn, take the prescriptions to pharmacies to be
filled. The pharmacies then place orders with the wholesalers or, in the case of
large chain pharmacies, their distribution centers, to whom Axcan sells its
products.
Axcan's expenses are comprised primarily of selling and administrative expenses
(including marketing expenses), cost of goods sold (including royalty payments
to those companies from whom Axcan licenses some of its products), research and
development expenses as well as depreciation and amortization.
Axcan's annual and quarterly operating revenue are primarily affected by three
factors: the level of acceptance of Axcan's products by gastroenterologists and
their patients; the ability of Axcan to convince practitioners to use Axcan
products for approved indications; and wholesaler buying patterns.
Historically, wholesalers' business models in the U.S. were dependent on drug
price inflation. Their profitability and gross margins were directly tied to
speculative purchasing pharmaceutical products at pre-price increase prices and
selling their product
AXCAN PHARMA INC.
inventory to the trade at the new higher price. This inventory price arbitrage
was predominantly how wholesalers were compensated for the distribution services
they provided and had a dramatic effect on wholesaler buying patterns as they
invested in inventories in anticipation of generating higher gross margins from
price increases from manufacturers. More recently, for a number of reasons,
pharmaceutical manufacturers have not been increasing drug prices as frequently,
and the increases as a percentage have been lower. For these and other reasons,
some wholesalers moved to a fee-for-service type arrangement where fees are now
typically expressed as a percentage of the wholesaler's purchases from the
manufacturer or as an amount per piece per unit. For wholesalers,
fee-for-service means their compensation will be periodic and volume activity
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
are reducing their carrying levels of inventory from their historical norms.
Under the new model, manufacturers will now realize the benefit of price
increase more rapidly and pay wholesalers for the services they provide on a
fee-for-service basis. This change in wholesaler's business model has affected
Axcan's revenue since fiscal 2005.
Most importantly, the level of patient and physician acceptance of Axcan's
products, as well as the availability of similar therapies, which may be less
effective but also less expensive than some of Axcan's products, impact Axcan's
revenues by driving the level and timing of prescriptions for its products.
Critical Accounting Policies
Axcan's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("U.S.
GAAP"), applied on a consistent basis. Axcan's critical accounting policies
include the use of estimates, revenue recognition, the recording of research and
development expenses and the determination of the useful lives or fair value of
goodwill and intangible assets. Some of our critical accounting policies require
the use of judgment in their application or require estimates of inherently
uncertain matters. Although our accounting policies are in compliance with U.S.
GAAP, a change in the facts and circumstances of an underlying transaction could
significantly change the application of our accounting policies to that
transaction, which could have an effect on our financial statements. Discussed
below are those policies that we believe are critical and require the use of
complex judgment in their application.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the recorded amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of financial statements and the disclosure of recognized amounts of
revenues and expenses during the year. Significant estimates and assumptions
made by management include the allowance for accounts receivable and
inventories, reserves for product returns, rebates and chargebacks, the
classification of intangible assets between finite and indefinite life, useful
lives of long-lived assets, the expected cash flows used in evaluating
long-lived assets, goodwill and investments for impairment, contingency
provisions and other accrued charges. These estimates were made using the
historical information and various other factors related to each circumstance
available to management. The Company reviews all significant estimates affecting
the financial statements on a recurring basis and records the effect of any
adjustments when necessary.
AXCAN PHARMA INC.
Actual results could differ from those estimates based upon future events, which
could include, among other risks, changes in regulations governing the manner in
which we sell our products, changes in health care environment and managed care
consumption patterns.
Revenue Recognition
Revenue is recognized when the product is shipped to the Company's customer,
provided the Company has not retained any significant risks of ownership or
future obligations with respect to the product shipped. Provisions for sales
discounts and estimates for chargebacks, managed care and Medicaid rebates and
product returns are established as a reduction of product sales revenues at the
time such revenues are recognized. These revenue reductions are established by
us as our best estimate at the time of sale based on historical experience
adjusted to reflect known changes in the factors that impact such reserves.
These revenue reductions are generally reflected as an addition to accrued
expenses.
We do not provide any forms of price protection to our wholesale customers and
permit product returns only if the product is returned within 12 months after
expiration. Credit for returns is issued to the original purchaser at current
net pricing less 10 %. Accrued liabilities include reserves of $7.6 million and
$7.5 million as of December 31, 2005, and September 30, 2005, respectively for
estimated product returns.
In the United States, we establish and maintain reserves for amounts payable by
us to managed care organizations and state Medicaid programs for the
reimbursement of portions of the retail price of prescriptions filled that are
covered by the respective programs. We also establish and maintain reserves for
amounts payable by us to wholesale distributors for the difference between their
regular sale price and the contract price for the products sold to our contract
customers. The amounts estimated to be paid relating to products sold are
recognized as revenue reductions and as additions to accrued expenses at the
time of sale based on our best estimate of the product's utilization by these
managed care and state Medicaid patients and sales to our contract customers,
using historical experience adjusted to reflect known changes in the factors
that impact such reserves. Accrued liabilities include reserves of $6.3 million
and $4.8 million as of December 31, 2005, and September 30, 2005, respectively,
for estimated rebates and chargebacks.
If the levels of chargebacks, managed care and Medicaid rebates, product returns
and discounts fluctuate significantly and/or if our estimates do not adequately
reserve for these reductions of net product revenues, our reported revenue could
be negatively affected.
Goodwill and Intangible Assets
We have in the past acquired products and businesses that include goodwill,
trademarks, license agreements and other identifiable intangible assets. Axcan's
goodwill and intangible assets are stated at cost, less accumulated
amortization. Since October 1, 2001, the Company has not amortize goodwill and
intangible assets with an indefinite life. However, management assesses the
impairment of goodwill and intangible assets at least annually and whenever
events or changes in circumstances indicate that the carrying amounts of these
assets may not be recoverable, by comparing the carrying value of the
unamortized portion of goodwill and intangible assets to the future benefits of
the Company's activities or expected sales of pharmaceutical products. Should
there be a permanent impairment in value or if the unamortized balance exceeds
recoverable amounts, a write-down will be recognized, for the current year. To
date, Axcan has not recognized any significant impairment in value.
AXCAN PHARMA INC.
Intangible assets with finite life are amortized over their estimated useful
lives according to the straight-line method at annual rates varying from 4% to
15%. The straight-line method of amortization is used because it reflects, in
the opinion of management, the pattern in which the intangible assets with
finite life are used. In determining the useful life of intangible assets, the
Company considers many factors including the intention of management to support
the asset on a long-term basis by maintaining the level of expenditure
necessary, the use of the asset, the existence and expiration date of a patent,
the existence of a generic or competitor and any legal or regulatory provisions
that could limit the use of the asset.
As a result of acquisitions, we included $27.5 million of goodwill on our
consolidated balance sheets as of December 31, 2005, and September 30, 2005.
Also as a result of acquisitions of product rights and other identifiable
intangible assets, we included $383.0 million and $388.9 million as net
intangible assets on our consolidated balance sheets as of December 31, 2005,
and September 30, 2005, respectively. Estimated annual amortization expense for
intangible assets with a finite life, which have a weighted-average remaining
amortization period of approximately 17 years, for the next five fiscal years,
is approximately $16.9 million.
Research and Development Expenses
Research and development expenses are charged to operations in the year they are
incurred. Acquired in-process research and development having no alternative
future use is written off at the time of acquisition. The cost of intangibles
that are acquired from others for a particular research and development project,
with no alternative use, is written off at the time of acquisition.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
revenue represented by items in Axcan's consolidated statements of operations:
For the three-month periods
ended December 31,
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2005 2004
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% %
Revenue 100.0 100.0
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Cost of goods sold 25.8 27.2
Selling and administrative expenses 33.4 34.0
Research and development expenses 12.6 10.4
Depreciation and amortization 8.0 8.7
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79.8 80.3
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Operating income 20.2 19.7
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Financial expenses 2.5 2.9
Interest income (1.1) (0.1)
Gain on foreign exchange (0.3) (0.4)
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1.1 2.4
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Income before income taxes 19.1 17.3
Income taxes 6.0 4.7
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Net income 13.1 12.6
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AXCAN PHARMA INC.
Three-month period ended December 31, 2005 compared to the three-month period
ended December 31, 2004
Revenue
For the three-month period ended December 31, 2005, revenue was $70.6 million
compared to $61.6 million for the corresponding period of the preceding fiscal
year, an increase of 14.6%. This increase in revenue primarily resulted from
higher sales in the United States. The end-customer prescription demand resulted
in positive growth for most of our products sold in the United States, which was
reflected in sales to our major wholesalers as they work towards reaching their
targeted inventory levels. Major wholesalers in the United States reduced their
inventory levels in fiscal 2005.
Revenue is stated net of deductions for product returns, chargebacks, contract
rebates, discounts and other allowances of $11.7 million (14.2% of gross
revenue) for the three-month period ended December 31, 2005, and $8.2 million
(11.7% of gross revenue) for the three-month period ended December 31, 2004.This
increase of total deductions as a percentage of gross revenue is primarily due
to an increase in returns and chargebacks.
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.
For the three-month period ended December 31, 2005, cost of goods sold increased
$1.4 million (8.3%) to $18.2 million from $16.8 million for the corresponding
period of the preceding fiscal year. As a percentage of revenue, cost of goods
sold for the three-month period ended December 31, 2005 decreased as compared to
the corresponding period of the preceding fiscal year from 27.2% to 25.8%. This
decrease in the cost of goods sold as a percentage of revenue was due mainly to
the increase in sales of products with a higher margin.
Selling and administrative expenses
Selling and administrative expenses consist principally of salaries and other
costs associated with Axcan's sales force and marketing activities. Selling and
administrative expenses increased $2.6 million (12.4%) to $23.6 million for the
three-month period ended December 31, 2005, from $21.0 million for the
corresponding period of the preceding fiscal year. The adoption of the new
accounting rule concerning the compensation cost for share based awards resulted
in an increase in selling and administrative expenses of $0.9 million. The
increase was also due to marketing preparations for new products, including
ITAX, additional marketing efforts with respect to our current products,
increased distribution cost following the signing of a new agreement with a
major wholesaler, consulting fees for Information Technology implementation and
regulatory compliance.
Research and development expenses
Research and development expenses consist principally of fees paid to outside
parties that Axcan uses to conduct clinical studies and to submit governmental
approval applications on its behalf as well as the salaries and benefits paid to
its personnel involved in research and development projects. Research and
development expenses increased $2.5 million (39.1%) to $8.9 million for the
three-month period ended December 31, 2005, from $6.4 million for the
corresponding period of the preceding fiscal year. This increase was mainly due
to the Phase III development of ITAX, acquired in August 2003, for the treatment
of functional dyspepsia. Phase III is the most expensive stage of clinical
development.
AXCAN PHARMA INC.
Depreciation and amortization
Depreciation and amortization consist principally of the amortization of
intangible assets with a finite life. Intangible assets include trademarks,
trademark licenses and manufacturing rights. Depreciation and amortization
increased $0.2 million (3.7%) to $5.6 million for the three-month period ended
December 31, 2005, from $5.4 million for the corresponding period of the
preceding fiscal year. The increase was mainly due to the amortization of
LACTEOL and ADEK's which were reclassified from intangible assets with an
indefinite life to intangible assets with a finite life on October 1, 2005.
Financial expenses
Financial expenses consist principally of interest and fees paid in connection
with money borrowed for acquisitions. Financial expenses remained stable at $1.8
million for the three-month periods ended December 31, 2005 and 2004.
Income Taxes
Income taxes amounted to $4.2 million for the three-month period ended December
31, 2005, compared to $2.9 million for the corresponding period of the preceding
fiscal year. The effective tax rates were 31.4% for the three-month period ended
December 31, 2005 and 27.2% for the three-month period ended December 31, 2004.
Net income
Net income was $9.2 million or $0.20 of basic income per share and $0.19 of
diluted income per share, for the three-month period ended December 31, 2005,
compared to $7.8 million or $0.17 of basic income per share and $0.16 of diluted
income per share for the corresponding period of the preceding year. Net income
for the three-month period ended December 31, 2005 takes into account the
expensing of stock-based compensation, which amounted to $0.9 million after
taxes. Had stock-based compensation been recorded in the prior year, the impact
to net income for the three-month period ended December 31, 2004 would have been
$1.1 million or $0.02 per share of basic and diluted income per share thus
reducing net income to $6.7 million or $0.15 of basic income per share and $0.14
of diluted income per share. The change in net income for the three-month period
ended December 31, 2005 resulted mainly from an increase in revenue of $9.0
million, and an increase in interest income of $0.7 million, which was offset by
a $6.9 million increase in operating expenses and an increase in income taxes of
$1.3 million. The weighted average number of common shares outstanding used to
establish the basic per share amounts increased from 45.6 million for the
three-month period ended December 31, 2004 to 45.7 million for the three-month
period ended December 31, 2005, following the exercise of options previously
granted pursuant to Axcan's stock option plan. The weighted average number of
common shares used to establish the diluted per share amounts decreased from
55.3 million for the three-month period ended December 31, 2004 to 55.0 million
for the three-month period ended December 31, 2005.
AXCAN PHARMA INC.
Canadian GAAP
The differences (in thousands of dollars) between U.S. and Canadian GAAP which
affected net income for the three-month periods ended December 31, 2005 and 2004
are summarized in the following table:
For the three-month periods
ended December 31,
-----------------------------
2005 2004
------------- -------------
$ $
Net income in accordance with U.S. GAAP 9,245 7,754
Implicit interest on convertible debt (1,229) (1,123)
Stock-based compensation expense - (1,300)
Amortization of new product acquisition costs (14) (14)
Income tax impact of the above adjustments (163) 5
- -------------------------------------------------------------------------------
Net earnings in accordance with Canadian GAAP 7,893 5,322
===============================================================================
On March 5, 2003, the Company closed an offering of $125.0 million aggregate
principal amount of 4.25% convertible subordinated notes due April 15, 2008. As
a result of the terms of the notes, under Canadian GAAP, an amount of $24.2
million was included in shareholders' equity as equity component of the
convertible debt, and an amount of $100.8 million was included in long-term
debt, as the liability component of the convertible notes. For the three-month
period ended December 31, 2005, implicit interest in the amount of $1.2 million
($1.1 million in 2004) was accounted for and added to the liability component.
Since October 1, 2004, under Canadian GAAP, the effect of stock-based
compensation has to be accounted for using the fair value method. Under U.S.
GAAP, the effect of stock-based compensation has to be accounted for using the
fair value method since October 1, 2005.
Under Canadian GAAP, research and development expenses are stated net of related
tax credits, which generally constitute between 5% and 10% of the aggregate
amount of such expenses. Under U.S. GAAP, these tax credits are applied against
income taxes.
Liquidity and capital resources
Axcan's cash, cash equivalents and short-term investments increased $28.3
million (29.0%) to $125.9 million at December 31, 2005 from $97.6 million at
September 30, 2005. As of December 31, 2005, working capital was $146.6 million,
compared to $132.0 million at September 30, 2005. These increases were mainly
due to the cash flows from operating activities for the three-month period ended
December 31, 2005.
Total assets increased $8.3 million (1.3%) to $649.7 million as of December 31,
2005 from $641.4 million as of September 30, 2005. Shareholders' equity
increased $8.2 million (2.0%) to $425.8 million as of December 31, 2005 from
$417.6 million as of September 30, 2005.
Historically, Axcan has financed research and development, operations,
acquisitions, milestone payments and investments out of the proceeds of public
and private sales of its equity and convertible debt, cash flows from operating
activities, and loans from joint venture partners and financial institutions.
Since it went public in Canada in December 1995, Axcan has raised approximately
$243.0 million from sales of its equity and $125.0 million from sales of
convertible notes. Furthermore, Axcan has borrowed and since repaid funds from
AXCAN PHARMA INC.
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 URSO.
Axcan's research and development expenses totalled $19.9 million for fiscal 2004
and $31.9 million for fiscal 2005. Axcan believes that cash, cash equivalents
and short-term investments, together with funds provided by operations, will be
sufficient to meet its operating cash requirements, including the development of
products through research and development activities, capital expenditures and
repayment of its debt. Axcan believes that regulatory approvals of future
products and extension of products indications, stemming from its research and
development efforts, will significantly contribute to an increase in funds
provided by operations. However, Axcan regularly reviews product and other
acquisition opportunities and may therefore require additional debt or equity
financing. Axcan cannot be certain that such additional financing, if required,
will be available on acceptable terms, or at all.
Line of credit
Effective September 22, 2004, the Company amended its existing credit facility
with a banking syndicate. The amended credit facility consists of a $125.0
million 364-day extendible revolving facility with a two-year term-out option
maturing on September 21, 2008.
The credit facility is secured by a first priority security interest on all
present and future acquired assets of the Company and its material subsidiaries,
and provides for the maintenance of certain financial ratios. Among the
restrictions imposed by the credit facility is a covenant limiting cash
dividends, share repurchases (other than redeemable shares issued in connection
with a permitted acquisition) and similar distributions to shareholders to 10%
of the Company's net income for the preceding fiscal year. As of December 31,
2005, Axcan was in compliance with all covenants under the credit facility.
The interest rate varies, depending on the Company's leverage, between 25 basis
points and 100 basis points over Canadian prime rate or U.S. base rate, and
between 125 basis points and 200 basis points over the LIBOR rate or bankers
acceptances. The line of credit also provides for a stand-by fee of between 25
and 37.5 basis points. The credit facility may be drawn in U.S. dollars, in
Canadian dollar or Euros equivalents. As of December 31, 2005, there was no
amount outstanding under this credit facility.
Convertible subordinated notes and other long-term debt
Long-term debt, including instalments due within one year, totalled $127.4
million as of December 31, 2005 compared to $127.8 million as of September 30,
2005. As of December 31, 2005, the long-term debt included $1.1 million of bank
loans, $1.3 million of obligations under capital leases contracted by Axcan's
French subsidiary and the $125.0 million 4.25% convertible subordinated notes
due 2008, which were issued on March 5, 2003.
The notes are convertible into 8,924,113 common shares during any quarterly
conversion period if the closing price per share for at least 20 consecutive
trading days during the 30 consecutive trading-day period ending on the first
day of the conversion period exceeds 110% of the conversion price in effect on
that thirtieth trading day. The notes are also convertible during the five
business-day period following any 10 consecutive trading-day period in which the
daily average of the trading prices for the notes was less than 95% of the
average conversion value for the notes during that period. The noteholders may
also convert their notes upon the occurrence of specified corporate transactions
or if the Company has called the notes for redemption. On or after April 20,
2006, the Company may at its option, redeem the notes, in whole or in part at
redemption prices varying from 101.70% to 100.85% of the principal
AXCAN PHARMA INC.
amount plus any accrued and unpaid interest to the redemption date. The notes
also include provisions for the redemption of all the notes for cash at the
option of the Company following certain changes in tax treatment.
Cash Flows
Cash flows from operating activities increased $20.5 million from $8.8 million
of cash provided by operating activities for the three-month period ended
December 31, 2004 to $29.3 million for the three-month period ended December 31,
2005. This increase is mainly due to the increase in income and the fact that
accounts receivable decreased by $12.9 million during the three-month period
ended December 31, 2005 compared to the corresponding period of the previous
fiscal year when they remained relatively stable. Cash flows used by financing
activities were $0.3 million for the three-month period ended December 31, 2005.
Cash flows provided by investment activities for the three-month period ended
December 31, 2005 were $6.4 million mainly due to the disposal of short-term
investments of $7.0 million less the cash used for the acquisition of property,
plant and equipment for $0.6 million. Cash flows provided by investment
activities for the three-month period ended December 31, 2004 were $11.0 million
mainly due to the disposal of short-term investments of $12.8 million less the
cash used for the acquisition of property, plant and equipment for $1.8 million.
Off-Balance Sheet Arrangements
Axcan does not have any transactions, arrangements and other relationships with
unconsolidated entities that are likely to affect its operating results, its
liquidity or capital resources. Axcan has no special purpose or limited purpose
entities that provide off-balance sheet financing, liquidity or market or credit
risk support, engage in leasing, hedging, research and development services, or
other relationships that expose the Company to liability that is not reflected
on the face of the consolidated financial statements.
Contractual Obligations
The following table summarizes Axcan's significant contractual obligations (in
thousands of dollars) as of December 31, 2005 and the effect such obligations
are expected to have on our liquidity and cash flows in future years. This table
excludes amounts already recorded on the balance sheet as current liabilities at
December 31, 2005 or certain other purchase obligations as discussed below:
For the twelve-month periods ending December 31,
--------------------------------------------------------
2010 and
2006 2007 2008 2009 thereafter
-------- ---------- ---------- ---------- ----------
$ $ $ $ $
Long-term debt 1,401 801 125,193 53 -
Operating leases 1,413 817 545 30 -
Other commitments 225 475 716 250 -
-------- ---------- ---------- ---------- ----------
3,039 2,093 126,454 333 0
======== ========== ========== ========== ==========
Purchase orders for raw materials, finished goods and other goods and services
are not included in the above table. Management is not able to determine the
aggregate amount of such purchase orders that represent contractual obligations,
as purchase orders may represent authorizations to purchase rather than binding
agreements. For the purpose of this table, contractual obligations for purchase
of goods or services are defined as agreements that are enforceable and legally
binding on the Company and that specify all significant terms, including: fixed
or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Axcan's purchase
orders are based on current
AXCAN PHARMA INC.
needs and are fulfilled by our vendors with relatively short timetables. The
Company does not have significant agreements for the purchase of raw materials
or finished goods specifying minimum quantities or set prices that exceed its
short-term expected requirements. Axcan also enters into contracts for
outsourced services; however, the obligations under these contracts are not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty except for a sales management services
contract included in the above table. As milestone payments are primarily
contingent on receiving regulatory approval for products under development, they
do not have defined maturities.
The expected timing of payment of the obligations discussed above is estimated
based on current information. Timing of payments and actual amounts paid may be
different depending on the time of receipt of goods or services, or for some
obligations, changes to agreed-upon amounts.
Effect of recently issued U.S. accounting pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". SFAS No.
123R requires all entities to recognize compensation cost for share-based
awards, including options, granted to employees. The Statement eliminates the
ability to account for share-based compensation transactions using APB No. 25,
"Accounting for Stock Issued to Employees", and generally requires instead that
such transactions be accounted for using a fair-value based method. Public
companies are required to measure stock-based compensation classified as equity
by valuing the instrument the employee receives at its grant-date fair value.
Previously, such awards were measured at intrinsic value under both APB No. 25
and SFAS 123, "Accounting for Stock-Based Compensation". The Company applied the
Statement beginning in fiscal 2006 using the modified prospective transition
approach. The adoption resulted in an increase in compensation cost of $1.1
million for the three-month period ended December 31, 2005.
Earnings coverage
Under U.S. GAAP, for the twelve-month period ended December 31, 2005, our
interest requirements amounted to $6.2 million on a pro-forma basis and our
earnings coverage ratio, defined as the ratio of earnings before interest and
income taxes to pro-forma interest requirements, was 7.04 to one.
Under Canadian GAAP, for the twelve-month period ended December 31, 2005, our
interest requirements amounted to $11.4 million on a pro-forma basis, and our
earnings coverage ratio was 3.73 to one. The principal difference between the
earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable to
the inclusion of implicit interest of $5.2 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. Risks other than
those described below can be found in the Part III - Business of Axcan, of the
Company's Annual Information Form.
AXCAN PHARMA INC.
Foreign Currency Risk
Axcan operates internationally; however, a substantial portion of the revenue
and expense activities and capital expenditures are transacted in U.S. dollars.
Axcan's exposure to exchange rate fluctuation is reduced because, in general,
Axcan's revenues denominated in currencies other than the U.S. dollar are
matched by a corresponding amount of costs denominated in the same currency.
Axcan expects this matching to continue.
Interest Rate Risk
The primary objective of Axcan's investment policy is the protection of capital.
Accordingly, investments are made in high-grade government and corporate
securities with varying maturities, but typically, less than 180 days.
Therefore, Axcan does not have a material exposure to interest rate risk, and a
100 basis-point adverse change in interest rates would not have a material
effect on Axcan's consolidated results of operations, financial position or cash
flows. Axcan is exposed to interest rate risk on borrowings under the credit
facility. The credit facility bears interest based on LIBOR, U.S. dollar base
rate, Canadian dollar prime rate, or Canadian dollar Bankers' Acceptances. Based
on projected advances under the credit facility, a 100 basis-point adverse
change in interest rates would not have a material effect on Axcan's
consolidated results of operations, financial position, or cash flows.
Supply and Manufacture
Axcan depends on third parties for the supply of active ingredients and for the
manufacture of the majority of its products. Although Axcan looks to secure
alternative suppliers, Axcan may not be able to obtain the active ingredients or
products from such third parties, the active ingredients or products may not
comply with specifications, or the prices at which Axcan purchases them may
increase and Axcan may not be able to locate alternative sources of supply in a
reasonable time period, or at all. If any of these events occur, Axcan may not
be able to continue to market certain of its products, and its sales and
profitability would be adversely affected.
Volatility of Share Prices
The market price of Axcan's shares is subject to volatility. Deviations in
actual financial or scientific results, as compared to expectations of
securities analysts who follow our activities can have a significant effect on
the trading price of Axcan's shares.
Forward-looking Statements
This document contains forward-looking statements, which reflect the Company's
current expectations regarding future events. To the extent that any statements
in this document contain information that is not historical, the statements are
essentially forward-looking and are often identified by words such as
"anticipate", "expect", "estimate", "intend", "project", "plan" and "believe".
These forward-looking statements include, but are not limited to, the expected
sales growth of the Company's products and the expected increase in funds from
operations resulting from the Company's research and development expenditures.
The forward-looking statements involve risks and uncertainties. Actual events
could differ materially from those projected herein and depend on a number of
factors, including but not limited to the successful and timely completion of
clinical studies, the difficulty of predicting FDA or other regulatory
approvals, the commercialization of a drug or therapy after regulatory approval
is received, the difficulty of predicting acceptance and demand for
pharmaceutical products, the impact of competitive products and pricing, costs
associated with new product development and launch, the availability of raw
materials, the protection of our intellectual property, fluctuations in our
AXCAN PHARMA INC.
operating results and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission and the Canadian Securities
Commissions. The reader is cautioned not to rely on these forward looking
statements. The Company disclaims any obligation to update these forward-looking
statements.
This MD&A has been prepared as of February 9, 2006. Additional information on
the Company is available through regular filing of press releases, quarterly
financial statements and the Annual Information Form on the SEDAR website.
On behalf of Management,
Jean Vezina
Vice President, Finance and Chief Financial Officer
AXCAN PHARMA INC.
AXCAN PHARMA INC.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
December 31, September 30,
2005 2005
------------- -------------
(unaudited)
ASSETS $ $
Current assets
Cash and cash equivalents 115,238 79,969
Short-term investments available for sale 10,622 17,619
Accounts receivable 24,485 37,587
Income taxes receivable 7,912 8,351
Inventories (Note 3) 35,799 36,016
Prepaid expenses and deposits 3,514 1,771
Deferred income taxes 7,934 9,044
- -----------------------------------------------------------------------------------------------------------
Total current assets 205,504 190,357
Property, plant and equipment, net 30,618 31,673
Intangible assets, net (Note 4) 382,985 388,921
Goodwill, net 27,467 27,467
Deferred debt issue expenses, net 2,302 2,577
Deferred income taxes 781 412
- -----------------------------------------------------------------------------------------------------------
Total assets 649,657 641,407
===========================================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 51,198 52,990
Income taxes payable 4,943 3,247
Instalments on long-term debt 1,401 1,497
Deferred income taxes 1,327 602
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 58,869 58,336
Long-term debt 126,047 126,332
Deferred income taxes 38,929 39,135
- -----------------------------------------------------------------------------------------------------------
Total liabilities 223,845 223,803
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock
Preferred shares, without par value, unlimited shares
authorized, no shares issued; -- --
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; 45,688,344 issued as at
December 31, 2005 and 45,682,175 as at September 30, 2005. 261,780 261,714
Retained earnings 148,032 138,787
Additional paid-in capital 2,401 1,329
Accumulated other comprehensive income 13,599 15,774
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 425,812 417,604
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 649,657 641,407
===========================================================================================================
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.
AXCAN PHARMA INC.
Consolidated Shareholders' Equity
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
--------------- ---------------
Common shares (number)
Balance, beginning of period 45,682,175 45,562,336
Shares issued pursuant to the stock option plan 6,169 18,714
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period 45,688,344 45,581,050
============================================================================================================================
$ $
Common shares
Balance, beginning of period 261,714 260,643
Shares issued pursuant to the stock option plan 66 156
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period 261,780 260,799
- ----------------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of period 138,787 112,362
Net income 9,245 7,754
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period 148,032 120,116
- ----------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital
Balance, beginning of period 1,329 --
Stock-based compensation expense 1,072 --
Income tax deductions on stock options exercise -- 980
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period 2,401 980
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Balance, beginning of period 15,774 19,071
Foreign currency translation adjustments (2,175) 10,848
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period 13,599 29,919
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 425,812 411,814
============================================================================================================================
Comprehensive income
Foreign currency translation adjustments (2,175) 10,848
Net income 9,245 7,754
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 7,070 18,602
============================================================================================================================
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.
AXCAN PHARMA INC.
Consolidated Cash Flows
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
--------------- ---------------
Operations $ $
Net income 9,245 7,754
Non-cash items
Amortization of deferred debt issue expenses 275 275
Other depreciation and amortization 5,634 5,364
Stock-based compensation expense 1,072 --
Foreign currency fluctuation (283) (16)
Deferred income taxes 1,279 601
Changes in working capital items
Accounts receivable 12,876 (138)
Income taxes receivable 406 (682)
Inventories 322 (1,125)
Prepaid expenses and deposits (1,724) (722)
Accounts payable and accrued liabilities (1,569) (5,249)
Income taxes payable 1,727 2,755
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities 29,260 8,817
- ----------------------------------------------------------------------------------------------------------------------------
Financing
Repayment of long-term debt (368) (469)
Deferred debt issue expenses -- (589)
Issue of shares 66 156
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities (302) (902)
- ----------------------------------------------------------------------------------------------------------------------------
Investment
Disposal of short-term investments 6,997 12,822
Acquisition of property, plant and equipment (566) (1,834)
Acquisition of intangible assets -- (8)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investment activities 6,431 10,980
- ----------------------------------------------------------------------------------------------------------------------------
Foreign exchange gain (loss) on cash held in foreign currencies (120) 175
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 35,269 19,070
Cash and cash equivalents, beginning of period 79,969 21,979
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 115,238 41,049
============================================================================================================================
Additional information
Interest received 897 99
Interest paid 2,680 2,698
Income taxes paid 814 1,269
============================================================================================================================
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.
AXCAN PHARMA INC.
Consolidated Operations
- --------------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
--------------- ---------------
$ $
REVENUE 70,639 61,583
- ----------------------------------------------------------------------------------------------------------------------------
Cost of goods sold excluding depreciation and amortization 18,229 16,757
Selling and administrative expenses 23,642 20,957
Research and development expenses 8,894 6,389
Depreciation and amortization 5,634 5,364
- ----------------------------------------------------------------------------------------------------------------------------
56,399 49,467
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 14,240 12,116
.............................................................................................................................
Financial expenses 1,758 1,787
Interest income (786) (86)
Gain on foreign currency (210) (233)
- ----------------------------------------------------------------------------------------------------------------------------
762 1,468
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,478 10,648
Income taxes 4,233 2,894
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME 9,245 7,754
============================================================================================================================
============================================================================================================================
Income per common share
Basic 0.20 0.17
Diluted 0.19 0.16
============================================================================================================================
Weighted average number of common shares
Basic 45,686,661 45,571,370
Diluted 55,042,690 55,303,339
============================================================================================================================
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.
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)
1. Significant Accounting Policies
The accompanying unaudited financial statements are prepared in accordance with
U.S. GAAP for interim financial statements and do not include all the
information required for complete financial statements. They are consistent with
the policies outlined in the Company's audited financial statements for the year
ended September 30, 2005 except for the change mentioned in note 2. The interim
financial statements and related notes should be read in conjunction with the
Company's audited financial statements for the year ended September 30, 2005.
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.
2. Change in Accounting Policies
In December 2004, The Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment". SFAS
No. 123R requires all entities to recognize compensation cost for share-based
awards, including options, granted to employees. The Statement eliminates the
ability to account for share-based compensation transactions using the
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
To Employees", and generally requires instead that such transactions be
accounted for using a fair-value based method. Public companies are required to
measure stock-based compensation classified as equity by valuing the instrument
the employee receives at its grant-date fair value. Previously such awards were
measured at intrinsic value under both APB No. 25 and SFAS 123, "Accounting for
Stock-Based Compensation". The Company applied the Statement beginning in fiscal
2006 using the modified prospective transition approach.
If this change in accounting policy had been applied to the previous fiscal
year, the Company's net income, basic income per share and diluted income per
share for the three-month period ended December 31, 2004 would have been reduced
on a pro-forma basis as follows:
For the three-month period
ended December 31, 2004
---------------------------------
As reported Pro-forma
-------------- ---------------
$ $
Net income 7,754 6,657
Basic income per share 0.17 0.15
Diluted income per share 0.16 0.14
AXCAN PHARMA INC.
The estimated fair value of granted stock options for the periods ended December
31, 2005 and 2004 using the Black-Scholes model was as follows:
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
---------------- ---------------
Fair value per option $6.47 $6.98
Assumptions used
Expected volatility 44% 44%
Risk-free interest rate 4.01% 4.16%
Expected options life (years) 6 6
Expected dividend - -
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)
3. Inventories
December 31, September 30,
2005 2005
------------- ---------------
$ $
Raw materials and packaging material 17,317 18,710
Work in progress 1,716 1,547
Finished goods 16,766 15,759
- --------------------------------------------------------------------------------
35,799 36,016
================================================================================
AXCAN PHARMA INC.
4. Intangible Assets
December 31, 2005
- ------------------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
- ------------------------------------------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 344,796 49,943 294,853
Indefinite life 100,585 12,453 88,132
- ------------------------------------------------------------------------------------------------------------
445,381 62,396 382,985
============================================================================================================
September 30, 2005
- ------------------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
- ------------------------------------------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 334,749 45,841 288,908
Indefinite life 112,430 12,417 100,013
- ------------------------------------------------------------------------------------------------------------
447,179 58,258 388,921
============================================================================================================
The cost of the products LACTEOL and ADEK's 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 these products and resulting in
the modification of their useful life. The net cost of these products as of
October 1, 2005, which amounted to $13,520,565, is therefore amortized over a
15-year period.
AXCAN PHARMA INC.
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(amounts in tables are stated 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 For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
--------------- ----------------
$ $
Revenue
Canada
Domestic sales 10,184 9,190
Foreign sales - -
United States
Domestic sales 44,909 37,028
Foreign sales 1,346 1,157
Europe
Domestic sales 12,145 11,743
Foreign sales 2,022 2,423
Other 33 42
- --------------------------------------------------------------------------------------------------------------------------
70,639 61,583
==========================================================================================================================
December 31, September 30,
2005 2005
--------------- ----------------
$ $
Property, plant, equipment, intangible assets and goodwill
Canada 39,042 39,506
United States 126,843 127,915
Europe 247,408 252,509
Other 27,777 28,131
- -----------------------------------------------------------------------------------------------------------------------
441,070 448,061
========================================================================================================================
Revenue is attributed to geographic segments based on the sales country of
origin.
AXCAN PHARMA INC.
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(amounts in tables are stated 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 For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
------------- --------------
$ $
Interest on long-term debt 1,375 1,434
Bank charges 29 7
Financing fees 79 71
Amortization of deferred debt issue expenses 275 275
- --------------------------------------------------------------------------------
1,758 1,787
================================================================================
b) Selling and administrative expenses
Selling and administrative expenses include the followings:
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
-------------- ---------------
$ $
Shipping and handling expenses 1,258 1,004
Advertising expenses 4,069 4,625
c) Other information
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
------------ -------------
$ $
Rental expenses 290 287
Depreciation of property, plant and equipment 1,406 1,301
Amortization of intangible assets 4,228 4,063
AXCAN PHARMA INC.
d) Income per common share
The following tables reconcile the numerators and the denominators of the basic
and diluted income per common share computations:
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
------------- -------------
$ $
Net income available to common shareholders
Basic 9,245 7,754
Interest and amortization of deferred debt issue
expenses relating to the convertible subordinated
notes, net of income taxes 1,121 1,079
- --------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders on a diluted basis 10,366 8,833
==========================================================================================================================
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)
6. Financial Information Included in the Consolidated Statement of
Operations (continued)
d) Income per common share (continued)
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
----------------- ---------------
Weighted average number of common shares
Weighted average number of common shares outstanding 45,686,661 45,571,370
Effect of dilutive stock options 431,916 807,856
Effect of dilutive convertible subordinated notes 8,924,113 8,924,113
- --------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average number of common shares outstanding 55,042,690 55,303,339
==========================================================================================================================
==========================================================================================================================
Number of common shares outstanding as at January 31, 2006 45,710,879
==========================================================================================================================
Options to purchase 1,180,874 and 283,000 common shares were outstanding as at
December 31, 2005 and 2004 respectively but were not included in the computation
of diluted income per share as exercise price of the options was greater than
the average market price of the common shares.
AXCAN PHARMA INC.
The $125,000,000 subordinated notes are convertible into 8,924,113 common
shares. The noteholders may convert their notes during any quarterly conversion
period if the closing price per share for at the least 20 consecutive trading
days during the 30 consecutive trading-day period ending on the first day of the
conversion period exceeds 110% of the conversion price in effect on that
thirtieth trading day. The noteholders may also convert their notes during the
five business-day period following any 10 consecutive trading-day period in
which the daily average of the trading prices for the notes was less than 95% of
the average conversion value for the notes during that period. Finally, the
noteholders may also convert their notes upon the occurrence of specified
corporate transactions or, if the company has called the notes for redemption.
On or after April 20, 2006, the Company may at its option, redeem the notes, in
whole or in part at redemption prices varying from 101.70% to 100.85% of the
principal amount plus any accrued and unpaid interest to the redemption date.
The notes also include provisions for the redemption of all the notes for cash
at the option of the Company following some changes in tax treatment.
e) Employee benefit plan
A subsidiary of the Company has a defined contribution plan ("The Plan") for its
U.S. employees. Participation is available to substantially all U.S. employees.
Employees may contribute up to 15% of their gross pay and up to limits set by
the U.S. Internal Revenue Service. For the three-month period ended December 31,
2005, the Company made matching contributions to the Plan totalling $100,456
($122,183 in 2004).
AXCAN PHARMA INC.
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)
7. Summary of Differences Between Generally Accepted Accounting
Principles in the United States and in Canada
The consolidated interim financial statements have been prepared in accordance
with U.S. GAAP which, in the case of the Company, conform in all materials
respects with Canadian GAAP, except as set forth below:
For the For the
three-month three-month
period ended period ended
December 31, December 31,
2005 2004
--------------- ----------------
Operations adjustments $ $
Net income in accordance with U.S. GAAP 9,245 7,754
Implicit interest on convertible debt (1,229) (1,123)
Stock-based compensation expense - (1,300)
Amortization of new product acquisition costs (14) (14)
Income tax impact of the above adjustments (163) 5
- -----------------------------------------------------------------------------------------------------------------------
Net earnings in accordance with Canadian GAAP 7,839 5,322
========================================================================================================================
Earnings per share in accordance with Canadian GAAP
Basic 0.17 0.12
Diluted 0.17 0.11
December 31, 2005 September 30, 2005
---------------------------------- ---------------------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
-------------- ---------------- -------------- ---------------
Balance sheet adjustments $ $ $ $
Current assets 205,504 205,504 190,357 190,357
Property, plant and equipment 30,618 30,618 31,673 31,673
Intangible assets 382,985 395,280 388,921 401,229
Goodwill 27,467 28,862 27,467 28,862
Deferred debt issue expenses 2,302 2,302 2,577 2,577
Deferred income tax asset 781 612 412 412
Current liabilities 58,869 58,869 58,336 58,336
Long-term debt 126,047 114,194 126,332 113,250
Deferred income tax liability 38,929 40,023 39,135 40,234
Shareholders' equity
Equity component of convertible debt - 24,239 - 24,239
Capital stock 261,780 273,088 261,714 273,022
Additional paid-in capital 2,401 14,367 1,329 13,293
Retained earnings 148,032 120,643 138,787 112,806
Accumulated foreign currency translation
adjustments 13,599 17,755 15,774 19,930