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Axcan announces third quarter 2005 results


Aug 11, 2005 - 11:59 ET



TSX SYMBOL (Toronto Stock Exchange): AXP
NASDAQ SYMBOL (Nasdaq National Market): AXCA

 


MONT SAINT-HILAIRE, QC, Aug. 11 - Axcan Pharma Inc. ("Axcan"
or the "Company") announced today operating results for the quarter ended
June 30, 2005, the Company's third quarter of the fiscal year ending
September 30, 2005. Net sales were $59.4 million compared with $62.0 million
in the third quarter of 2004. Selling and administrative expenses were
$23.0 million for the quarter ended June 30, 2005, up from $19.5 million for
the corresponding quarter of the preceding fiscal year. Research and
development expenses increased $3.7 million to $8.9 million for the quarter
ended June 30, 2005, from $5.2 million for the corresponding quarter of the
preceding fiscal year. Net income for the three-month period ended June 30,
2005, was $4.1 million compared with $12.6 million for the same period of
fiscal 2004. Diluted earnings per share were $0.09 compared with $0.25 in 2004
(all amounts stated in U.S. dollars).

"We observed prescription growth in our key products during the quarter.
However net sales for the quarter were below the level that prescriptions
would indicate," said Léon F. Gosselin, Chairman of the Board and outgoing
President and CEO of Axcan. "Overall, US wholesaler inventory levels of Axcan
products declined during the quarter which resulted in lower sales. Axcan is
dependent on wholesaler inventory buying policies. Changes in these policies
make it difficult to predict swings of sales between reporting periods.
Prescription trends for our major products are healthy, and we remain
confident about our core business."

"Our top priority is increasing shareholder value, and I am very
confident in Axcan's future growth opportunities and position as a leader in
the gastrointestinal field," added Dr. Frank Verwiel, who joined Axcan on
July 11, as President and CEO. "For the remainder of the year, we will
concentrate our efforts on maximizing the in-market potential of our currently
promoted products while our research and development team will continue to
advance its programs," he concluded.

Dr. François Martin, Senior Vice President, Scientific Affairs of Axcan,
reported on Itopride, Axcan's lead product candidate for the treatment of
functional dyspepsia. "We are pleased to report that significant progress in
the development of Itopride was made during the quarter as Axcan is meeting
important development milestones. Enrolment, screening and randomization are
on track to be completed by the end of August for the International Phase III
clinical trial, and by the end of calendar 2005 for the North American
Phase III clinical trial. Results of the Phase III trials will be known in the
first half of calendar 2006," said Dr. Martin. "I am also pleased to report
that all patients needed for the 6-month and 1-year safety study are currently
being treated and results will be available for inclusion in the New Drug
Application (NDA). We have completed the clinical work on 5 of 7 Phase I
studies. "These data will form the basis of the clinical section of the NDA to
be filed with the U.S. Food and Drug Administration in the summer of 2006."

RECENT DEVELOPMENTS

PENDING APPROVALS

HELIZIDE - The Company finalized 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 filing the amendment to the NDA during the second quarter of
fiscal 2006.

SALOFALK 750 MG TABLETS - The Company filed a supplemental New Drug
Submission ("sNDS") for approval of a new 750-milligram mesalamine (5-ASA)
tablet for the oral treatment of ulcerative colitis in Canada in the
first quarter of fiscal 2004. Axcan received a non-approvable letter from the
Therapeutic Products Directorate of Health Canada containing a list of
questions and comments for both the clinical and Chemistry, Manufacturing and
Controls aspects of the original sNDS submission. Axcan responded to all
questions in the non-approvable letter during the third quarter of fiscal 2005
and expects to obtain a final response in the first half of fiscal 2006.

RESEARCH AND DEVELOPMENT UPDATE

OTHER PHASE III STUDIES

CANASA / SALOFALK rectal gel - Axcan recently completed Phase III studies
to confirm the efficacy and safety of a new mesalamine rectal gel in the
treatment of distal ulcerative colitis. Data are currently being analyzed, and
final results are expected to be available by the end of 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 expects
to launch the rectal gel in North America in the first half of fiscal 2007.

PHOTOFRIN - This product is approved in a number of countries for the
treatment of different forms of cancers. Axcan recently completed the
PHOBAR 02 study assessing the efficacy of PHOTOFRIN in the prevention of
esophageal cancer. Data are currently being analyzed.

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. Axcan expects to initiate a pilot, therapeutic proof-of-concept,
Phase II study at the end of fiscal 2005.

Ursodiol Disulfate - Axcan completed a proof-of-concept study in rats to
evaluate the effect of ursodiol disulfate on the development of colonic
tumors. The Company initiated animal toxicity studies in the fourth quarter of
fiscal 2004, which will be followed by clinical Phase I studies that should be
initiated in the first half of fiscal 2006.

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 is under development consideration for
the relief of pain in small duct chronic pancreatitis. It is expected that
NMK 150 will enter Phase I clinical trials in the first half of fiscal 2006.

INTERIM FINANCIAL REPORT

This release includes, by reference, the third quarter interim financial
report incorporating the financial statements in accordance with 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 5:00 P.M. ET, on August 11, 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
(866) 250-4910 (Canada and United States) or (416) 640-4127 (international). A
replay of the call will be available until August 18, 2005. The telephone
number to access the replay of the call is (416) 640-1917 code: 21133243.

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".

"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 Salofalk, Helizide, Photofrin and Canasa appearing in this
press release are trademarks of Axcan Pharma Inc. and its subsidiaries.


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 speciality pharmaceutical company concentrating in the
field of gastroenterology, with operations in North America and Europe. Axcan
markets and sells pharmaceutical products used in the treatment of a variety
of gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO 250, URSO FORTE 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. Axcan has a number of pharmaceutical projects in all phases of
development including ITAX for the treatment of functional dyspepsia. In the
first quarter of fiscal 2004, Axcan filed a supplemental New Drug Submission
for a new 750-milligram Mesalamine (5-ASA) tablet for the oral treatment of
ulcerative colitis. On March 24, 2005, Axcan received a non-approval letter
from the Therapeutic Products Directorate of Health Canada containing a list
of questions and comments for both the clinical and Chemistry, Manufacturing
and Controls aspects of the original New Drug Submission. Axcan responded to
all questions in the non-approvable letter during the third quarter of fiscal
2005 and expects to obtain a final response in the first half of fiscal 2006.

Axcan reported revenue of $59.4 million, operating income of $6.1 million
and net income of $4.1 million for the three-month period ended June 30, 2005.
For the nine-month period ended June 30, 2005, revenue was $184.4 million,
operating income was $26.5 million and net income was $17.3 million. Revenue
from sales of Axcan's products in the United States was $115.8 million (62.8%
of total revenue) for the nine-month period ended June 30, 2005, compared to
$123.8 million (67.7% of total revenue) for the same period of fiscal 2004. In
Canada, revenue was $25.4 million (13.8% of total revenue) for the nine-month
period ended June 30, 2005, compared to $20.5 million (11.2% of total revenue)
for the same period of fiscal 2004. In Europe, revenue was $43.1 million
(23.4% of total revenue) for the nine-month period ended June 30, 2005,
compared to $38.3 million (21.0% 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 a group of
products from Aventis Pharma S.A. ("Aventis"). The $145.0 million purchase
price was paid out of Axcan's cash on hand. These products are CARAFATE and
BENTYL for the U.S. market and SULCRATE, BENTYLOL and PROCTOSEDYL for the
Canadian market (collectively, "AVAX" product line).

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 $10.0 million in cash and assumed $2.0 million in research contract
liability.

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 certain of these acquisition
transactions acts as selling agent for the management of these products. For
the nine-month period ended June 30, 2005, 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 nine-month period ended June 30, 2005 were $2,313,204 ($6,928,009 in
2004), the Company only included in its revenue an amount of $707,089
($4,413,531 in 2004) 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:


For the For the
three-month periods nine-month periods
ended June 30, ended June 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
% % % %
Revenue 100.0 100.0 100.0 100.0
-------------------------------------------------------------------------
Cost of goods sold 26.9 22.0 28.9 23.6
Selling and
administrative
expenses 38.8 31.5 35.2 31.7
Research and
development
expenses 15.1 8.4 12.8 7.2
Depreciation and
amortization 9.0 6.9 8.7 6.7
-------------------------------------------------------------------------
89.8 68.8 85.6 69.2
-------------------------------------------------------------------------
Operating income 10.2 31.2 14.4 30.8
-------------------------------------------------------------------------
Financial expenses 2.7 2.7 2.9 2.8
Interest income (0.5) (0.3) (0.4) (0.2)
Loss (gain) on
foreign exchange 0.1 (0.7) (0.2) (0.1)
-------------------------------------------------------------------------
2.3 1.7 2.3 2.5
-------------------------------------------------------------------------
Income before
income taxes 7.9 29.5 12.1 28.3
Income taxes 1.0 9.2 2.7 8.9
-------------------------------------------------------------------------
Net income 6.9 20.3 9.4 19.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------

 


Periods ended June 30, 2005 compared to periods ended June 30, 2004

Revenue

For the three-month period ended June 30, 2005, revenue was $59.4 million
compared to $62.0 million for the corresponding quarter of the preceding
fiscal year, a decrease of 4.2%. This decrease is revenue primarily resulted
from lower sales in the United States following an announced intention from
major wholesalers to reduce their inventory level. The end-customer
prescription demand continues to show positive growth for most of our products
sold in the United States which leads us to believe that this reduction in
revenue is only temporary and that sales should increase when our major
wholesalers reach their targeted inventory level. For the nine-month period
ended June 30, 2005, revenue was $184.4 million compared to $182.8 million for
the corresponding quarter of the preceding fiscal year, an increase of 0.9%.

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 $2.4 million (17.7%) to
$16.0 million for the three-month period ended June 30, 2005 from
$13.6 million for the corresponding quarter of the preceding fiscal year. As a
percentage of revenue, cost of goods sold for the quarter ended June 30, 2005
increased as compared to the corresponding quarter of the preceding fiscal
year from 22.0% to 26.9%. This increase in cost of goods sold as a percentage
of revenue was due mainly to a reduction in sales of products with a higher
margin partly offset by sales of products with a lower margin. For the nine-
month period ended June 30, 2005, cost of goods sold increased $10.0 million
(23.2%) to $53.2 million from $43.2 million for the corresponding period of
the preceding fiscal year. As a percentage of revenue, cost of goods sold for
the nine-month period ended June 30, 2005 increased as compared to the
corresponding period of the preceding fiscal year from 23.6% to 28.9%. 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 in the first two quarters of the fiscal year and a reduction in
the third quarter of sales of products with a higher margin partly offset by
sales of products with a lower margin. Cost of goods sold includes
$4.7 million for the nine-month period ended June 30, 2005 related to the
write-down of inventory of finished goods for one product line sold in the
United States.

Selling and administrative expenses

Selling and administrative expenses consist principally of salaries and
other costs associated with Axcan's sales force and marketing activities.
Selling and administrative expenses increased $3.5 million (18.0%) to
23.0 million for the three-month period ended June 30, 2005 from $19.5 million
for the corresponding quarter of the preceding fiscal year. For the nine-month
period ended June 30, 2005, selling and administrative expenses increased
$6.9 million (11.9%) to $64.9 million from $58.0 million for the corresponding
period of the preceding fiscal year. This increase is mainly due to an
increase in our sales force in preparation for additional products to be
marketed, including ITAX, additional marketing efforts on our current
products, increased distribution cost following the new agreement with a major
wholesaler and consulting fees for IT implementation and regulatory
compliance.

Research and development expenses

Research and development expenses consist principally of fees paid to
outside parties that Axcan uses to conduct clinical studies and to submit
governmental approval applications on its behalf as well as the salaries and
benefits paid to its personnel involved in research and development projects.
Research and development expenses increased $3.7 million (71.2%) to
$8.9 million for the quarter ended June 30, 2005 from $5.2 million for the
corresponding quarter of the preceding fiscal year. For the nine-month period
ended June 30, 2005, research and development expenses increased $10.5 million
(80.2%) to $23.6 million from $13.1 million for the corresponding period of
the preceding fiscal year. This increase is mainly due to the Company's
decision to accelerate 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 $1.0 million (23.3%) to $5.3 million for the quarter ended June 30,
2005 from $4.3 million for the corresponding quarter of the preceding fiscal
year. For the nine-month period ended June 30, 2005, depreciation and
amortization increased $3.8 million (31.2%) to $16.0 million from
$12.2 million for the corresponding period 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 decreased
$0.1 million (5.9%) to $1.6 million for the quarter ended June 30, 2005 from
$1.7 million for the corresponding quarter of the preceding fiscal year. For
the nine-month period ended June 30, 2005, financial expenses increased
$0.2 million (3.9%) to $5.3 million from $5.1 million for the corresponding
period of the preceding fiscal year.

Income Taxes

Income taxes amounted to $0.6 million for the quarter ended June 30,
2005, compared to $5.7 million for the quarter ended June 30, 2004. The
effective tax rates were 12.6% for the quarter ended June 30, 2005 and 31.4%
for the quarter ended June 30, 2004. The decrease in effective tax rate is
mainly due to the research and development tax credits, deducted from the
income taxes expense, of $0.8 million for the quarter ended June 30, 2005
compared to $0.3 million for the corresponding quarter of the preceding fiscal
year. For the nine-month period ended June 30, 2005, income taxes amounted to
$5.0 million compared to $16.3 million for the corresponding period of the
preceding fiscal year. The effective tax rates were 22.4% for the nine-month
period ended June 30, 2005 and 31.6% for the nine-month period ended June 30,
2004. The decrease in effective tax rate is mainly due to the research and
development tax credits, deducted from the income taxes expense, of
$1.9 million for the nine-month period ended June 30, 2005 compared to
$0.6 million for the corresponding period of the preceding fiscal year.

The income tax expense and corresponding tax rate are summarized in the
following tables:


Income tax expense For the For the
three-month periods nine-month periods
ended June 30 ended June 30
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Income tax 1,363 6,056 6,841 16,993
Research and
development
tax credits (770) (322) (1,851) (644)
-------------------------------------------------------------------------
Income tax expense 593 5,734 4,990 16,349
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Income tax rate For the For the
three-month periods nine-month periods
ended June 30 ended June 30
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
% % % %

Income tax 29.0 33.1 30.7 32.8
Research and
development
tax credits (16.4) (1.7) (8.3) (1.2)
-------------------------------------------------------------------------
Effective tax rate 12.6 31.4 22.4 31.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------

 


Net income

Net income was $4.1 million or $0.09 of basic and diluted income per
share, for the quarter ended June 30, 2005, compared to $12.6 million or
$0.28 of basic income per share and $0.25 of diluted income per share for the
corresponding quarter of the preceding year. The reduction in net income for
the quarter resulted mainly from a decrease in revenue of $2.6 million, an
increase in operating expenses totaling $10.7 million and a decrease in income
taxes of $5.1 million. The weighted average number of common shares
outstanding used to establish the basic per share amounts increased from
45.4 million for the quarter ended June 30, 2004 to 45.6 million for the
quarter ended June 30, 2005, following the exercise of options previously
granted pursuant to Axcan's stock option plan. The weighted average number of
common shares used to establish the diluted per share amounts decreased from
55.3 million for the quarter ended June 30, 2004 to 46.2 million for the
quarter ended June 30, 2005.

Net income was $17.3 million or $0.38 of basic income per share and
$0.37 of diluted income per share, for the nine-month period ended June 30,
2005, compared to $35.4 million or $0.78 of basic income per share and
$0.68 of diluted income per share for the corresponding period of the
preceding year. The reduction in net income for the nine-month period ended
June 30, 2005, resulted mainly from an increase in revenue of $1.6 million, an
increase in operating expenses of $31.4 million and a decrease in income taxes
of $11.4 million.

Canadian GAAP

The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affect net income for the periods ended June 30, 2005 and 2004 are
summarized in the following table:


For the For the
three-month periods nine-month periods
ended June 30, ended June 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Net income in
accordance with
U.S. GAAP 4,097 12,552 17,276 35,408

Implicit interest
on convertible
debt (1,183) (1,082) (3,426) (3,131)
Stock-based
compensation
expense (1,096) - (3,527)
Amortization of
new product
acquisition costs (14) (14) (40) (40)
Income tax impact
of the above
adjustments 191 5 331 15
-------------------------------------------------------------------------
Net earnings in
accordance with
Canadian GAAP 1,995 11,461 10,614 32,252
-------------------------------------------------------------------------
-------------------------------------------------------------------------

 


On March 5, 2003, the Company closed an offering of $125.0 million
aggregate principal amount of 4.25% convertible subordinated notes due April
15, 2008. As a result of the terms of the notes, under Canadian GAAP, an
amount of $24,238,899 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
nine-month period ended June 30, 2005, implicit interest in the amount of
$3,425,653 ($3,131,424 in 2004) was accounted for and added to the liability
component.

Since October 1, 2004, under Canadian GAAP, the effect of stock-based
compensation has to be accounted for using the fair value method.

Under 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
$38.4 million (101.3%) to $76.3 million at June 30, 2005 from $37.9 million at
September 30, 2004. As of June 30, 2005, working capital was $115.5 million,
compared to $87.7 million at September 30, 2004. These increases are mainly
due to the cash flows from operating activities of the nine-month period ended
June 30, 2005.

Total assets increased $19.3 million (3.2%) to $628.9 million as of
June 30, 2005 from $609.6 million as of September 30, 2004. Shareholders'
equity increased $16.4 million (4.2%) to $408.5 million as of June 30, 2005
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 and $23.6 million for the nine-month period ended June 30, 2005.
Axcan believes that cash, cash equivalents and short-term investments,
together with funds provided by operations, will be sufficient to meet its
operating cash requirements, including the development of products through
research and development activities, capital expenditures and repayment of its
debt. 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 21, 2008.

The credit facility is secured by a first priority security interest on
all present and future acquired assets of the Company and its material
subsidiaries, and provides for the maintenance of certain financial ratios.
Among the restrictions imposed by the credit facility is a covenant limiting
cash dividends, share repurchases (other than redeemable shares issued in
connection with a permitted acquisition) and similar distributions to
shareholders to 10% of the Company's net income for the preceding fiscal year.
As of June 30, 2005, Axcan was in compliance with all covenants under the
credit facility.

The interest rate varies, depending on the Company's leverage, between 25
basis points and 100 basis points over Canadian prime rate or U.S. base rate,
and between 125 basis points and 200 basis points over the LIBOR rate or
bankers acceptances. The credit facility may be drawn in U.S. dollars or in
Canadian dollar equivalents. As of June 30, 2005, there was no amount
outstanding under this credit facility.

Convertible subordinated notes and other long-term debt

Long-term debt including instalments due within one year totalled
$128.3 million as of June 30, 2005 compared to $129.7 million as of
September 30, 2004. As of June 30, 2005, the long-term debt included,
$1.5 million of bank loans, $1.8 million of obligations under capital leases
contracted by Axcan's French subsidiary and the $125.0 million 4.25%
convertible subordinated notes due 2008 which were issued on March 5, 2003.

The notes are convertible into 8,924,113 common shares during any
quarterly conversion period if the closing price per share for at least
20 consecutive trading days during the 30 consecutive trading-day period
ending on the first day of the conversion period exceeds 110% of the
conversion price in effect on that thirtieth trading day. The notes are also
convertible during the five business-day period following any 10 consecutive
trading-day period in which the daily average of the trading prices for the
notes was less than 95% of the average conversion value for the notes during
that period. The noteholders may also convert their notes upon the occurrence
of specified corporate transactions or if the Company has called the notes for
redemption. On or after April 20, 2006, the Company may at its option, redeem
the notes, in whole or in part at redemption prices varying from 101.70% to
100.85% of the principal 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 $6.3 million from
$11.9 million of cash provided by operating activities for the quarter ended
June 30, 2004 to $18.2 million for the quarter ended June 30, 2005. Cash flows
from operating activities increased $16.1 million from $29.0 million of cash
provided by operating activities for the nine-month period ended June 30, 2004
to $45.1 million for the nine-month period ended June 30, 2005. This increase
is mainly due to the fact that the inventories remained relatively stable and
the accounts receivable decreased by $6.5 million during the nine-month period
ended June 30, 2005 compared to the corresponding period of the previous
fiscal year when they increased by $26.1 million following the increase in
sales and the acquisition of new products. Cash flows used by financing
activities were $0.1 million for the quarter ended June 30, 2005 and
$1.1 million for the nine-month period ended June 30, 2005. Cash flows used
for investment activities for the quarter ended June 30, 2005 were
$7.8 million mainly due to the net cash used for the acquisition of property,
plant and equipment for $1.6 million and the acquisition of short term
investments for $6.2 million. Cash flows from investment activities for the
nine-month period ended June 30, 2005 were $0.1 million mainly due to the net
disposal of short-term investments of $5.2 million less the cash used for the
acquisition of property, plant and equipment for $5.1 million. Cash flows used
for investment activities for the nine-month period ended June 30, 2004 were
$36.4 million mainly due to the net cash used for the acquisition of
intangible assets for $145.7 million and property, plant and equipment for
$11.1 million with the net 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 June 30, 2005 and the effect such
obligations are expected to have on our liquidity and cash flows in future
years. This table excludes amounts already recorded on the balance sheet as
current liabilities at June 30, 2005 or certain other purchase obligations as
discussed below:


For the twelve-month periods ending June 30,
------------------------------------------------------
2010 and
2006 2007 2008 2009 thereafter
---------- ---------- ---------- ---------- ----------
$ $ $ $ $
Long-term debt 1,545 1,289 125,292 114 52
Operating leases 985 192 103 46 22
Other commitments 865 150 150 - -
---------- ---------- ---------- ---------- ----------
3,395 1,631 125,545 160 74
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
 


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 fiscal years 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 will be 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 will always be included in the
Company's diluted earnings per share calculation.

Earnings coverage

Under U.S. GAAP, for the twelve months ended June 30, 2005, our interest
requirements amounted to $6.2 million on a pro-forma basis and our earnings
coverage ratio, defined as the ratio of earnings before interest and income
taxes to pro-forma interest requirements, was 7.7 to one.

Under Canadian GAAP, for the twelve months ended June 30, 2005, our
interest requirements amounted to $11.2 million on a pro-forma basis, and our
earnings coverage ratio was 4.2 to one. The principal difference between the
earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable to
the inclusion of implicit interest of $5.0 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, the active ingredients or
products may not comply with specifications, or the prices at which Axcan
purchases them may increase and Axcan may not be able to locate alternative
sources of supply in a reasonable time period, or at all. If any of these
events occur, Axcan may not be able to continue to market certain of its
products, and its sales and profitability would be adversely affected.

Volatility of Share Prices

The market price of Axcan's shares is subject to volatility. Deviations
in actual financial or scientific results, as compared to expectations of
securities analysts who follow our activities can have a significant effect on
the trading price of Axcan's shares.

Forward-looking Statements

This document contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent that any
statements in this document contain information that is not historical, the
statements are essentially forward-looking and are often identified by words
such as "anticipate", "expect", "estimate", "intend", "project", "plan" and
"believe". These forward-looking statements include, but are not limited to,
the expected sales growth of the Company's products and the expected increase
in funds from operations resulting from the Company's research and development
expenditures. The forward-looking statements involve risks and uncertainties.
Actual events could differ materially from those projected herein and depend
on a number of factors, including but not limited to the successful and timely
completion of clinical studies, the difficulty of predicting FDA or other
regulatory approvals, the commercialization of a drug or therapy after
regulatory approval is received, the difficulty of predicting acceptance and
demand for pharmaceutical products, the impact of competitive products and
pricing, 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 August 3, 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.


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

June September
30, 30,
2005 2004
------------ ------------
(unaudited)
ASSETS $ $

Current assets
Cash and cash equivalents 65,667 21,979
Short-term investments available for sale 10,669 15,922
Accounts receivable 39,653 46,585
Income taxes receivable 6,942 9,196
Inventories (Note 4) 36,870 37,270
Prepaid expenses and deposits 3,402 3,494
Deferred income taxes 7,795 4,586
-------------------------------------------------------------------------
Total current assets 170,998 139,032

Property, plant and equipment, net 32,607 31,252
Intangible assets, net (Note 5) 393,223 407,875
Goodwill, net 27,467 27,467
Deferred debt issue expenses, net 2,852 3,088
Deferred income taxes 1,779 930
-------------------------------------------------------------------------
Total assets 628,926 609,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 50,999 47,917
Income taxes payable 1,997 731
Instalments on long-term debt 1,545 1,778
Deferred income taxes 941 936
-------------------------------------------------------------------------
Total current liabilities 55,482 51,362

Long-term debt 126,747 127,916
Deferred income taxes 38,196 38,290
-------------------------------------------------------------------------
Total liabilities 220,425 217,568
-------------------------------------------------------------------------

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; 45,674,674 issued as at
June 30, 2005 and 45,562,336 as
at September 30, 2004. 261,531 260,643
Retained earnings 129,638 112,362
Contributed surplus 1,329 -
Accumulated other comprehensive income 16,003 19,071
-------------------------------------------------------------------------
Total shareholders' equity 408,501 392,076
-------------------------------------------------------------------------
Total liabilities and shareholders' equity 628,926 609,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
Consolidated Statements of Shareholders' Equity
-------------------------------------------------------------------------
In accordance with U.S. GAAP
in thousands of U.S. dollars,
except share related data
(unaudited)

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Common shares
(number)
Balance,
beginning of
period 45,618,251 45,328,102 45,562,336 45,004,320
Exercise of
options 56,423 227,930 112,338 551,712
-------------------------------------------------------------------------
Balance,
end of period 45,674,674 45,556,032 45,674,674 45,556,032
-------------------------------------------------------------------------
-------------------------------------------------------------------------

$ $ $ $
Common shares
Balance, beginning
of period 261,200 258,567 260,643 255,743
Exercise of
options 331 2,005 888 4,829
-------------------------------------------------------------------------
Balance,
end of period 261,531 260,572 261,531 260,572
-------------------------------------------------------------------------

Retained earnings
Balance, beginning of
period 125,541 86,490 112,362 63,634
Net income 4,097 12,552 17,276 35,408
-------------------------------------------------------------------------
Balance,
end of period 129,638 99,042 129,638 99,042
-------------------------------------------------------------------------

Contributed surplus
Balance, beginning
of period 1,110 - - -
Income tax savings
on stock options
exercise 219 - 1,329 -
-------------------------------------------------------------------------
Balance,
end of period 1,329 - 1,329 -
-------------------------------------------------------------------------

Accumulated other
comprehensive
income (loss)
Balance, beginning
of period 24,425 17,895 19,071 11,634
Foreign currency
translation
adjustments (8,422) (1,061) (3,068) 5,200
-------------------------------------------------------------------------
Balance,
end of period 16,003 16,834 16,003 16,834
-------------------------------------------------------------------------
Total shareholders'
equity 408,501 376,448 408,501 376,448
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Comprehensive
income (loss)
Foreign currency
translation
adjustments (8,422) (1,061) (3,068) 5,200
Net income 4,097 12,552 17,276 35,408
-------------------------------------------------------------------------
Total comprehensive
income (4,325) 11,491 14,208 40,608
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
In accordance with U.S. GAAP
in thousands of U.S. dollars
(unaudited)

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Operations $ $ $ $
Net income 4,097 12,552 17,276 35,408
Non-cash items
Amortization of
deferred debt
issue expenses 275 264 825 780
Other depreciation
and amortization 5,346 4,276 16,040 12,195
Gain on disposal of
assets - (66) - (26)
Foreign currency
fluctuation (164) 624 (306) 504
Deferred income taxes (2,745) 893 (4,030) 3,778
Share in net loss of
joint ventures - (116) - (56)
Changes in working
capital items
Accounts receivable 9,274 (1,374) 6,490 (12,667)
Income taxes
receivable 227 (1,035) 2,928 (2,400)
Inventories (1,726) (5,284) 567 (13,457)
Prepaid expenses
and deposits 387 (263) 215 (893)
Accounts payable and
accrued liabilities 3,087 1,234 2,663 6,051
Income taxes payable 95 161 2,399 (249)
-------------------------------------------------------------------------
Cash flows from
operating
activities 18,153 11,866 45,067 28,968
-------------------------------------------------------------------------

Financing
Long-term debt - 2,212 - 2,212
Repayment of long-term
debt (443) (2,419) (1,400) (3,369)
Deferred debt
issue expenses - - (589) -
Issue of shares 331 2,005 888 4,829
-------------------------------------------------------------------------
Cash flows from
financing activities (112) 1,798 (1,101) 3,672
-------------------------------------------------------------------------
Investment
Acquisition of
short-term investments (6,174) (17,588) (7,569) (17,588)
Disposal of short-term
investments - 6,555 12,822 134,945
Disposal of investments - 496 - 1,735
Acquisition of property,
plant and equipment (1,562) (4,560) (5,148) (11,074)
Disposal of property,
plant and equipment - 19 - 397
Acquisition of intangible
assets (22) (81) (44) (145,685)
Disposal of intangible
assets - 917 - 917
-------------------------------------------------------------------------
Cash flows from
investment activities (7,758) (14,242) 61 (36,353)
-------------------------------------------------------------------------
Foreign exchange
gain (loss) on cash
held in foreign
currencies (400) (25) (339) 174
-------------------------------------------------------------------------
Net increase (decrease)
in cash
and cash equivalents 9,883 (603) 43,688 (3,539)
Cash and cash equivalents,
beginning of period 55,784 34,837 21,979 37,773
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period 65,667 34,234 65,667 34,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Additional information
Interest received 309 70 694 354
Interest paid 2,711 2,653 5,585 6,091
Income taxes paid 797 2,917 4,169 14,290
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Revenue 59,409 62,005 184,356 182,762
-------------------------------------------------------------------------

Cost of goods sold 16,009 13,643 53,235 43,187
Selling and
administrative
expenses 23,024 19,543 64,929 57,953
Research and
development expenses 8,947 5,182 23,649 13,106
Depreciation and
amortization 5,346 4,276 16,040 12,195
-------------------------------------------------------------------------
53,326 42,644 157,853 126,441
-------------------------------------------------------------------------

Operating income 6,083 19,361 26,503 56,321
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Financial expenses 1,637 1,694 5,293 5,081
Interest income (309) (160) (681) (406)
Loss (gain) on foreign
currency 65 (459) (375) (111)
-------------------------------------------------------------------------
1,393 1,075 4,237 4,564
-------------------------------------------------------------------------
Income before
income taxes 4,690 18,286 22,266 51,757
Income taxes 593 5,734 4,990 16,349
-------------------------------------------------------------------------
Net income 4,097 12,552 17,276 35,408
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Income per common share
Basic 0.09 0.28 0.38 0.78
Diluted 0.09 0.25 0.37 0.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average
number of
common shares
Basic 45,624,819 45,376,423 45,596,718 45,193,880
Diluted 46,214,037 55,271,713 55,291,815 54,967,876
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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



AXCAN PHARMA INC.
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

Effects of contingently convertible instruments on diluted income per
share

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 income per share calculation. For the nine-month period
ended June 30, 2004, the weighted number of common shares used in the
calculation of the diluted income per share has been increased from 51,971,458
to 54,967,876 and the diluted income per share has been reduced from $ 0.72 to
$ 0.68.

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 nine-month period ended June 30,
2005, 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 nine-month period
ended June 30, 2005 were $2,313,204 ($6,928,009 in 2004), the Company only
included in its revenue an amount of $707,089 ($4,413,531 in 2004)
representing the net sales less cost of goods sold and other seller related
expenses.


4. Inventories
June September
30, 30,
2005 2004
------------ ------------
$ $

Raw materials and packaging material 15,462 10,311
Work in progress 1,623 1,781
Finished goods 19,785 25,178
-------------------------------------------------------------------------
36,870 37,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------


5. Intangible Assets

-------------------------------------------------------------------------
June 30, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 334,968 41,849 293,119
Indefinite life 112,521 12,417 100,104
-------------------------------------------------------------------------
447,489 54,266 393,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------


-------------------------------------------------------------------------
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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Revenue
Canada
Domestic sales 8,458 7,100 25,358 20,517
Foreign sales - - - -
United States
Domestic sales 36,508 41,519 112,636 121,288
Foreign sales 791 1,137 3,130 2,500
Europe
Domestic sales 11,058 10,147 35,326 34,669
Foreign sales 2,560 2,029 7,752 3,618
Other 34 73 154 170
-------------------------------------------------------------------------
59,409 62,005 184,356 182,762
-------------------------------------------------------------------------
-------------------------------------------------------------------------


June September
30, 30,
2005 2004
------------ ------------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 40,593 40,401
United States 128,714 131,242
Europe 255,507 265,417
Other 28,483 29,534
-------------------------------------------------------------------------
453,297 466,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Interest on
long-term debt 1,238 1,390 4,120 4,119
Bank charges 46 31 94 109
Financing fees 78 9 254 73
Amortization of deferred
debt issue expenses 275 264 825 780
-------------------------------------------------------------------------
1,637 1,694 5,293 5,081
-------------------------------------------------------------------------
-------------------------------------------------------------------------

b) Selling and administrative expenses

Selling and administrative expenses include the followings:


For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Shipping and
handling expenses 1,538 1,223 3,813 3,448
Advertising expenses 4,903 4,578 13,632 10,958


c) Other information

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Rental expenses 287 274 861 822
Depreciation of property,
plant and equipment 1,255 873 3,854 2,912
Amortization of
intangible assets 4,091 3,403 12,186 9,283
Share in net loss
of joint ventures - (116) - (56)
Investment tax credits
applied against
current income taxes 770 322 1,851 644


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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Net income available
to common
shareholders
Basic 4,097 12,552 17,276 35,408
Financial expenses
relating to the
convertible
subordinated notes - 1,084 3,188 2,157
-------------------------------------------------------------------------
Net income available to
common shareholders
on a diluted basis 4,097 13,636 20,464 37,565
-------------------------------------------------------------------------
-------------------------------------------------------------------------


For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------

Weighted
average number
of common shares
Weighted
average number
of common shares
outstanding 45,624,819 45,376,423 45,596,718 45,193,880
Effect of dilutive
stocks options 589,218 971,177 770,984 849,883
Effect of dilutive
convertible
subordinated notes - 8,924,113 8,924,113 8,924,113
-------------------------------------------------------------------------
Adjusted
weighted average
number of common
shares
outstanding 46,214,037 55,271,713 55,291,815 54,967,876
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Number of
common shares
outstanding as
at July 31, 2005 45,679,515
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Options to purchase 283,000 and 258,500 common shares were outstanding as
at June 30, 2005 and 2004 respectively but were not included in the
computation of diluted income per share for the nine-month periods ended June
30, 2005 and 2004 respectively 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 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 nine-month period
ended June 30, 2005, the Company made matching contributions to the Plan
totalling $385,849 ($233,022 in 2004).


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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------

Fair value per option $6.63 $7.84 $7.16 $6.74
Assumptions used
Expected volatility 43% 44% 43% 44%
Risk-free interest
rate 3.78% 3.96% 4.06% 4.18%
Expected option
life (years) 6 6 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
June 30, June 30, June 30, June 30,
2005 2005 2004 2004
------------ ------------ ------------ ------------
As reported Pro-forma As reported Pro-forma
------------ ------------ ------------ ------------
$ $ $ $

Net income 4,097 2,999 12,552 11,456
Basic income per share 0.09 0.07 0.28 0.25
Diluted income per share 0.09 0.06 0.25 0.23


For the For the For the For the
nine-month nine-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2005 2004 2004
------------ ------------ ------------ ------------
As reported Pro-forma As reported Pro-forma
------------ ------------ ------------ ------------
$ $ $ $

Net income 17,276 13,748 35,408 32,198
Basic income per share 0.38 0.30 0.78 0.71
Diluted income per share 0.37 0.30 0.68 0.63


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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Operations
adjustments $ $ $ $

Net income
in accordance
with U.S. GAAP 4,097 12,552 17,276 35,408
Implicit interest
on convertible debt (1,183) (1,082) (3,426) (3,131)
Stock-based
compensation
expense (1,096) - (3,527) -
Amortization of new
product acquisition
costs (14) (14) (40) (40)
Income tax impact of
the above adjustments 191 5 331 15
-------------------------------------------------------------------------
Net earnings
in accordance
with Canadian GAAP 1,995 11,461 10,614 32,252
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Earnings per share
in accordance
with Canadian GAAP
Basic 0.04 0.25 0.23 0.71
Diluted 0.04 0.25 0.23 0.70



June 30, 2005 September 30, 2004
-------------------------- --------------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
------------ ------------ ------------ ------------
Balance sheet
adjustments $ $ $ $

Current assets 170,998 170,998 139,032 139,054
Property, plant
and equipment 32,607 32,607 31,252 31,265
Intangible assets 393,223 405,544 407,875 420,235
Goodwill 27,467 28,862 27,467 28,862
Deferred debt issue
expenses 2,852 2,852 3,088 3,088
Deferred income
tax asset 1,779 1,779 930 930
Current liabilities 55,482 55,482 51,362 51,430
Long-term debt 126,747 112,460 127,916 110,203
Deferred income tax
liability 38,196 39,300 38,290 39,376
Shareholders' equity
Equity component of
convertible debt - 24,239 - 24,239
Capital stock 261,531 272,798 260,643 267,288
Contributed surplus 1,329 12,272 - -
Retained earnings 129,638 105,932 112,362 107,671
Accumulated foreign
currency translation
adjustments 16,003 20,159 19,071 23,227



AXCAN PHARMA INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
June September
30, 30,
2005 2004
------------ ------------
(unaudited)
ASSETS $ $

Current assets
Cash and cash equivalents 65,667 22,063
Short-term investments 10,669 15,922
Accounts receivable 39,653 46,518
Income taxes receivable 6,942 9,196
Inventories (Note 4) 36,870 37,270
Prepaid expenses and deposits 3,402 3,499
Future income taxes 7,795 4,586
-------------------------------------------------------------------------
Total current assets 170,998 139,054

Property, plant and equipment, net 32,607 31,265
Intangible assets, net (Note 5) 405,544 420,235
Goodwill, net 28,862 28,862
Deferred debt issue expenses, net 2,852 3,088
Future income taxes 1,779 930
-------------------------------------------------------------------------
642,642 623,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 50,999 47,985
Income taxes payable 1,997 731
Instalments on long-term debt 1,545 1,778
Future income taxes 941 936
-------------------------------------------------------------------------
Total current liabilities 55,482 51,430

Long-term debt 112,460 110,203
Future income taxes 39,300 39,376
-------------------------------------------------------------------------
207,242 201,009
-------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Equity component of convertible debt (Note 6) 24,239 24,239
Capital stock 272,798 267,288
Contributed surplus 12,272 -
Retained earnings 105,932 107,671
Accumulated foreign currency translation
adjustments 20,159 23,227
-------------------------------------------------------------------------
435,400 422,425
-------------------------------------------------------------------------
642,642 623,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
Consolidated Cash Flows
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
(unaudited)

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Operations
Net earnings 1,995 11,461 10,614 32,252
Non-cash items
Implicit interest
on convertible
debt 1,183 1,082 3,426 3,132
Amortization of
deferred debt
issue expenses 275 264 825 780
Other depreciation
and amortization 5,359 4,292 16,079 12,241
Gain on disposal
of assets - (71) - (31)
Foreign currency
fluctuation (164) 624 (306) 504
Future income taxes (2,750) 888 (4,045) 3,763
Stock-based
compensation
expense 1,096 - 3,527 -
Changes in working
capital items
Accounts receivable 9,274 (1,515) 6,490 (12,696)
Income taxes
receivable 42 (1,035) 2,613 (2,379)
Inventories (1,726) (5,284) 567 (13,457)
Prepaid expenses
and deposits 387 (265) 215 (877)
Accounts payable
and accrued
liabilities 3,087 1,336 2,579 5,984
Income taxes
payable 95 161 2,399 (249)
-------------------------------------------------------------------------
Cash flows from
operating activities 18,153 11,938 44,983 28,967
-------------------------------------------------------------------------
Financing
Long-term debt - 2,212 - 2,212
Repayment of
long-term debt (443) (2,419) (1,400) (3,369)
Deferred debt
issue expenses - - (589) -
Issue of shares 331 2,005 888 4,829
-------------------------------------------------------------------------
Cash flows from
financing activities (112) 1,798 (1,101) 3,672
-------------------------------------------------------------------------
Investment
Acquisition of
short-term
investments (6,174) (17,588) (7,569) (17,588)
Disposal of short-
term investments - 6,555 12,822 134,945
Disposal of
investments - 496 - 1,735
Acquisition of
property, plant
and equipment (1,562) (4,562) (5,148) (11,076)
Disposal of
property, plant
and equipment - 26 - 404
Acquisition of
intangible assets (22) (81) (44) (145,685)
Disposal of
intangible assets - 917 - 917
-------------------------------------------------------------------------
Cash flows from
investment activities (7,758) (14,237) 61 (36,348)
-------------------------------------------------------------------------
Foreign exchange
gain (loss) on
cash held
in foreign
currencies (400) (23) (339) 176
-------------------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents 9,883 (524) 43,604 (3,533)
Cash and cash
equivalents,
beginning of
period 55,784 34,877 22,063 37,886
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 65,667 34,353 65,667 34,353
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 309 73 694 357
Interest paid 2,711 2,653 5,585 6,091
Income taxes paid 797 2,917 4,169 14,290
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
Consolidated Earnings
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars, except share related data
(unaudited)

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
REVENUE 59,409 61,931 184,356 182,859
-------------------------------------------------------------------------
Cost of goods sold 16,083 13,643 53,474 43,187
Selling and
administrative
expenses 23,897 19,418 67,737 57,956
Research and
development
expenses 8,327 4,907 22,279 12,553
Depreciation and
amortization 5,359 4,292 16,079 12,241
-------------------------------------------------------------------------
53,666 42,260 159,569 125,937
-------------------------------------------------------------------------
Operating income 5,743 19,671 24,787 56,922
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Financial expenses 2,820 2,776 8,719 8,219
Interest income (309) (159) (681) (408)
Loss (gain) on
foreign currency 65 (456) (375) (108)
-------------------------------------------------------------------------
2,576 2,161 7,663 7,703
-------------------------------------------------------------------------
Earnings before
income taxes 3,167 17,510 17,124 49,219
Income taxes 1,172 6,049 6,510 16,967
-------------------------------------------------------------------------
NET EARNINGS 1,995 11,461 10,614 32,252
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share
Basic 0.04 0.25 0.23 0.71
Diluted 0.04 0.25 0.23 0.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
Basic 45,624,819 45,376,423 45,596,718 45,193,880
Diluted 46,214,037 55,271,713 46,367,702 51,971,458
-------------------------------------------------------------------------
-------------------------------------------------------------------------


AXCAN PHARMA INC.
Consolidated Retained Earnings
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
(unaudited)

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Balance, beginning
of period 103,937 84,002 107,671 63,211
Retroactive
adjustment for
stock-based
compensation
(Note 2) - - (12,353) -
Net earnings 1,995 11,461 10,614 32,252
-------------------------------------------------------------------------
Balance, end
of period 105,932 95,463 105,932 95,463
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
Consolidated Contributed Surplus
-------------------------------------------------------------------------
In accordance with Canadian GAAP
in thousands of U.S. dollars
(unaudited)

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Balance, beginning
of period 11,664 - - -
Retroactive
adjustment for
stock-based
compensation
(Note 2) - - 8,723 -
Tax benefit from
exercise of
stock options 34 - 544 -
Stock-based
compensation
expense 1,096 - 3,527 -
Exercise of stock
options (522) - (522) -
-------------------------------------------------------------------------
Balance, end
of period 12,272 - 12,272 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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



AXCAN PHARMA INC.
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 $12,353,000, the capital stock has been increased by
$4,100,233, the contributed surplus has been increased by $8,722,767 and the
income taxes receivable have been increased by $470,000. Stock-based
compensation expense charged to the consolidated statement of earnings for the
nine-month period ended June 30, 2005 was $3,527,003.

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 periods ended June 30, 2004 would have been reduced
on a pro-forma basis as follows:

For the three-month period For the nine-month period
ended June 30, 2004 ended June 30, 2004
-------------------------- --------------------------
As reported Pro-forma As reported Pro-forma
------------ ------------ ------------ ------------
$ $ $ $
Net earnings 11,461 10,365 32,252 29,042
Basic earnings
per share 0.25 0.23 0.71 0.64
Diluted earnings
per share 0.25 0.23 0.70 0.64


The estimated fair value of granted stock options for the periods ended
June 30, 2005 and 2004 using the Black-Scholes model was as follows:

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Fair value
per option $6.63 $7.84 $7.16 $6.74
Assumptions used
Expected volatility 43% 44% 43% 44%
Risk-free interest
rate 3.78% 3.96% 4.06% 4.18%
Expected options
life (years) 6 6 6 6
Expected dividend - - - -


3. Products Acquisitions

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 nine-month period ended June 30,
2005, 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 nine-month period
ended June 30, 2005 were $2,313,204 ($6,928,009 in 2004), the Company only
included in its revenue an amount of $707,089 ($4,413,531 in 2004)
representing the net sales less cost of goods sold and other seller related
expenses.


4. Inventories

June September
30, 30,
2005 2004
------------ ------------
$ $

Raw materials and packaging material 15,462 10,311
Work in progress 1,623 1,781
Finished goods 19,785 25,178
-------------------------------------------------------------------------
36,870 37,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------


5. Intangible Assets

-------------------------------------------------------------------------
June 30, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 347,797 42,357 305,440
Indefinite life 112,521 12,417 100,104
-------------------------------------------------------------------------
460,318 54,774 405,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
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 totaling $6,526,246 was accounted for and added to the liability
component. For the nine-month period ended June 30, 2005, implicit interest in
the amount of $3,425,653 ($3,131,424 in 2004) 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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Revenue
Canada
Domestic sales 8,458 7,100 25,358 20,517
Foreign sales - - - -
United States
Domestic sales 36,508 41,519 112,636 121,288
Foreign sales 791 1,137 3,130 2,500
Europe
Domestic sales 11,058 10,073 35,326 34,766
Foreign sales 2,560 2,029 7,752 3,618
Other 34 73 154 170
-------------------------------------------------------------------------
59,409 61,931 184,356 182,859
-------------------------------------------------------------------------
-------------------------------------------------------------------------

June September
30, 30,
2005 2004
------------ ------------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 44,868 44,676
United States 129,035 131,602
Europe 255,507 265,431
Other 37,603 38,653
-------------------------------------------------------------------------
467,013 480,362
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Interest on
long-term debt 2,421 2,472 7,546 7,250
Bank charges 46 31 94 116
Financing fees 78 9 254 73
Amortization of
deferred debt
issue expenses 275 264 825 780
-------------------------------------------------------------------------
2,820 2,776 8,719 8,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------


b) Selling and administrative expenses

Selling and administrative expenses include the followings:

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Shipping and
handling expenses 1,538 1,223 3,813 3,448
Advertising expenses 4,903 4,962 13,632 11,182


c) Other information

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $

Rental expenses 287 274 861 822
Depreciation of
property, plant
and equipment 1,255 875 3,854 2,918
Amortization of
intangible assets 4,104 3,417 12,225 9,323
Investiment tax
credits applied
against research
and development
expenses 770 322 1,851 644


d) Earnings per common share

The following tables reconcile the numerators and the denominators of the
basic and diluted earnings per common share computations:

For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ $ $ $
Net income
available to
common shareholders
Basic 1,995 11,461 10,614 32,252
Financial expenses
relating to the
convertible
subordinated notes - 2,135 - 4,210
-------------------------------------------------------------------------
Net income available
to common shareholders
on a diluted basis 1,995 13,596 10,614 36,462
-------------------------------------------------------------------------
-------------------------------------------------------------------------


For the For the For the For the
three-month three-month nine-month nine-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------

Weighted average
number of common
shares
Weighted average
number of
common shares
outstanding 45,624,819 45,376,423 45,596,718 45,193,880
Effect of
dilutive
stock options 589,218 971,177 770,984 849,883
Effect of
dilutive
convertible
subordinated
notes - 8,924,113 - 5,927,695
-------------------------------------------------------------------------
Adjusted weighted
average number of
common shares
outstanding 46,214,037 55,271,713 46,367,702 51,971,458
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common
shares outstanding
at the end of
the period 45,674,674 45,556,032
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares
outstanding as at
July 31, 2005 45,679,515
-------------------------------------------------------------------------
-------------------------------------------------------------------------

 


Options to purchase 283,000 and 258,500 common shares were outstanding as
at June 30, 2005 and 2004 respectively but were not included in the
computation of diluted earnings per share for the nine month periods ended
June 30, 2005 and 2004 respectively, 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 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. As of June 30, 2005, the subordinated notes had no effect on the
diluted earnings per share. Since the trigger event did not occur during the
third quarter, the 8,924,113 common shares were not included in the weighted
number of common shares outstanding for the period.

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 nine-month period
ended June 30, 2005, the Company made matching contributions to the Plan
totalling $385,849 ($233,022 in 2004).



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;
Web: www.axcan.com ;

SOURCE: AXCAN PHARMA INC.;