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Axcan Reports First Quarter 2005 Results


Feb 14, 2005 - 12:00 ET

Axcan Reports First Quarter 2005 Results

MONT-SAINT-HILAIRE, Quebec, Feb. 14 - Axcan Pharma Inc.
("Axcan" or the "Company") announced today operating results for the quarter
ended December 31, 2004, the Company's first quarter of the fiscal year ending
September 30, 2005. The Company reported revenue growth of 6.9% to
$61.6 million. Net income was $7.8 million, or $0.16 per share (fully
diluted), compared to $10.4 million in net income or $0.21 of diluted income
per share for the corresponding quarter of the preceding fiscal year (all
amounts stated in U.S. dollars).
    
"We are pleased with this quarter's financial results," stated
Léon F. Gosselin, President and Chief Executive Officer of Axcan. "Revenues
and net income are in line with our plans and reflect Axcan's commitment to
increase its R&D expenditures to move ITAX, a potential blockbuster drug for
the treatment of functional dyspepsia, to market as soon as possible. The
results also demonstrate our intention to support the rapid development of the
other innovative drugs in our pipeline that will assure a prosperous future
for Axcan throughout the coming decade."

RECENT DEVELOPMENTS

PRODUCT LAUNCHES

URSO FORTE

In July 2004, Axcan received approval from the U.S. Food and Drug
Administration ("FDA") for the use of a new, double-strength tablet
formulation of URSO (ursodiol, URSO 500mg tablets). This new formulation
simplifies the dosing regimen used in the treatment of Primary Biliary
Cirrhosis. The product was launched recently in the United States under the
brand name URSO Forte™.

APPROVALS

1000-MG MESALAMINE SUPPOSITORY

In November, 2004, Axcan received approval from the FDA for the use of a
new, 1000-mg mesalamine suppository dosage form, to be administered once-per-
day, for the treatment of ulcerative proctitis. Axcan expects to launch the
product in the United States in the next few weeks .

PENDING APPROVALS

SALOFALK 750-MG TABLETS

Axcan completed a Phase III trial, for the Canadian market, on the
efficacy and safety of a new 750-mg mesalamine (5-ASA) tablet for the oral
treatment of ulcerative colitis. The Company filed a supplemental New Drug
Submission for approval in Canada in the first quarter of fiscal 2004. If
approved, Axcan expects to launch this product in Canada during the third
quarter of fiscal 2005.

HELIZIDE

The Company is finalizing the qualification of a manufacturer of
biskalcitrate potassium (bismuth salt) a component of the Helizide combination
therapy for the eradication of Helicobacter Pylori bacterium. Axcan
anticipates FDA re-submission during the 2005 fiscal year. Assuming approval,
the Company expects to launch the product in the United States, Canada and
Europe during the second half of fiscal 2006.

RESEARCH AND DEVELOPMENT UPDATE

PHASE III STUDIES

ITAX

In May 2004, Axcan obtained the approval of the Therapeutic Products
Directorate ("TPD") of Health Canada and Investigational New Drug clearance
from the Gastro-intestinal division of the FDA, required to initiate Phase III
clinical trials to demonstrate the safety and efficacy of ITAX (Itopride
Hydrochloride) in the treatment of functional dyspepsia.
    
Enrollment for the two Phase III studies, which are being conducted in
North America and Western Europe, is well underway and should be completed in
the third quarter of fiscal 2005. More recently, Axcan announced positive
cardiac safety results of a high dose (supratherapeutic) study. In this study,
ITAX had no clinically relevant effects on heart rate, cardiac conduction and
cardiac repolarization. Axcan expects to file a New Drug Application during
the first quarter of fiscal 2006.
    
Axcan also plans to study ITAX in the treatment of diabetic gastropathy .
As previously announced, Axcan believes that, if approved by the FDA, ITAX has
the potential to become its largest selling product, and expects to launch
this product in the United States, Canada, Germany, U.K. and France in the
first half of fiscal 2007.

CANASA / SALOFALK rectal gel

Axcan completed Phase III studies to confirm the efficacy and safety of a
new mesalamine rectal gel in the treatment of distal ulcerative colitis. Final
results are expected to be available during the second half of fiscal 2005.
Assuming the results of the Phase III studies are positive, the Company plans
to submit regulatory filings for approvals in the United States and Canada and
hopes to launch the rectal gel in the United States and Canada in the second
half of fiscal 2006.

HEPENAX

L-Ornithine L-Aspartate salt ("LOLA"), which is known as HEPENAX, was
developed by Merz Pharmaceuticals GmbH in Germany and is licensed to Axcan.
The Company intends to further develop HEPENAX in North America and Europe for
patients suffering from Porto-Systemic Encephalopathy ("PSE"), a condition
used to describe the deleterious effects of liver failure on the central
nervous system. The Company plans to conduct a Phase II/III clinical
development program for HEPENAX and plans to seek approval of the intravenous
formulation to treat the acute symptoms of PSE. The Company initiated its
clinical research program in the third quarter of fiscal 2004 and expects to
complete such studies in the second half of fiscal 2007.

PHOTOFRIN

PHOTOFRIN is approved in a number of countries for the treatment of
different forms of cancers. Axcan is currently investigating the use of
PHOTOFRIN for the treatment of cholangiocarcinoma, a serious bile duct (liver)
cancer with a high mortality rate. The treatment under investigation combines
PHOTOFRIN with PDT and the stenting of the bile ducts. It is anticipated that
the proposed Phase III study will start in the second quarter of fiscal 2005.

PRE-CLINICAL, PHASE I AND PHASE II

NCX-1000

The FDA has accepted an Investigational New Drug Application for 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. Phase II studies are planned to begin during fiscal 2005.

Ursodiol Disulfate

Axcan recently completed a proof of concept study in rats to evaluate the
effect of ursodiol disulfate on the development of colonic tumors. Axcan
initiated animal toxicity studies in the fourth quarter of fiscal 2004, which
will be followed by clinical Phase I studies. Also, Axcan intends to pursue
the development of an intravenous ursodiol disulfate to be used in the domain
of organ preservation in liver transplants.

NMK 150

Axcan and Nordmark GmbH, a German pharmaceutical firm, have set up a
joint-venture, Norax, in order to develop NMK 150, a new high protease
pancrelipase preparation. This product will be developed for the relief of
pain in small duct chronic pancreatitis. It is expected that NMK 150 will
enter clinical development in the fiscal year 2005.

NMK 250

Norax is also developing NMK 250, a bacterial lipase intended to correct
steatorrhea in patients suffering from diverse causes of pancreatic
insufficiency (e.g., following surgery for cancer or due to cystic fibrosis).
Norax expects to complete the formulation work during the second quarter of
fiscal 2005.

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. ET, on February 14, 2005.
Interested parties may also access the conference call by way of web cast at
www.axcan.com. The telephone numbers to access the conference call are     
(800) 814-4941 (Canada and United States) or (416) 850-1243 (international).  
A replay of the call will be available until February 21, 2005. The telephone
number to access the replay of the call is (416) 640-1917 code: 21112528.

ABOUT AXCAN PHARMA

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".

/T/

    "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
    Multijurisdictional Disclosure System.

    The names ITAX, Photobarr, Salofalk, Hepenax, Helizide, Urso, Urso Forte,
    Photofrin and Canasa appearing in this press release are trademarks of
    Axcan Pharma Inc. and its subsidiaries.

/T/

Management Discussion and Analysis (MD&A), Financial Statements and Notes
Attached

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, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; 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 cancers and other
conditions. In addition, as at December 31, 2004, Axcan had one product
pending approval, a new formulation for a product currently marketed in the
United States. Axcan also has a number of other pharmaceutical projects in all
phases of development, including ITAX for the treatment of functional
dyspepsia. Axcan reported revenue of $61.6 million and operating income of
$12.1 million for the three-month period ended December 31, 2004.
    
During the first quarter of fiscal 2004, Axcan acquired the rights to a
group of products from Aventis Pharma S.A. ("Aventis") for a cash purchase
price of $145.0 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 $38.2 million (62.0% of total revenue) for the three-
month period ended December 31, 2004, compared to $37.8 million (65.6% of
total revenue) for the same period of fiscal 2004. In Canada, revenue was $9.2
million (14.9% of total revenue) for the three-month period ended December 31,
2004, compared to $6.6 million (11.5% of total revenue) for the same period of
fiscal 2004. In Europe, revenue was $14.2 million (23.1% of total revenue) for
the three-month period ended December 31, 2004, compared to $13.2 million
(22.9% of total revenue) for the same period of fiscal 2004.
    
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 some of its products),
research and development expenses as well as depreciation and amortization.
    
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
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, 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, 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 available to management. The Company reviews
all significant estimates affecting the financial statements on a recurring
basis and records the effect of any adjustment when necessary. 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.

Goodwill and Intangible Assets

Axcan's goodwill and intangible assets are stated at cost, less
accumulated amortization. Since October 1, 2001, the Company does not amortize
goodwill and intangible assets with an indefinite life. However, 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 significant permanent impairment in value
except for an amount of $83,000 of goodwill for the year ended       
September 30, 2004. Intangible assets with finite life are 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 the AVAX product
line from Aventis. The $145.0 million purchase price was paid out of Axcan's
cash on hand.
    
On August 29, 2003, the Company acquired an exclusive license for North
America, the European Union and Latin America, from Abbott Laboratories
("Abbott") to develop, manufacture and market ITAX, a patented
gastroprokinetic drug. Under the terms of this license agreement, the Company
paid $10 million in cash and assumed $2 million in research contract
liability. This product is in development, has not reached technological
feasibility and has no known alternative uses; therefore, its acquisition was
deemed to be acquired in-process research and was expensed in the period of
acquisition.
    
On December 10, 2002, the Company acquired the rights to the Ursodiol
250 mg tablets DELURSAN for the French market from Aventis, for a cash
purchase price of $22.8 million.
    
On December 3, 2002, the Company acquired the worldwide rights to the
PANZYTRAT enzyme product line from Abbott for a cash purchase price of
$45.0 million.
    
During a transition period, the seller in some of these acquisition
transactions acts as selling agent for the management of these products. For
the three-month period ended December 31, 2004, sales of some 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, 2004 were $854,008
($2,892,231 in 2003), the Company only included in its revenue an amount of
$336,294 ($1,748,359 in 2003) representing the net sales less cost of goods
sold and other seller related expenses.


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:

/T/

                                                 For the three-month periods
                                                        ended December 31,
                                                  __________________________

                                                      2004             2003
                                                  _____________ ____________
                                                         %                %
    Revenue                                          100.0            100.0
    ________________________________________________________________________

    Cost of goods sold                                27.2             25.3
    Selling and administrative expenses               34.0             31.9
    Research and development expenses                 10.4              6.9
    Depreciation and amortization                      8.7              6.5
    ________________________________________________________________________
                                                      80.3             70.6
    ________________________________________________________________________

    Operating income                                  19.7             29.4
    ________________________________________________________________________

    Financial expenses                                 2.9              2.9
    Interest income                                   (0.1)            (0.3)
    Loss (gain) on foreign exchange                   (0.4)             0.1
    ________________________________________________________________________
                                                       2.4              2.7
    ________________________________________________________________________

    Income before income taxes                        17.3             26.7
    Income taxes                                       4.7              8.6
    ________________________________________________________________________
    Net income                                        12.6             18.1
    ________________________________________________________________________
    ________________________________________________________________________

/T/

Quarter ended December 31, 2004 compared to quarter ended December 31, 2003

Revenue

For the three-month period ended December 31, 2004, revenue was
$61.6 million compared to $57.6 million for the corresponding quarter of the
preceding fiscal year, an increase of 6.9%. This increase in revenue primarily
resulted from the 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 $2.2 million (15.1%) to
$16.8 million for the three-month period ended December 31, 2004 from
$14.6 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, 2004 increased as compared to the corresponding quarter of the
preceding fiscal year from 25.3% to 27.2%. This increase in the cost of goods
sold as a percentage of revenue was due mainly to the write-down of inventory
of finished goods with less than twelve months of shelf life.

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 (14.1%) to
$21.0 million for the three-month period ended December 31, 2004 from
$18.4 million for the corresponding quarter of the preceding fiscal year. This
increase is mainly due to an increase in our sales force and additional
marketing efforts.

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 (64.1%) to
$6.4 million for the quarter ended December 31, 2004 from $3.9 million for the
corresponding quarter of the preceding fiscal year. This increase is mainly
due to the development of ITAX, acquired in August 2003, for the treatment of
functional dyspepsia.

Depreciation and amortization

Depreciation and amortization consists principally of the amortization of
intangible assets with a finite life. Intangible assets include trademarks,
trademark licenses and manufacturing rights. Depreciation and amortization
increased $1.7 million (45.9%) to $5.4 million for the quarter ended
December 31, 2004 from $3.7 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 PANZYTRAT
which was reclassified from intangible assets with an indefinite life to
intangible assets with a finite life on October 1, 2004.

Financial expenses

Financial expenses consist principally of interest and fees paid in
connection with money borrowed for acquisitions. Financial expenses increased
$0.1 million (5.9%) to $1.8 million for the quarter ended December 31, 2004
from $1.7 million for the corresponding quarter of the preceding fiscal year.

Income Taxes

Income taxes amounted to $2.9 million for the quarter ended December 31,
2004, compared to $5.0 million for the quarter ended December 31, 2003. The
effective tax rates were 32.2% for the quarter ended December 31, 2003 and
27.2% for the quarter ended December 31, 2004. The decrease in the effective
tax rate is mainly due to the research and development tax credits, deducted
from the income taxes expense, of $0.5 million for the quarter ended December
31, 2004 compared to $0.2 million for the corresponding quarter of the
preceding fiscal year.

Net income

Net income was $7.8 million or $0.17 of basic income per share and $0.16
of diluted income per share, for the quarter ended December 31, 2004, compared
to $10.4 million or $0.23 of basic income per share and $0.21 of diluted
income per share for the corresponding quarter of the preceding year. The
weighted average number of common shares outstanding used to establish the
basic per share amounts increased from 45.0 million for the quarter ended
December 31, 2003 to 45.6 million for the quarter ended December 31, 2004,
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 increased from 54.5 million for the quarter
ended December 31, 2003 to 55.3 million for the quarter ended December 31,
2004. The shares issuable under the convertible subordinated notes are
included for both periods following the change in accounting policy applied by
restating all periods during which time the convertible notes were
outstanding.

Canadian GAAP

The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affect net income for the three-month periods ended December 31, 2004
and 2003 are summarized in the following table:

/T/

                                                 For the three-month periods
                                                        ended December 31,
                                                 ___________________________
                                                      2004             2003
                                                  _____________ ____________
                                                         $                $

    Net income in accordance with U.S. GAAP          7,754           10,435

    Implicit interest on convertible debt           (1,123)          (1,026)
    Stock-based compensation expense                (1,300)               -
    Amortization of new product acquisition costs      (14)             (13)
    Income tax impact of the above adjustments           5                5
    ________________________________________________________________________

    Net earnings in accordance with Canadian GAAP    5,322            9,401
    ________________________________________________________________________
    ________________________________________________________________________

/T/

On March 5, 2003, the Company closed an offering of $125.0 million
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 quarter ended December 31, 2004, implicit interest in the amount of
$1,122,846 ($1,025,603 in 2003) 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 based method.
    
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.

Liquidity and capital resources

Axcan's cash, cash equivalents and short-term investments increased
$6.2 million (16.4%) to $44.1 million at December 31, 2004 from $37.9 million
at September 30, 2004. As of December 31, 2004, working capital was
$102.0 million, compared to $87.7 million at September 30, 2004. These
increases are mainly due to the cash flows from operating activities of the
quarter.
    
Total assets increased $19.8 million (3.2%) to $629.4 million as of
December 31, 2004 from $609.6 million as of September 30, 2004. Shareholders'
equity increased $19.7 million (5.0%) to $411.8 million as of December 31,
2004 from $392.1 million as of September 30, 2004.
    
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 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.
    
Axcan's research and development expenses totalled $19.9 million for
fiscal 2004. 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 will also 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

Since September 22, 2004, the Company has had an amended credit facility
with a banking syndicate. The amended credit facility consists in a
$125.0 million 364-day extendible revolving facility with a two-year term-out
option maturing on September 22, 2007.
    
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, 2004, 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 credit facility may be drawn in U.S. dollars or in
Canadian dollar equivalents. As of December 31, 2004, 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 totaled
$129.6 million as of December 31, 2004 compared to $129.7 million as of
September 30, 2004. As of December 31, 2004, the long-term debt included,
$2.1 million of bank loans, $2.5 million of obligations under capital leases
contracted by Axcan's French subsidiary and the $125.0 million 4 1/4%
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 note
holders 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 certain changes in tax
treatment.

Cash Flows

Cash flows from operating activities increased $10.0 million from
$1.2 million of cash used by operating activities for the quarter ended
December 31, 2003 to $8.8 million of cash provided by operating activities for
the quarter ended December 31, 2004. This increase is mainly due to the fact
that the accounts receivable and inventories remained stable during the
quarter ended December 31, 2004 compared to the corresponding quarter of the
previous fiscal year when they increased following the increase in sales and
the acquisition of new products. Cash flows used by financing activities for
the quarter ended December 31, 2004 were $0.9 million. Cash flows from
investment activities for the quarter ended December 31, 2004 were
$11.0 million and were mainly due to the receipt of $12.8 million from the
sale of short-term investments, which was offset by the use of $1.8 million
for the acquisition of property, plant and equipment. Cash flows used for
financing activities for the quarter ended December 31, 2003 were $0.1
million. Cash flows used for investment activities for the quarter ended
December 31, 2003 were $21.1 million mainly due to the net cash used for the
acquisition of intangible assets for $145.6 million with the proceeds from the
disposal of short-term investments.

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, 2004 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, 2004 or certain other purchase
obligations as discussed below:

/T/

                           For the twelve-month periods ending December 31,
                           ________________________________________________
                                                                   2009 and
                            2005      2006      2007      2008   thereafter
                           ________  ________  ________  ________  ________
                               $         $         $         $         $
    Long-term debt         1,857     1,601       937   125,221        34
    Operating leases       1,117       415       136        93        35
    Other commitments      1,579       150       150       150         -
                           ________  ________  ________  ________  ________
                           4,553     2,166     1,223   125,464        69
                           ________  ________  ________  ________  ________
                           ________  ________  ________  ________  ________

/T/

    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 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 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition to SFAS No. 123's fair value method
of accounting for stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and Accounting Principles Board
Opinion ("APB") No. 28, "Interim Financial Reporting", to require disclosure
in the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock- based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value method,
the disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB No. 25. As allowed by SFAS No. 123, the Company elected to
continue to utilize the accounting method prescribed by APB No. 25 and applies
the disclosure requirements of SFAS No. 123.
    
On March 31, 2004, the FASB issued an Exposure Draft, "Share-Based
Payment, an Amendment of FASB Statements No. 123 and 95". The Exposure Draft
would require all entities to recognize compensation cost for share-based
awards, including options, granted to employees. The proposed Statement would
eliminate the ability to account for share-based compensation transactions
using APB No. 25, "Accounting for Stock Issued to Employees", and generally
would require instead that such transactions be accounted for using a fair-
value based method. Public companies would be required to measure stock-based
compensation classified as equity by valuing the instrument the employee
receives at its grant-date fair value. Share-based awards classified as
liabilities, would be measured at fair value and remeasured at fair value at
each reporting period. Currently such awards are measured at intrinsic value
under both APB No. 25 and SFAS 123, "Accounting for Stock-Based Compensation".
The Company would apply the proposed Statement for interim and fiscal periods
beginning after June 15, 2005 using the modified prospective transition
approach.
    
During the September 2004 meeting of the Emerging Issues Task Force
("EITF") a consensus was reached on EITF Issue 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share". The EITF 04-8
requires Companies to include certain convertible debt and equity instruments,
that were previously excluded, into their calculations of diluted earnings per
share. The EITF concluded that Issue 04-8 is effective for periods ending
after December 15, 2004, and must be applied by restating all periods during
which time the applicable convertible instruments were outstanding. The 4 1/4%
convertible subordinated notes, issued in 2003 are therefore included in the
Company's diluted earnings per share calculation.

Earnings coverage

Under U.S. GAAP, for the twelve months ended December 31, 2004, our
interest requirements amounted to $5.7 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 12.5 to one.
    
Under Canadian GAAP, for the twelve months ended December 31, 2004, our
interest requirements amounted to $10.8 million on a pro-forma basis, and our
earnings coverage ratio was 6.7 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 $4.7 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 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. Furthermore, the active
ingredients or products acquired from third parties may not comply with
specifications, and the prices at which Axcan purchases them may increase. In
the event of a problem with a supplier, 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 contains 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, new product development and launch, the availability of raw
materials, the protection of our intellectual property, fluctuations in our
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 14, 2005. Additional
information on the Company is available through regular filing of press
releases, quarterly financial statements and Annual Information Form on the
SEDAR website.

/T/

    On behalf of Management,

    (signed)
    Jean Vézina
    Vice President, Finance and Chief Financial Officer


    <<
    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,
                                                          2004          2004
                                                   ___________  _____________
                                                   (unaudited)
    ASSETS                                                   $             $

    Current assets
      Cash and cash equivalents                         41,049        21,979
      Short-term investments available for sale          3,100        15,922
      Accounts receivable                               47,887        46,585
      Income taxes receivable                           10,426         9,196
      Inventories (Note 4)                              39,145        37,270
      Prepaid expenses and deposits                      4,398         3,494
      Deferred income taxes                              5,822         4,586
    _________________________________________________________________________
    Total current assets                               151,827       139,032

    Property, plant and equipment, net                  32,575        31,252
    Intangible assets, net (Note 5)                    413,007       407,875
    Goodwill, net                                       27,467        27,467
    Deferred debt issue expenses, net                    3,402         3,088
    Deferred income taxes                                1,129           930
    _________________________________________________________________________
    Total assets                                       629,407       609,644
    _________________________________________________________________________
    _________________________________________________________________________

    LIABILITIES

    Current liabilities
      Accounts payable and accrued liabilities          44,181        47,917
      Income taxes payable                               2,503           731
      Instalments on long-term debt                      1,653         1,778
      Deferred income taxes                              1,528           936
    _________________________________________________________________________
    Total current liabilities                           49,865        51,362

    Long-term debt                                     127,996       127,916
    Deferred income taxes                               39,732        38,290
    _________________________________________________________________________
    Total liabilities                                  217,593       217,568
    _________________________________________________________________________

    SHAREHOLDERS' EQUITY
    Capital stock
      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; 45,581,050 issued as at
      December 31, 2004 and 45,562,336 as
       at September 30, 2004.                          260,799       260,643
    Retained earnings                                  120,116       112,362
    Contributed surplus                                    980             -
    Accumulated other comprehensive income              29,919        19,071
    _________________________________________________________________________
    Total shareholders' equity                         411,814       392,076
    _________________________________________________________________________
    Total liabilities and shareholders' equity         629,407       609,644
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.


    Consolidated Statements of Shareholders' Equity
    _________________________________________________________________________
    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,
                                                          2004          2003
                                                  ____________  _____________
    Common shares (number)
    Balance, beginning of period                    45,562,336    45,004,320
    Exercise of options                                 18,714        57,211
    _________________________________________________________________________
    Balance, end of period                          45,581,050    45,061,531
    _________________________________________________________________________

                                                             $             $
    Common shares
    Balance, beginning of period                       260,643       255,743
    Exercise of options                                    156           435
    _________________________________________________________________________
    Balance, end of period                             260,799       256,178
    _________________________________________________________________________

    Retained earnings
    Balance, beginning of period                       112,362        63,634
    Net income                                           7,754        10,435
    _________________________________________________________________________
    Balance, end of period                             120,116        74,069
    _________________________________________________________________________

    Contributed surplus
    Balance, beginning of period                             -             -
    Income tax savings on stock options exercise           980             -
    _________________________________________________________________________
    Balance, end of period                                 980             -
    _________________________________________________________________________

    Accumulated other comprehensive income
    Balance, beginning of period                        19,071        11,634
    Foreign currency translation adjustments            10,848         8,527
    _________________________________________________________________________
    Balance, end of period                              29,919        20,161
    _________________________________________________________________________
    Total shareholders' equity                         411,814       350,408
    _________________________________________________________________________
    _________________________________________________________________________

    Comprehensive income
    Foreign currency translation adjustments            10,848         8,527
    Net income                                           7,754        10,435
    _________________________________________________________________________
    Total comprehensive income                          18,602        18,962
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.


    Consolidated Statements of Cash Flows
    _________________________________________________________________________
    In accordance with U.S. GAAP
    (in thousands of U.S. dollars)                     For the       For the
    (unaudited)                                    three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________
    Operations                                               $             $
    Net income                                           7,754        10,435
    Non-cash items
      Amortization of deferred debt issue expenses         275           258
      Other depreciation and amortization                5,364         3,723
      Loss on disposal of assets                             -            87
      Foreign currency fluctuation                         (16)            -
      Deferred income taxes                                601         1,303
      Changes in working capital items
        Accounts receivable                               (138)       (8,864)
        Income taxes receivable                           (682)       (2,606)
        Inventories                                     (1,125)       (8,376)
        Prepaid expenses and deposits                     (722)       (1,049)
        Accounts payable and accrued liabilities        (5,249)       (1,386)
        Income taxes payable                             2,755         5,323
    _________________________________________________________________________
    Cash flows from operating activities                 8,817        (1,152)
    _________________________________________________________________________

    Financing
    Repayment of long-term debt                           (469)         (542)
    Deferred debt issue expenses                          (589)            -
    Issue of shares                                        156           435
    _________________________________________________________________________
    Cash flows from financing activities                  (902)         (107)
    _________________________________________________________________________

    Investment
    Disposal of short-term investments                  12,822       126,360
    Disposal of investments                                  -           138
    Acquisition of property, plant and equipment        (1,834)       (2,363)
    Disposal of property, plant and equipment                -           326
    Acquisition of intangible assets                        (8)     (145,590)
    _________________________________________________________________________
    Cash flows from investment activities               10,980       (21,129)
    _________________________________________________________________________

    Foreign exchange gain on cash held in
     foreign currencies                                    175           231
    _________________________________________________________________________

    Net increase (decrease) in cash and
     cash equivalents                                   19,070       (22,157)
    Cash and cash equivalents, beginning of period      21,979        37,773
    _________________________________________________________________________

    Cash and cash equivalents, end of period            41,049        15,616
    _________________________________________________________________________
    _________________________________________________________________________

    Additional information
      Interest received                                     99           220
      Interest paid                                      2,698         2,722
      Income taxes paid                                  1,269           952
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.


    Consolidated Statements of 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,
                                                          2004          2003
                                                   ____________  ____________
                                                             $             $

    REVENUE                                             61,583        57,565
    _________________________________________________________________________

    Cost of goods sold                                  16,757        14,572
    Selling and administrative expenses                 20,957        18,367
    Research and development expenses                    6,389         3,933
    Depreciation and amortization                        5,364         3,723
    _________________________________________________________________________
                                                        49,467        40,595
    _________________________________________________________________________

    Operating income                                    12,116        16,970
    -------------------------------------------------------------------------
    Financial expenses                                   1,787         1,681
    Interest income                                        (86)         (191)
    Loss (gain) on foreign currency                       (233)           84
    _________________________________________________________________________
                                                         1,468         1,574
    _________________________________________________________________________

    Income before income taxes                          10,648        15,396
    Income taxes                                         2,894         4,961
    _________________________________________________________________________
    NET INCOME                                           7,754        10,435
    _________________________________________________________________________
    _________________________________________________________________________

    Income per common share
      Basic                                               0.17          0.23
      Diluted                                             0.16          0.21
    _________________________________________________________________________
    _________________________________________________________________________
    Weighted average number of common shares
      Basic                                         45,571,370    45,019,129
      Diluted                                       55,303,339    54,466,207
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.
    >>


    Notes to Consolidated Financial  Statements
    _________________________________________________________________________
    In accordance with U.S. GAAP
    (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, 2004, 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, 2004. 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. Change in Accounting Policies

During the September 2004 meeting of the Emerging Issues Task Force
("EITF") a consensus was reached on EITF Issue 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share". The EITF 04-8
requires companies to include certain convertible debt and equity instruments,
that were previously excluded, into their calculations of diluted earnings per
share. The EITF concluded that Issue 04-8 is effective for periods ending
after December 15, 2004, and must be applied by restating all periods during
which time the applicable convertible instruments were outstanding. The 4.25%
convertible subordinated notes issued in 2003, are therefore included in the
Company's diluted earnings per share calculation. For the three-month period
ended December 31, 2003, the weighted number of common shares used in the
calculation of the diluted income per share has been increased from 45,542,094
to 54,466,207 and the diluted income per share has been reduced from $0.23 to
$0.21.

3. Product Acquisition

On November 18, 2003, the Company acquired the rights to a group of
products from Aventis Pharma S.A. 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 Laboratoires .
    
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, 2004, a portion of the sales of some 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, 2004 were $854,008 ($2,892,231 in 2003), the Company only
included in its revenue an amount of $336,294 ($1,748,359 in 2003)
representing the net sales less cost of goods sold and other seller related
expenses.


    4. Inventories
                                                   December 31, September 30,
                                                          2004          2004
                                                   ___________  _____________
                                                             $             $

    Raw materials and packaging material                10,847        10,311
    Work in progress                                     1,889         1,781
    Finished goods                                      26,409        25,178
    _________________________________________________________________________
                                                        39,145        37,270
    _________________________________________________________________________
    _________________________________________________________________________


    5. Intangible Assets
                                                    December 31, 2004
    _________________________________________________________________________
                                                   Accumulated
                                            Cost  amortization           Net
    _________________________________________________________________________
                                               $             $             $
    Trademarks, trademark licenses and
     manufacturing rights with a:
      Finite life                        343,420        34,073       309,347
      Indefinite life                    116,077        12,417       103,660
    _________________________________________________________________________
                                         459,497        46,490       413,007
    _________________________________________________________________________
    _________________________________________________________________________


                                                    September 30, 2004
    _________________________________________________________________________
                                                   Accumulated
                                            Cost  amortization           Net
    _________________________________________________________________________
                                               $             $             $
    Trademarks, trademark licenses and
     manufacturing rights with a:
      Finite life                        280,034        29,869       250,165
      Indefinite life                    170,127        12,417       157,710
    _________________________________________________________________________
                                         450,161        42,286       407,875
    _________________________________________________________________________
    _________________________________________________________________________

The cost of the product PANZYTRAT 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, 2004, which amounted to $56,817,802, is therefore amortized
over a 25-year period.

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       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $
    Revenue
      Canada
        Domestic sales                                   9,190         6,552
        Foreign sales                                        -             -
      United States
        Domestic sales                                  37,028        37,811
        Foreign sales                                    1,157             -
      Europe
        Domestic sales                                  11,743        12,645
        Foreign sales                                    2,423           529
      Other                                                 42            28
    _________________________________________________________________________
                                                        61,583        57,565
    _________________________________________________________________________
    _________________________________________________________________________


                                                   December 31, September 30,
                                                          2004          2004
                                                  ____________  _____________
                                                             $             $
    Property, plant, equipment, intangible
     assets and goodwill
      Canada                                            40,364        40,401
      United States                                    130,465       131,242
      Europe                                           273,040       265,417
      Other                                             29,180        29,534
    _________________________________________________________________________
                                                       473,049       466,594
    _________________________________________________________________________
    _________________________________________________________________________

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


    7. 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,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $

    Interest on long-term debt                           1,434         1,382
    Bank charges                                             7            24
    Financing fees                                          71            17
    Amortization of deferred debt issue expenses           275           258
    _________________________________________________________________________
                                                         1,787         1,681
    _________________________________________________________________________
    _________________________________________________________________________


    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,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $

    Shipping and handling expenses                       1,004           980
    Advertising expenses                                 4,625         2,843




    c) Other information

                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $

    Rental expenses                                        287           274
    Depreciation of property, plant and equipment        1,301         1,250
    Amortization of intangible assets                    4,063         2,473


    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,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $
    Net income available to common shareholders
      Basic                                              7,754        10,435
      Financial expenses relating to the
       convertible subordinated notes                    1,079         1,079
    _________________________________________________________________________
    Net income available to common shareholders
     on a diluted basis                                  8,833        11,514
    _________________________________________________________________________
    _________________________________________________________________________


                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________

    Weighted average number of common shares
      Weighted average number of common
       shares outstanding                           45,571,370    45,019,129
      Effect of dilutive stock options                 807,856       522,965
      Effect of dilutive convertible subordinated
       notes                                         8,924,113     8,924,113
    _________________________________________________________________________
    Adjusted weighted average number of common
     shares outstanding                             55,303,339    54,466,207
    _________________________________________________________________________
    _________________________________________________________________________

    Number of common shares outstanding
     as at January 31, 2005                               45,592,365
    _________________________________________________________________________

Options to purchase 283,000 and 698,550 common shares were outstanding as
at December 31, 2004 and 2003 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.
    
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, 2004, the Company made matching contributions to the Plan
totalling $122,183 ($61,778 in 2003).


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       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________

    Fair value per option                                $6.98         $5.87
    Assumptions used in Black-Scholes option
     pricing model
      Expected volatility                                   44%           44%
      Risk-free interest rate                             4.16%         4.40%
      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 reduced on a pro-forma basis as follows:


                           For the       For the       For the       For the
                       three-month   three-month   three-month   three-month
                      period ended  period ended  period ended  period ended
                       December 31,  December 31,  December 31,  December 31,
                              2004          2004          2003          2003
                      _____________ _____________ _____________ _____________
                       As reported     Pro-forma   As reported     Pro-forma
                      _____________ _____________ _____________ _____________
                                 $             $             $             $

    Net income               7,754         6,454        10,435         9,465
    Basic income per
     share                    0.17          0.14          0.23          0.21
    Diluted income per
     share                    0.16          0.14          0.21          0.19



    9. 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,
                                                          2004          2003
                                                  ____________  _____________
    Operations adjustments                                   $             $

    Net income in accordance with U.S. GAAP              7,754        10,435
      Implicit interest on convertible debt             (1,123)       (1,026)
      Stock-based compensation expense                  (1,300)            -
      Amortization of new product acquisition costs        (14)          (13)
      Income tax impact of the above adjustments             5             5
    _________________________________________________________________________
    Net earnings in accordance with Canadian GAAP        5,322         9,401
    _________________________________________________________________________
    _________________________________________________________________________

    Earnings per share in accordance with Canadian GAAP
      Basic                                               0.12          0.21
      Diluted                                             0.11          0.21



                                 December 31, 2004        September 30, 2004
                                ___________________    ______________________
                                   U.S.   Canadian        U.S.      Canadian
                                   GAAP       GAAP        GAAP          GAAP
                                _______   _________    _______      _________
    Balance sheet adjustments         $          $           $             $

    Current assets              151,827    151,827     139,032       139,054
    Property, plant and
     equipment                   32,575     32,575      31,252        31,265
    Intangible assets           413,007    425,353     407,875       420,235
    Goodwill                     27,467     28,862      27,467        28,862
    Deferred debt issue
     expenses                     3,402      3,402       3,088         3,088
    Deferred income tax
     asset                        1,129      1,129         930           930
    Current liabilities          49,865     49,865      51,362        51,430
    Long-term debt              127,996    111,406     127,916       110,203
    Deferred income tax
     liability                   39,732     40,846      38,290        39,376
    Shareholders' equity
      Equity component of
       convertible debt               -     24,239           -        24,239
      Capital stock             260,799    271,544     260,643       267,288
      Contributed surplus           980     11,003           -             -
      Retained earnings         120,116    100,170     112,362       107,671
      Accumulated foreign
       currency translation
       adjustments               29,919     34,075      19,071        23,227


    Consolidated Balance Sheets
    _________________________________________________________________________
    In accordance with Canadian GAAP
    (in thousands of U.S. dollars)
                                                   December 31, September 30,
                                                          2004          2004
                                                   ___________  _____________
    ASSETS                                         (unaudited)
                                                             $             $
    Current assets
      Cash and cash equivalents                         41,049        22,063
      Short-term investments                             3,100        15,922
      Accounts receivable                               47,887        46,518
      Income taxes receivable                           10,426         9,196
      Inventories (Note 4)                              39,145        37,270
      Prepaid expenses and deposits                      4,398         3,499
      Future income taxes                                5,822         4,586
    _________________________________________________________________________
    Total current assets                               151,827       139,054

    Property, plant and equipment, net                  32,575        31,265
    Intangible assets, net (Note 5)                    425,353       420,235
    Goodwill, net                                       28,862        28,862
    Deferred debt issue expenses, net                    3,402         3,088
    Future income taxes                                  1,129           930
    _________________________________________________________________________
                                                       643,148       623,434
    _________________________________________________________________________
    _________________________________________________________________________

    LIABILITIES

    Current liabilities
      Accounts payable and accrued liabilities          44,181        47,985
      Income taxes payable                               2,503           731
      Instalments on long-term debt                      1,653         1,778
      Future income taxes                                1,528           936
    _________________________________________________________________________
    Total current liabilities                           49,865        51,430

    Long-term debt                                     111,406       110,203
    Future income taxes                                 40,846        39,376
    _________________________________________________________________________
                                                       202,117       201,009
    _________________________________________________________________________

    SHAREHOLDERS' EQUITY

    Equity component of convertible debt (Note 6)       24,239        24,239
    Capital stock                                      271,544       267,288
    Contributed surplus                                 11,003             -
    Retained earnings                                  100,170       107,671
    Accumulated foreign currency translation
     adjustments                                        34,075        23,227
    _________________________________________________________________________
                                                       441,031       422,425
    _________________________________________________________________________
                                                       643,148       623,434
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.


    Consolidated Cash Flows
    _________________________________________________________________________
    In accordance with Canadian GAAP
    (in thousands of U.S. dollars)
    (unaudited)                                        For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  ____________
                                                             $             $
    Operations
    Net earnings                                         5,322         9,401
    Non-cash items
      Implicit interest on convertible debt              1,123         1,026
      Amortization of deferred debt issue expenses         275           258
      Other depreciation and amortization                5,378         3,736
      Loss on disposal of assets                             -            87
      Foreign currency fluctuation                         (16)            -
      Future income taxes                                  596         1,298
      Stock-based compensation expense                   1,300             -
      Changes in working capital items
        Accounts receivable                               (138)       (8,864)
        Income taxes receivable                           (682)       (2,606)
        Inventories                                     (1,125)       (8,376)
        Prepaid expenses and deposits                     (722)       (1,049)
        Accounts payable and accrued liabilities        (5,333)       (1,386)
        Income taxes payable                             2,755         5,323
    _________________________________________________________________________
    Cash flows from operating activities                 8,733        (1,152)
    _________________________________________________________________________

    Financing
    Repayment of long-term debt                           (469)         (542)
    Deferred debt issue expenses                          (589)            -
    Issue of shares                                        156           435
    _________________________________________________________________________
    Cash flows from financing activities                  (902)         (107)
    _________________________________________________________________________

    Investment
    Disposal of short-term investments                  12,822       126,360
    Disposal of investments                                  -           138
    Acquisition of property, plant and equipment        (1,834)       (2,363)
    Disposal of property, plant and equipment                -           326
    Acquisition of intangible assets                        (8)     (145,590)
    _________________________________________________________________________
    Cash flows from investment activities               10,980       (21,129)
    _________________________________________________________________________

    Foreign exchange gain on cash held in
     foreign currencies                                    175           231
    _________________________________________________________________________

    Net increase (decrease) in cash and cash
     equivalents                                        18,986       (22,157)
    Cash and cash equivalents, beginning of period      22,063        37,886
    _________________________________________________________________________

    Cash and cash equivalents, end of period            41,049        15,729
    _________________________________________________________________________
    _________________________________________________________________________

    Additional information
      Interest received                                     99           220
      Interest paid                                      2,698         2,722
      Income taxes paid                                  1,269           952
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.


    Consolidated Earnings
    _________________________________________________________________________
    In accordance with Canadian 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,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $
    REVENUE                                             61,583        57,715
    _________________________________________________________________________

    Cost of goods sold                                  16,845        14,572
    Selling and administrative expenses                 21,992        18,517
    Research and development expenses                    6,031         3,715
    Depreciation and amortization                        5,378         3,736
    _________________________________________________________________________
                                                        50,246        40,540
    _________________________________________________________________________

    Operating income                                    11,337        17,175
    -------------------------------------------------------------------------
    Financial expenses                                   2,910         2,707
    Interest income                                        (86)         (191)
    Loss (gain) on foreign currency                       (233)           84
    _________________________________________________________________________
                                                         2,591         2,600
    _________________________________________________________________________

    Earnings before income taxes                         8,746        14,575
    Income taxes                                         3,424         5,174
    _________________________________________________________________________
    NET EARNINGS                                         5,322         9,401
    _________________________________________________________________________
    _________________________________________________________________________

    Earnings per common share
      Basic                                               0.12          0.21
      Diluted                                             0.11          0.21
    _________________________________________________________________________
    _________________________________________________________________________

    Weighted average number of common shares
      Basic                                         45,571,370    45,019,129
      Diluted                                       46,379,226    45,542,094
    _________________________________________________________________________
    _________________________________________________________________________


    Consolidated Retained Earnings
    _________________________________________________________________________
    In accordance with Canadian GAAP
    (in thousands of U.S. dollars)
    (unaudited)
                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $
    Balance, beginning of period                       107,671        63,211
    Retroactive adjustment for stock-based
    compensation (Note 2)                              (12,823)            -
    Net earnings                                         5,322         9,401
    _________________________________________________________________________
    Balance, end of period                             100,170        72,612
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements.


    Consolidated Contributed Surplus
    _________________________________________________________________________
    In accordance with Canadian GAAP
    (in thousands of U.S. dollars)
    (unaudited)
                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  _____________ _____________
                                                             $             $
    Balance, beginning of period                             -             -
    Retroactive adjustment for stock-based
     compensation (Note 2)                               8,723             -
    Tax benefit from exercise of stock options             980             -
    Stock-based compensation expense                     1,300             -
    _________________________________________________________________________
    Balance, end of period                              11,003             -
    _________________________________________________________________________
    _________________________________________________________________________

    See the accompanying notes to the Consolidated Financial Statements.
    These interim financial statements should be read in conjunction with the
    annual Consolidated Financial Statements


    Notes to Consolidated Financial  Statements
    _________________________________________________________________________
    In accordance with Canadian GAAP
    (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 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, 2004 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, 2004. 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. Change in Accounting Policies

Stock-based compensation

In September and November 2003, the Accounting Board made amendments to
CICA Handbook Section 3870 to require that the fair value based method be
applied to awards granted to employees, which previously had not been
accounted for at fair value. Thus, enterprises are required to account for the
effect of such awards in their financial statements for fiscal years beginning
on or after January 1, 2004. The Company adopted the fair value based method
in its fiscal year 2005 with a retroactive application, without restating
prior periods. As at October 1,2004, the retained earnings of the Company have
been reduced by $12,823,000, the capital stock has been increased by
$4,100,233 and the contributed surplus has been increased by $8,722,767. Stock-
based compensation expense charged to the consolidated statement of earnings
for the three-month period ended December 31, 2004 was $1,300,402.
    
If this change in accounting policy had been applied to the previous
fiscal year, the Company's net earnings, basic earnings per share and diluted
earnings per share for the three-month period ended December 31, 2003 would
have been reduced on a pro-forma basis as follows:


                                                   As reported     Pro-forma
                                                   ___________     __________
                                                             $             $

    Net earnings                                         9,401         8,431
    Basic earnings per share                              0.21          0.19
    Diluted earnings per share                            0.21          0.19


The average weighted fair value of granted options was $6.98 and $5.87
for the three-month periods ended December 31, 2004 and 2003. The fair value
of granted options was estimated with the Black-Scholes model of evaluation
using the following assumptions:


                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                   ____________  ____________

    Expected volatility                                     44%           44%
    Risk-free interest rate                               4.16%         4.40%
    Expected options life (years)                            6             6
    Expected dividend                                        -             -



3. Product Acquisition

On November 18, 2003, the Company acquired the rights to a group of
products from Aventis Pharma S.A. 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.
    
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, 2004, a portion of the sales of some 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, 2004 were $854,008 ($2,892,231 in 2003), the
Company only included in its revenue an amount of $336,294 ($1,748,359 in
2003) representing the net sales less cost of goods sold and other seller
related expenses.


4. Inventories

                                                   December 31, September 30,
                                                          2004          2004
                                                   ___________  _____________
                                                             $             $

    Raw materials and packaging material                10,847        10,311
    Work in progress                                     1,889         1,781
    Finished goods                                      26,409        25,178
    _________________________________________________________________________
                                                        39,145        37,270
    _________________________________________________________________________
    _________________________________________________________________________


    5. Intangible Assets

                                                    December 31, 2004
    _________________________________________________________________________
                                                   Accumulated
                                            Cost  amortization           Net
    _________________________________________________________________________
                                               $             $             $
    Trademarks, trademark licenses and
     manufacturing rights with a:
      Finite life                        356,249        34,556       321,693
      Indefinite life                    116,077        12,417       103,660
    _________________________________________________________________________
                                         472,326        46,973       425,353
    _________________________________________________________________________
    _________________________________________________________________________


                                                    September 30, 2004
    _________________________________________________________________________
                                                   Accumulated
                                            Cost  amortization           Net
    _________________________________________________________________________
                                               $             $             $
    Trademarks, trademark licenses and
     manufacturing rights with a:
      Finite life                        292,863        30,338       262,525
      Indefinite life                    170,127        12,417       157,710
    _________________________________________________________________________
                                         462,990        42,755       420,235
    _________________________________________________________________________
    _________________________________________________________________________

The cost of the product PANZYTRAT 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, 2004, which amounted to $56,817,802, is therefore
amortized over a 25-year period.

6. 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, 2004, implicit interest of
9.17% and totalling $6,526,246 was accounted for and added to the liability
component. For the three-month period ended December 31, 2004, implicit
interest in the amount of $1,122,846 ($1,025,603 in 2003) was accounted for
and added to the liability component.

7. 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,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $
    Revenue
      Canada
        Domestic sales                                   9,190         6,552
        Foreign sales                                        -             -
      United States
        Domestic sales                                  37,028        37,811
        Foreign sales                                    1,157             -
      Europe
        Domestic sales                                  11,743        12,795
        Foreign sales                                    2,423           529
      Other                                                 42            28
    _________________________________________________________________________
                                                        61,583        57,715
    _________________________________________________________________________
    _________________________________________________________________________


                                                   December 31, September 30,
                                                          2004          2004
                                                  ____________  _____________
                                                             $             $
    Property, plant, equipment, intangible assets
    and goodwill
      Canada                                            44,638        44,676
      United States                                    130,812       131,602
      Europe                                           273,040       265,431
      Other                                             38,300        38,653
    _________________________________________________________________________
                                                       486,790       480,362
    _________________________________________________________________________
    _________________________________________________________________________

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

    8. Financial Information Included in the Consolidated Statement
       of Earnings

    a) Financial expenses
                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $

    Interest on long-term debt                           2,557         2,408
    Bank charges                                             7            24
    Financing fees                                          71            17
    Amortization of deferred debt issue expenses           275           258
    ________________________________________________________________________
                                                         2,910         2,707
    ________________________________________________________________________
    ________________________________________________________________________


    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,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $

    Shipping and handling expenses                       1,004           980
    Advertising expenses                                 4,625         2,843


    c) Other information

                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________
                                                             $             $

    Rental expenses                                        287           274
    Depreciation of property, plant and equipment        1,301         1,250
    Amortization of intangible assets                    4,077         2,486
    Investment tax credits applied against research
     and development expenses                              535           218


    d) Earnings per common share

    The following table reconciles the denominators of the basic and diluted
    earnings per common share computations:


                                                       For the       For the
                                                   three-month   three-month
                                                  period ended  period ended
                                                   December 31,  December 31,
                                                          2004          2003
                                                  ____________  _____________

    Weighted average number of common shares
      Weighted average number of common
       shares outstanding                            45,571,370   45,019,129
      Effect of dilutive stock options                  807,856      522,965
    ________________________________________________________________________
    Adjusted weighted average number of common
     shares outstanding                             46,379,226    45,542,094
    ________________________________________________________________________
    ________________________________________________________________________
    Number of common shares outstanding at
     the end of the period                          45,581,050    45,061,531
    ________________________________________________________________________

    Number of common shares outstanding as
     at January 31, 2005                                    45,592,365
    ________________________________________________________________________

/T/

Options to purchase 283,000 and 698,550 common shares were outstanding as
at December 31, 2004 and 2003 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, 2004 and 2003, the convertible debt had no effect on the diluted
earnings per share.
    
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 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 notesholders 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, 2004, the Company made matching contributions to the Plan
totalling $122,183 ($61,778 in 2003).


David W. Mims, Executive Vice President and Chief Operating Officer, Axcan Pharma Inc., (205) 991-8085 ext. 3223; Julie M. Thibodeau, Manager, Investor Relations, Axcan Pharma Inc., (450) 467-2600 ext. 2062, www.axcan.com; Source: Axcan Pharma Inc.