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Axcan reports second quarter 2005 results


May 04, 2005 - 12:00 ET

MONT-SAINT-HILAIRE, QC May 4 - Axcan Pharma Inc. ("Axcan" or
the "Company") announced today operating results for the quarter ended March
31, 2005, the Company's second quarter of the fiscal year ending September 30,
2005.  Net sales were $63.4 million compared with $63.2 million in the second
quarter of 2004. Research and development expenses increased $4.3 million to
$8.3 million for the quarter ended March 31, 2005 from $4.0 million for the
corresponding quarter of the preceding fiscal year. Net income for the three-
month period ended March 31, 2005 was $5.4 million compared with $12.4 million
for the same period of fiscal 2004. Diluted earnings per share were $0.12
compared with $0.24 in 2004 (all amounts stated in U.S. dollars).
    
"To assure Axcan's long-term growth, we are totally committed to meeting
our milestones for the development of ITAX," stated Léon F. Gosselin,
President and Chief Executive Officer. "These milestones include completing
patient enrolment in our two Phase III clinical trials for this product
candidate in June 2005 and completing the clinical trials themselves by
September of this year. As a result, our R&D expenses rose to 13% of revenues
in the second quarter compared to 10% in the first quarter and to an average
of 6%-8% in previous years. This, coupled with an inventory write-down, has
had a negative impact on net income and earnings per share for the quarter. We
are, however, very pleased with the progress we are making on advancing ITAX
to a filing for regulatory approval that should take place by year-end."

RECENT DEVELOPMENTS

PRODUCT LAUNCHES

1000 MG MESALAMINE SUPPOSITORY

In November 2004, Axcan received approval from the U.S. Food and Drug
Administration ("FDA") for the use of a new, 1000-milligram mesalamine
suppository dosage form, to be administered once-per-day, for the treatment of
ulcerative proctitis. Axcan received three-year marketing exclusivity for the
new dosage form under the non-patent exclusivity provisions of the Federal
Food, Drug and Cosmetic Act. The product was launched in February in the
United States under the brand name Canasa 1000mg.

URSO FORTE

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

PENDING APPROVALS

HELIZIDE

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

SALOFALK 750 MG TABLETS

Axcan completed a Phase III trial, for the Canadian market, on the
efficacy and safety of a new 750-milligram mesalamine (5-ASA) tablet for the
oral treatment of ulcerative colitis. The Company filed a supplemental New
Drug Submission ("sNDS") for approval in Canada in the first quarter of fiscal
2004. Recently, Axcan received a non-approval letter from the Therapeutic
Products Directorate ("TPD") of Health Canada containing a list of questions
and comments for both the clinical and Chemistry, Manufacturing and Controls
("CMC") aspects of the original sNDS submission. Axcan intends to respond to
all questions in the non-approvable letter as well as request a meeting with
TPD of Health Canada to discuss their decision.

RESEARCH AND DEVELOPMENT UPDATE

PHASE III STUDIES

ITAX

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

CANASA / SALOFALK rectal gel

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

HEPENAX

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

PHOTOFRIN

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

PRE-CLINICAL, PHASE I AND PHASE II

NCX-1000

The FDA has accepted an Investigational New Drug Application for NCX-
1000, a patented, nitric oxide donating derivative of ursodiol, for the
treatment of portal hypertension, a late-stage complication of chronic,
advanced liver disease. The Phase I clinical development program, which is
designed to demonstrate the tolerability and safety of NCX-1000, has been
completed. Phase II studies are planned to begin during fiscal 2005.

Ursodiol Disulfate

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

NMK 150

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

NMK 250

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

INTERIM FINANCIAL REPORT

This release includes, by reference, the second quarter interim financial
report incorporating the financial statements in accordance with both U.S. and
Canadian GAAP as well as the full Management Discussion & Analysis ("MD&A")
including the reconciliation to Canadian GAAP of the U.S. GAAP presentation.
The interim report, including the MD&A and financial statements, is filed with
applicable U.S. and Canadian regulatory authorities.

CONFERENCE CALL

Axcan will host a conference call at 4:30 P.M. ET, on May 4, 2005.
Interested parties may also access the conference call by way of web cast at
www.axcan.com . The telephone numbers to access the conference call are (800)
814-4890 (Canada and United States) or (416) 640-4127 (international). A
replay of the call will be available until May 11, 2005. The telephone number
to access the replay of the call is (416) 640-1917 code: 21122352.

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
securities regulatory authorities.

The names ITAX, , Salofalk, Hepenax, Helizide, Urso, Urso Forte,
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 specialty pharmaceutical company concentrating in the
field of gastroenterology, with operations in North America and Europe. Axcan
markets and sells pharmaceutical products used in the treatment of a variety
of gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO 250, 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 intends to
respond to all questions in the non-approvable letter as well as request a
meeting with Therapeutic Products Directorate of Health Canada.
    
Axcan reported revenue of $63.4 million, operating income of $8.3 million
and net income of $5.4 million for the three-month period ended March 31,
2005. For the six-month period ended March 31,2005, revenue was
$124.9 million, operating income was $20.4 million and net income was
$13.2 million. Revenue from sales of Axcan's products in the United States was
$78.5 million (62.8% of total revenue) for the six-month period ended
March 31, 2005, compared to $81.1 million (67.2% of total revenue) for the
same period of fiscal 2004. In Canada, revenue was $16.9 million (13.5% of
total revenue) for the six-month period ended March 31, 2005, compared to
$13.4 million (11.1% of total revenue) for the same period of fiscal 2004. In
Europe, revenue was $29.5 million (23.6% of total revenue) for the six-month
period ended March 31, 2005, compared to $26.1 million (21.6% 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. This product is in development, has not reached technological
feasibility and has no known alternative uses; therefore, its acquisition was
deemed to be acquired in-process research and was expensed in the period of
acquisition.
    
On December 10, 2002, the Company acquired the rights to the Ursodiol
250 mg tablets DELURSAN for the French market from Aventis, for a cash
purchase price of $22.8 million.
    
On December 3, 2002, the Company acquired the worldwide rights to the
PANZYTRAT enzyme product line from Abbott for a cash purchase price of
$45.0 million.
    
During a transition period, the seller in some of these acquisition
transactions acts as selling agent for the management of these products. For
the six-month period ended March 31, 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 six-month period ended March 31, 2005 were $1,194,522 ($5,315,913 in
2004), the Company only included in its revenue an amount of $467,078
($3,440,421 in 2004) representing the net sales less cost of goods sold and
other seller related expenses.

/T/

Results of Operations

The following table sets forth, for the periods indicated, the percentage
of revenue represented by items in Axcan's consolidated statements of
operations:

                      For the three-month periods   For the six-month periods
                            ended March 31,               ended March 31,
                      ---------------------------   -------------------------
                             2005          2004          2005          2004
                      ------------   ------------   -----------    ----------
                                %             %             %             %
    Revenue                 100.0         100.0         100.0         100.0
    -------------------------------------------------------------------------

    Cost of goods sold       32.3          23.7          29.8          24.5
    Selling and
     administrative
     expenses                33.1         31.7           33.5          31.8
    Research and
     development expenses    13.1          6.3           11.8           6.6
    Depreciation and
     amortization             8.4          6.6            8.6           6.5
    -------------------------------------------------------------------------
                             86.9         68.3           83.7          69.4
    -------------------------------------------------------------------------
    Operating income         13.1         31.7           16.3          30.6
    -------------------------------------------------------------------------
    Financial expenses        3.0          2.7            2.9           2.8
    Interest income          (0.5)           -           (0.3)         (0.2)
    Loss (gain) on foreign
     exchange                (0.3)         0.4           (0.4)          0.3
    -------------------------------------------------------------------------
                              2.2          3.1            2.2           2.9
    -------------------------------------------------------------------------
    Income before income
     taxes                   10.9         28.6           14.1          27.7
    Income taxes              2.3          8.9            3.5           8.8
    -------------------------------------------------------------------------
    Net income                8.6         19.7           10.6          18.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    
/T/

Periods ended March 31, 2005 compared to periods ended March 31, 2004

Revenue

For the three-month period ended March 31, 2005, revenue was
$63.4 million compared to $63.2 million for the corresponding quarter of the
preceding fiscal year, an increase of 0.3%. For the six-month period ended
March 31, 2005, revenue was $124.9 million compared to $120.8 million for the
corresponding quarter of the preceding fiscal year, an increase of 3.3%. This
increase in revenue primarily resulted from the U.S. and Canadian sales of the
AVAX product line that was acquired in November 2003.

Cost of goods sold

Cost of goods sold consists principally of costs of raw materials,
royalties and manufacturing costs. Axcan outsources most of its manufacturing
requirements. Cost of goods sold increased $5.5 million (36.7%) to
$20.5 million for the three-month period ended March 31, 2005 from
$15.0 million for the corresponding quarter of the preceding fiscal year. As a
percentage of revenue, cost of goods sold for the quarter ended March 31, 2005
increased as compared to the corresponding quarter of the preceding fiscal
year from 23.7% to 32.3%. For the six-month period ended March 31, 2005, cost
of goods sold increased $7.7 million (26.1%) to $37.2 million from
$29.5 million for the corresponding period of the preceding fiscal year. As a
percentage of revenue, cost of goods sold for the six-month period ended March
31, 2005 increased as compared to the corresponding period of the preceding
fiscal year from 24.4% to 29.8%. 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. Cost of goods sold
includes $3.9 million for the quarter and $4.7 million for the six-month
period ended March 31, 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 $0.9 million (4.5%) to
$20.9 million for the three-month period ended March 31, 2005 from
$20.0 million for the corresponding quarter of the preceding fiscal year. For
the six-month period ended March 31, 2005, selling and administrative expenses
increased $3.5 million (9.1%) to $41.9 million from $38.4 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, and additional marketing efforts on our current
products.

Research and development expenses

Research and development expenses consist principally of fees paid to
outside parties that Axcan uses to conduct clinical studies and to submit
governmental approval applications on its behalf as well as the salaries and
benefits paid to its personnel involved in research and development projects.
Research and development expenses increased $4.3 million (107.5%) to
$8.3 million for the quarter ended March 31, 2005 from $4.0 million for the
corresponding quarter of the preceding fiscal year. For the six-month period
ended March 31, 2005, research and development expenses increased $6.8 million
(86.1%) to $14.7 million from $7.9 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 $1.1 million (26.2%) to $5.3 million for the quarter ended March 31,
2005 from $4.2 million for the corresponding quarter of the preceding fiscal
year. For the six-month period ended March 31, 2005, depreciation and
amortization increased $2.8 million (35.4%) to $10.7 million from $7.9 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 increased
$0.2 million (11.8%) to $1.9 million for the quarter ended March 31, 2005 from
$1.7 million for the corresponding quarter of the preceding fiscal year. For
the six-month period ended March 31, 2005, financial expenses increased
$0.3 million (8.8%) to $3.7 million from $3.4 million for the corresponding
period of the preceding fiscal year.

Income Taxes

Income taxes amounted to $1.5 million for the quarter ended March 31,
2005, compared to $5.7 million for the quarter ended March 31, 2004. The
effective tax rates were 21.7% for the quarter ended March 31, 2005 and 31.3%
for the quarter ended March 31, 2004. The decrease in effective tax rate is
mainly due to the research and development tax credits, deducted from the
income taxes expense, of $0.5 million for the quarter ended March 31, 2005
compared to $0.1 million for the corresponding quarter of the preceding fiscal
year. For the six-month period ended March 31, 2005, income taxes amounted to
$4.4 million compared to $10.6 million for the corresponding period of the
preceding fiscal year. The effective tax rates were 25.0% for the six-month
period ended March 31, 2005 and 31.7% for the six-month period ended March 31,
2004. The decrease in effective tax rate is mainly due to the research and
development tax credits, deducted from the income taxes expense, of
$1.1 million for the six-month period ended March 31, 2005 compared to
$0.3 million for the corresponding period of the preceding fiscal year.

/T/

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

    Income tax        For the three-month period   For the six-month period
     expense                ended March 31               ended March 31
                      --------------------------   --------------------------
                             2005          2004          2005          2004
                      ------------  ------------   -----------  -------------
                                $             $             $             $

    Income tax              2,049         5,758         5,478        10,937
    Research and
     development tax
     credits                 (546)         (104)       (1,081)         (322)
    -------------------------------------------------------------------------
    Income tax expense      1,503         5,654         4,397        10,615
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Income tax rate   For the three-month period   For the six-month period
                            ended March 31               ended March 31
                      --------------------------   --------------------------
                             2005          2004          2005          2004
                      ------------  ------------   -----------  -------------
                                %             %             %             %

    Income tax               29.6          31.9          31.2          32.7
    Research and
     development
     tax credits             (7.9)         (0.6)         (6.2)         (1.0)
    -------------------------------------------------------------------------
    Effective tax rate       21.7          31.3          25.0          31.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

/T/

Net income

Net income was $5.4 million or $0.12 of basic and diluted income per
share, for the quarter ended March 31, 2005, compared to $12.4 million or
$0.27 of basic income per share and $0.24 of diluted income per share for the
corresponding quarter of the preceding year. The weighted average number of
common shares outstanding used to establish the basic per share amounts
increased from 45.2 million for the quarter ended March 31, 2004 to
45.6 million for the quarter ended March 31, 2005, following the exercise of
options previously granted pursuant to Axcan's stock option plan. The weighted
average number of common shares used to establish the diluted per share
amounts increased from 55.1 million for the quarter ended March 31, 2004 to
55.4 million for the quarter ended March 31, 2005.
    
Net income was $13.2 million or $0.29 of basic income per share and $0.28
of diluted income per share, for the six-month period ended March 31, 2005,
compared to $22.9 million or $0.51 of basic income per share and $0.46 of
diluted income per share for the corresponding period of the preceding year.

Canadian GAAP

The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affect net income for the periods ended March 31, 2005 and 2004 are
summarized in the following table:

/T/

                      For the three-month period   For the six-month period
                            ended March 31               ended March 31
                      --------------------------   --------------------------
                             2005          2004          2005          2004
                      ------------  ------------   -----------  -------------
                                $             $             $             $

    Net income in
     accordance with
     U.S. GAAP              5,425        12,421        13,179        22,856

    Implicit interest
     on convertible debt   (1,120)       (1,023)       (2,243)       (2,049)
    Stock-based
     compensation expense  (1,131)            -        (2,431)            -
    Amortization of new
     product acquisition
     costs                    (12)          (13)          (26)          (26)
    Income tax impact of
     the above adjustments    135             5           140            10
    -------------------------------------------------------------------------
    Net earnings in
     accordance with
     Canadian GAAP          3,297        11,390         8,619        20,791
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

/T/

On March 5, 2003, the Company closed an offering of $125.0 million
aggregate principal amount of 4 1/4% convertible subordinated notes due
April 15, 2008. As a result of the terms of the notes, under Canadian GAAP, an
amount of $24,238,899 was included in shareholders' equity as equity component
of the convertible debt and an amount of $100,761,101 was included in long-
term debt, as the liability component of the convertible notes. For the six-
month period ended March 31, 2005, implicit interest in the amount of
$2,242,724 ($2,049,057 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
$22.4 million (59.1%) to $60.3 million at March 31, 2005 from $37.9 million at
September 30, 2004. As of March 31, 2005, working capital was $109.6 million,
compared to $87.7 million at September 30, 2004. These increases are mainly
due to the cash flows from operating activities of the six-month period ended
March 31, 2005.
    
Total assets increased $22.7 million (3.7%) to $632.3 million as of
March 31, 2005 from $609.6 million as of September 30, 2004. Shareholders'
equity increased $20.2 million (5.2%) to $412.3 million as of March 31, 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 $14.7 million for the six-month period ended March 31, 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 22, 2007.
    
The credit facility is secured by a first priority security interest on
all present and future acquired assets of the Company and its material
subsidiaries, and provides for the maintenance of certain financial ratios.
Among the restrictions imposed by the credit facility is a covenant limiting
cash dividends, share repurchases (other than redeemable shares issued in
connection with a permitted acquisition) and similar distributions to
shareholders to 10% of the Company's net income for the preceding fiscal year.
As of March 31, 2005, Axcan was in compliance with all covenants under the
credit facility.
    
The interest rate varies, depending on the Company's leverage, between 25
basis points and 100 basis points over Canadian prime rate or U.S. base rate,
and between 125 basis points and 200 basis points over the LIBOR rate or
bankers acceptances. The credit facility may be drawn in U.S. dollars or in
Canadian dollar equivalents. As of March 31, 2005, there was no amount
outstanding under this credit facility.

Convertible subordinated notes and other long-term debt

Long-term debt including instalments due within one year totalled
$129.0 million as of March 31, 2005 compared to $129.7 million as of
September 30, 2004. As of March 31, 2005, the long-term debt included,
$1.9 million of bank loans, $2.1 million of obligations under capital leases
contracted by Axcan's French subsidiary and the $125.0 million 4 1/4%
convertible subordinated notes due 2008 which were issued on March 5, 2003.
    
The notes are convertible into 8,924,113 common shares during any
quarterly conversion period if the closing price per share for at least 20
consecutive trading days during the 30 consecutive trading-day period ending
on the first day of the conversion period exceeds 110% of the conversion price
in effect on that thirtieth trading day. The notes are also convertible during
the five business-day period following any 10 consecutive trading-day period
in which the daily average of the trading prices for the notes was less than
95% of the average conversion value for the notes during that period. The note
holders may also convert their notes upon the occurrence of specified
corporate transactions or if the Company has called the notes for redemption.
On or after April 20, 2006, the Company may at its option, redeem the notes,
in whole or in part at redemption prices varying from 101.70% to 100.85% of
the principal amount plus any accrued and unpaid interest to the redemption
date. The notes also include provisions for the redemption of all the notes
for cash at the option of the Company following certain changes in tax
treatment.

Cash Flows

    
Cash flows from operating activities decreased $0.2 million from
$18.3 million of cash provided by operating activities for the quarter ended
March 31, 2004 to $18.1 million for the quarter ended March 31, 2005. Cash
flows from operating activities increased $9.7 million from $17.1 million of
cash provided by operating activities for the six-month period ended March 31,
2004 to $26.8 million for the six-month period ended March 31, 2005. This
increase is mainly due to the fact that the accounts receivable and
inventories remained relatively stable during the six-month period ended
March 31, 2005 compared to the corresponding period of the previous fiscal
year when they increased following the increase in sales and the acquisition
of new products. Cash flows used by financing activities were $0.1 million for
the quarter ended March 31, 2005 and $1.0 million for the six-month period
ended March 31, 2005. Cash flows used for investment activities for the
quarter ended March 31, 2005 were $3.2 million mainly due to the net cash used
for the acquisition of property, plant and equipment for $1.8 million and the
acquisition of short term investments for $1.4 million. Cash flows from
investment activities for the six-month period ended March 31, 2005 were
$7.8 million mainly due to the net disposal of short-term investments of
$11.4 million less the cash used for the acquisition of property plant and
equipment for $3.6 million. Cash flows used for investment activities for the
six-month period ended March 31, 2004 were $22.1 million mainly due to the net
cash used for the acquisition of intangible assets for $145.6 million with the
proceeds from the disposal of short-term investments.

Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table summarizes Axcan's significant contractual
obligations (in thousands of dollars) as of March 31, 2005 and the effect such
obligations are expected to have on our liquidity and cash flows in future
years. This table excludes amounts already recorded on the balance sheet as
current liabilities at March 31, 2005 or certain other purchase obligations as
discussed below:

/T/

                          For the twelve-month period ending March 31,
                    ------------------------------------------------------
                                                                 2010 and
                          2006       2007       2008       2009 thereafter
                    ---------- ---------- ---------- ---------- ----------
                             $          $          $          $          $
    Long-term debt       1,793        967    125,782        267        168
    Operating leases     1,199        139        102         64         79
    Other commitments    1,579        150        150        150          -
                    ---------- ---------- ---------- ---------- ----------
                         4,571      1,256    126,034        481        247
                    ---------- ---------- ---------- ---------- ----------
                    ---------- ---------- ---------- ---------- ----------

/T/

Purchase orders for raw materials, finished goods and other goods and
services are not included in the above table. Management is not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this table,
contractual obligations for purchase of goods or services are defined as
agreements that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Axcan's purchase orders are based on current needs
and are fulfilled by our vendors with relatively short timetables. The Company
does not have significant agreements for the purchase of raw materials or
finished goods specifying minimum quantities or set prices that exceed its
short-term expected requirements. Axcan also enters into contracts for
outsourced services; however, the obligations under these contracts are not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty except for a sales management
services contract included in the above table. As milestone payments are
primarily contingent on receiving regulatory approval for products under
development, they do not have defined maturities.
    
The expected timing of payment of the obligations discussed above is
estimated based on current information. Timing of payments and actual amounts
paid may be different depending on the time of receipt of goods or services,
or for some obligations, changes to agreed-upon amounts.

Effect of recently issued U.S. accounting pronouncements

In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition to SFAS No. 123's fair value method
of accounting for stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and Accounting Principles Board
Opinion ("APB") No. 28, "Interim Financial Reporting", to require disclosure
in the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value method,
the disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB No. 25. As allowed by SFAS No. 123, the Company elected to
continue to utilize the accounting method prescribed by APB No. 25 and applies
the disclosure requirements of SFAS No. 123.
    
On March 31, 2004, the FASB issued an Exposure Draft, "Share-Based
Payment, an Amendment of FASB Statements No. 123 and 95". The Exposure Draft
would require all entities to recognize compensation cost for share-based
awards, including options, granted to employees. The proposed Statement would
eliminate the ability to account for share-based compensation transactions
using APB No. 25, "Accounting for Stock Issued to Employees", and generally
would require instead that such transactions be accounted for using a      
fair-value based method. Public companies would be required to measure    
stock-based compensation classified as equity by valuing the instrument the
employee receives at its grant-date fair value. Share-based awards classified
as liabilities, would be measured at fair value and remeasured at fair value
at each reporting period. Currently such awards are measured at intrinsic
value under both APB No. 25 and SFAS 123, "Accounting for Stock-Based
Compensation". The Company would apply the proposed Statement for 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 1/4%
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 March 31, 2005, our interest
requirements amounted to $6.3 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 9.8 to one.
    
Under Canadian GAAP, for the twelve months ended March 31, 2005, our
interest requirements amounted to $11.0 million on a pro-forma basis, and our
earnings coverage ratio was 5.5 to one. The principal difference between the
earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable to
the inclusion of implicit interest of $4.7 million as required by Canadian
GAAP.

Risk Factors

Axcan is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Axcan does not use derivative
financial instruments for speculative or trading purposes. Axcan does not use
off-balance sheet financing or similar special purpose entities. Inflation has
not had a significant impact on Axcan's results of operations.

Foreign Currency Risk

Axcan operates internationally; however, a substantial portion of the
revenue and expense activities and capital expenditures are transacted in
U.S. dollars. Axcan's exposure to exchange rate fluctuation is reduced
because, in general, Axcan's revenues denominated in currencies other than the
U.S. dollar are matched by a corresponding amount of costs denominated in the
same currency. Axcan expects this matching to continue.

Interest Rate Risk

The primary objective of Axcan's investment policy is the protection of
capital. Accordingly, investments are made in high-grade government and
corporate securities with varying maturities, but typically, less than
180 days. Therefore, Axcan does not have a material exposure to interest rate
risk, and a 100 basis-point adverse change in interest rates would not have a
material effect on Axcan's consolidated results of operations, financial
position or cash flows. Axcan is exposed to interest rate risk on borrowings
under the credit facility. The credit facility bears interest based on LIBOR,
U.S. dollar base rate, Canadian dollar prime rate, or Canadian dollar
Bankers' Acceptances. Based on projected advances under the credit facility, a
100 basis-point adverse change in interest rates would not have a material
effect on Axcan's consolidated results of operations, financial position, or
cash flows.

Supply and Manufacture

Axcan depends on third parties for the supply of active ingredients and
for the manufacture of the majority of its products. Although Axcan looks to
secure alternative suppliers, Axcan may not be able to obtain the active
ingredients or products from such third parties, 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 April 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.

/T/

    On behalf of Management,
    (signed)
    Jean Vézina
    Vice President, Finance and Chief Financial Officer


    <<
    AXCAN PHARMA INC.
    Consolidated Balance Sheets
    -------------------------------------------------------------------------
    In accordance with U.S. GAAP
    (in thousands of U.S. dollars, except share related data)

                                                     March 31, September 30,
                                                         2005          2004
                                                 ------------- --------------
                                                   (unaudited)
    ASSETS                                                  $             $

    Current assets
      Cash and cash equivalents                        55,784        21,979
      Short-term investments available for sale         4,495        15,922
      Accounts receivable                              49,892        46,585
      Income taxes receivable                           6,995         9,196
      Inventories (Note 4)                             35,670        37,270
      Prepaid expenses and deposits                     3,859         3,494
      Deferred income taxes                             6,467         4,586
    -------------------------------------------------------------------------
    Total current assets                              163,162       139,032

    Property, plant and equipment, net                 32,482        31,252
    Intangible assets, net (Note 5)                   404,352       407,875
    Goodwill, net                                      27,467        27,467
    Deferred debt issue expenses, net                   3,126         3,088
    Deferred income taxes                               1,676           930
    -------------------------------------------------------------------------
    Total assets                                      632,265       609,644
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES

    Current liabilities
      Accounts payable and accrued liabilities         48,553        47,917
      Income taxes payable                              1,921           731
      Instalments on long-term debt                     1,793         1,778
      Deferred income taxes                             1,271           936
    -------------------------------------------------------------------------
    Total current liabilities                          53,538        51,362

    Long-term debt                                    127,184       127,916
    Deferred income taxes                              39,267        38,290
    -------------------------------------------------------------------------
    Total liabilities                                 219,989       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; 45,618,251 issued as at
       March 31, 2005 and 45,562,336 as at
       September 30, 2004.                            261,200       260,643
    Retained earnings                                 125,541       112,362
    Contributed surplus                                 1,110             -
    Accumulated other comprehensive income             24,425        19,071
    -------------------------------------------------------------------------
    Total shareholders' equity                        412,276       392,076
    -------------------------------------------------------------------------
    Total liabilities and shareholders' equity        632,265       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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
    Common shares
     (number)
    Balance, beginning
     of period         45,581,050    45,061,531    45,562,336    45,004,320
      Exercise of
       options             37,201       266,571        55,915       323,782
    -------------------------------------------------------------------------
    Balance, end of
     period            45,618,251    45,328,102    45,618,251    45,328,102
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                $             $             $             $
    Common shares
    Balance, beginning
     of period            260,799       256,178       260,643       255,743
      Exercise of
       options                401         2,389           557         2,824
    -------------------------------------------------------------------------
    Balance, end of
     period               261,200       258,567       261,200       258,567
    -------------------------------------------------------------------------

    Retained earnings
    Balance, beginning
     of period            120,116        74,069       112,362        63,634
      Net income            5,425        12,421        13,179        22,856
    -------------------------------------------------------------------------
    Balance, end of
     period               125,541        86,490       125,541        86,490
    -------------------------------------------------------------------------

    Contributed surplus
    Balance, beginning
     of period                980             -             -             -
    Income tax savings
     on stock options
     exercise                 130             -         1,110             -
    -------------------------------------------------------------------------
    Balance, end of
     period                 1,110             -         1,110             -
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive
     income (loss)
    Balance, beginning
     of period             29,919        20,161        19,071        11,634
      Foreign currency
       translation
       adjustments         (5,494)       (2,266)        5,354         6,261
    -------------------------------------------------------------------------
    Balance, end of
     period                24,425        17,895        24,425        17,895
    -------------------------------------------------------------------------
    Total shareholders'
     equity               412,276       362,952       412,276       362,952
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Comprehensive income (loss)
    Foreign currency
     translation
     adjustments           (5,494)       (2,266)        5,354         6,261
    Net income              5,425        12,421        13,179        22,856
    -------------------------------------------------------------------------
    Total comprehensive
     income (loss)            (69)       10,155        18,533        29,117
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
    Operations                  $             $             $             $
    Net income              5,425        12,421        13,179        22,856
    Non-cash items
      Amortization of
       deferred debt
       issue expenses         275           258           550           516
      Other depreciation
       and amortization     5,330         4,196        10,694         7,919
      Loss (gain) on
       disposal of
       assets                   -           (47)            -            40
      Foreign currency
       fluctuation           (126)         (120)         (142)         (120)
      Deferred income
       taxes               (1,886)        1,582        (1,285)        2,885
      Share in net loss
       of joint ventures        -            60             -            60
      Changes in working
       capital items
        Accounts
         receivable        (2,646)       (2,429)       (2,784)      (11,293)
        Income taxes
         receivable         3,383         1,241         2,701        (1,365)
        Inventories         3,418           203         2,293        (8,173)
        Prepaid expenses
         and deposits         550           419          (172)         (630)
        Accounts payable
         and accrued
         liabilities        4,825         6,203          (424)        4,817
        Income taxes
         payable             (451)       (5,733)        2,304          (410)
    -------------------------------------------------------------------------
    Cash flows from
     operating activities  18,097        18,254        26,914        17,102
    -------------------------------------------------------------------------
    Financing
      Repayment of
       long-term debt        (488)         (408)         (957)         (950)
      Deferred debt
       issue expenses           -             -          (589)            -
      Issue of shares         401         2,389           557         2,824
    -------------------------------------------------------------------------
    Cash flows from
     financing activities     (87)        1,981          (989)        1,874
    -------------------------------------------------------------------------
    Investment
      Acquisition of
       short-term
       investments         (1,395)            -        (1,395)            -
      Disposal of
       short-term
       investments              -         2,030        12,822       128,390
      Disposal of
       investments              -         1,101             -         1,239
      Acquisition of
       property, plant
       and equipment       (1,752)       (4,151)       (3,586)       (6,514)
      Disposal of
       property, plant
       and equipment            -            52             -           378
      Acquisition of
       intangible assets      (14)          (14)          (22)     (145,604)
    -------------------------------------------------------------------------
    Cash flows from
     investment activities (3,161)         (982)        7,819       (22,111)
    -------------------------------------------------------------------------
    Foreign exchange gain
     (loss) on cash held
     in foreign
     currencies              (114)          (32)           61           199
    -------------------------------------------------------------------------
    Net increase
     (decrease) in cash
     and cash equivalents  14,735        19,221        33,805        (2,936)
    Cash and cash
     equivalents,
     beginning of period   41,049        15,616        21,979        37,773
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end
     of period             55,784        34,837        55,784        34,837
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Additional information
      Interest received       286            64           385           284
      Interest paid           176            72         2,874         3,438
      Income taxes paid     2,103        10,421         3,372        11,373
    -------------------------------------------------------------------------

    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    REVENUE                63,364        63,192       124,947       120,757
    -------------------------------------------------------------------------

    Cost of goods sold     20,469        14,972        37,226        29,544
    Selling and
     administrative
     expenses              20,948        20,043        41,905        38,410
    Research and
     development expenses   8,313         3,991        14,702         7,924
    Depreciation and
     amortization           5,330         4,196        10,694         7,919
    -------------------------------------------------------------------------
                           55,060        43,202       104,527        83,797
    -------------------------------------------------------------------------

    Operating income        8,304        19,990        20,420        36,960
    -------------------------------------------------------------------------

    Financial expenses      1,869         1,706         3,656         3,387
    Interest income          (286)          (55)         (372)         (246)
    Loss (gain) on
     foreign currency        (207)          264          (440)          348
    -------------------------------------------------------------------------
                            1,376         1,915         2,844         3,489
    -------------------------------------------------------------------------

    Income before income
     taxes                  6,928        18,075        17,576        33,471
    Income taxes            1,503         5,654         4,397        10,615
    -------------------------------------------------------------------------
    NET INCOME              5,425        12,421        13,179        22,856
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Income per common share
      Basic                  0.12          0.27          0.29          0.51
      Diluted                0.12          0.24          0.28          0.46
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average
     number of common
     shares
      Basic            45,599,780    45,188,011    45,582,668    45,105,013
      Diluted          55,442,988    55,124,302    55,367,112    54,802,916
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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

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, is therefore included in the
Company's diluted income per share calculation. For the six-month period ended
March 31, 2004, the weighted number of common shares used in the calculation
of the diluted income per share has been increased from 50,316,477 to
54,802,916 and the diluted income per share has been reduced from $0.48 to
$0.46.

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 six-month period ended March 31,
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 six-month period
ended March 31, 2005 were $1,194,522 ($5,315,913 in 2004), the Company only
included in its revenue an amount of $467,078 ($3,440,421 in 2003)
representing the net sales less cost of goods sold and other seller related
expenses.

4. Inventories

                                                     March 31, September 30,
                                                         2005          2004
                                                 ------------- --------------
                                                            $             $

    Raw materials and packaging material               11,176        10,311
    Work in progress                                    1,890         1,781
    Finished goods                                     22,604        25,178
    -------------------------------------------------------------------------
                                                       35,670        37,270
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5. Intangible Assets

    -------------------------------------------------------------------------
                                                 March 31, 2005
    -------------------------------------------------------------------------
                                                  Accumulated
                                           Cost  amortization           Net
    -------------------------------------------------------------------------
                                              $             $             $
    Trademarks, trademark licenses
     and manufacturing rights with a:
      Finite life                       340,089        38,007       302,082
      Indefinite life                   114,687        12,417       102,270
    -------------------------------------------------------------------------
                                        454,776        50,424       404,352
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                              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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    Revenue
      Canada
        Domestic sales      7,710         6,865        16,900        13,417
        Foreign sales           -             -             -             -
      United States
        Domestic sales     39,100        41,958        76,128        79,769
        Foreign sales       1,182         1,363         2,339         1,363
      Europe
        Domestic sales     12,525        11,877        24,268        24,522
        Foreign sales       2,769         1,060         5,192         1,589
      Other                    78            69           120            97
    -------------------------------------------------------------------------
                           63,364        63,192       124,947       120,757
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                     March 31, September 30,
                                                         2005          2004
                                                   ----------    ------------
                                                            $             $
    Property, plant, equipment, intangible
     assets and goodwill
      Canada                                           40,109        40,401
      United States                                   129,556       131,242
      Europe                                          265,803       265,417
      Other                                            28,833        29,534
    -------------------------------------------------------------------------
                                                      464,301       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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Interest on
     long-term debt         1,448         1,347         2,882         2,729
    Bank charges               41            54            48            78
    Financing fees            105            47           176            64
    Amortization of
     deferred debt
     issue expenses           275           258           550           516
    -------------------------------------------------------------------------
                            1,869         1,706         3,656         3,387
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b) Selling and administrative expenses

    Selling and administrative expenses include the followings:

                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Shipping and
     handling
     expenses               1,271         1,245         2,275         2,225
    Advertising expenses    4,104         3,537         8,729         6,380

    c) Other information

                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Rental expenses           287           274           574           548
    Depreciation of
     property, plant
     and equipment          1,298           789         2,599         2,039
    Amortization of
     intangible assets      4,032         3,407         8,095         5,880
    Share in net loss
     of joint ventures          -            60             -            60
    Investments tax
     credits applied
     against current
     income taxes             546           104         1,081           322

    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    Net income available
     to common
     shareholders
      Basic                 5,425        12,421        13,179        22,856
      Financial expenses
       relating to the
       convertible
       subordinated
       notes                1,055         1,071         2,134         2,150
    -------------------------------------------------------------------------
    Net income available
     to common
     shareholders
     on a diluted basis     6,480        13,492        15,313        25,006
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------

    Weighted average
     number of common
     shares
    Weighted average
     number of common
     shares
     outstanding       45,599,780    45,188,011    45,582,668    45,105,013
    Effect of dilutive
     stocks options       919,095     1,012,178       860,331       773,790
    Effect of dilutive
     convertible
     subordinated
     notes              8,924,113     8,924,113     8,924,113     8,924,113
    -------------------------------------------------------------------------
    Adjusted weighted
     average number
     of common
     shares
     outstanding       55,442,988    55,124,302    55,367,112    54,802,916
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Number of common shares outstanding as at April 30, 2005     45,620,283
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Options to purchase 271,200 and 404,950 common shares were outstanding as
at March 31, 2005 and 2004 respectively but were not included in the
computation of diluted income per share for the six-month periods ended March
31, 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 the least 20
consecutive trading days during the 30 consecutive trading-day period ending
on the first day of the conversion period exceeds 110% of the conversion price
in effect on that thirtieth trading day. The noteholders may also convert
their notes during the five business-day period following any 10 consecutive
trading-day period in which the daily average of the trading prices for the
notes was less than 95% of the average conversion value for the notes during
that period. Finally, the noteholders may also convert their notes upon the
occurrence of specified corporate transactions or, if the company has called
the notes for redemption. On or after April 20, 2006, the Company may at its
option, redeem the notes, in whole or in part at redemption prices varying
from 101.70% to 100.85% of the principal amount plus any accrued and unpaid
interest to the redemption date. The notes also include provisions for the
redemption of all the notes for cash at the option of the Company following
some changes in tax treatment.

e) Employee benefit plan

A subsidiary of the Company has a defined contribution plan ("The Plan")
for its U.S. employees. Participation is available to substantially all U.S.
employees. Employees may contribute up to 15% of their gross pay and up to
limits set by the U.S. Internal Revenue Service. For the six-month period
ended March 31, 2005, the Company made matching contributions to the Plan
totalling $272,185 ($151,943 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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------

    Fair value
     per option             $7.45         $8.71         $7.09         $6.34
    Assumptions used
     Expected volatility       43%           44%           43%           44%
     Risk-free interest
      rate                   3.76%         3.67%         4.08%         4.28%
     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
                         March 31,     March 31,     March 31,     March 31,
                             2005          2005          2004          2004
                     ------------- ------------- ------------- --------------
                      As reported     Pro-forma   As reported     Pro-forma
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Net income              5,425         4,424        12,421        11,282
    Basic income
     per share               0.12          0.10          0.27          0.25
    Diluted income
     per share               0.12          0.10          0.24          0.22


                          For the       For the       For the       For the
                        six-month     six-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2005          2004          2004
                     ------------- ------------- ------------- --------------
                      As reported     Pro-forma   As reported     Pro-forma
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Net income             13,179        10,878        22,856        20,747
    Basic income
     per share               0.29          0.24          0.51          0.46
    Diluted income
     per share               0.28          0.24          0.46          0.42

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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
    Operations                  $             $             $             $
     adjustments

    Net income in
     accordance with
     U.S. GAAP              5,425        12,421        13,179        22,856
      Implicit interest
       on convertible
       debt                (1,120)       (1,023)       (2,243)       (2,049)
      Stock-based
       compensation
       expense             (1,131)            -        (2,431)            -
      Amortization of
       new product
       acquisition costs      (12)          (13)          (26)          (26)
      Income tax impact
       of the above
       adjustments            135             5           140            10
    -------------------------------------------------------------------------
    Net earnings in
     accordance with
     Canadian GAAP          3,297        11,390         8,619        20,791
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings per share in
     accordance with
     Canadian GAAP
      Basic                  0.07          0.25          0.19          0.46
      Diluted                0.07          0.24          0.19          0.45


                               March 31, 2005            September 30, 2004
                            -------------------         ---------------------
                             U.S.      Canadian          U.S.      Canadian
                             GAAP          GAAP          GAAP          GAAP
                            -----        ------         -----        --------
    Balance sheet               $             $             $             $
     adjustments

    Current assets        163,162       163,162       139,032       139,054
    Property, plant
     and equipment         32,482        32,482        31,252        31,265
    Intangible assets     404,352       416,686       407,875       420,235
    Goodwill               27,467        28,862        27,467        28,862
    Deferred debt
     issue expenses         3,126         3,126         3,088         3,088
    Deferred income
     tax asset              1,676         1,676           930           930
    Current liabilities    53,538        53,538        51,362        51,430
    Long-term debt        127,184       111,714       127,916       110,203
    Deferred income
     tax liability         39,267        40,376        38,290        39,376
    Shareholders' equity
      Equity component
       of convertible
       debt                     -        24,239             -        24,239
      Capital stock       261,200       271,945       260,643       267,288
      Contributed
       surplus              1,110        11,664             -             -
      Retained earnings   125,541       103,937       112,362       107,671
      Accumulated
       foreign
       currency
       translation
       adjustments         24,425        28,581        19,071        23,227


    AXCAN PHARMA INC.
    Consolidated Balance Sheets
    -------------------------------------------------------------------------
    In accordance with Canadian GAAP
    (in thousands of U.S. dollars)
                                                     March 31, September 30,
                                                         2005          2004
                                                 ------------- --------------
    ASSETS                                         (unaudited)
                                                            $             $
    Current assets
      Cash and cash equivalents                        55,784        22,063
      Short-term investments                            4,495        15,922
      Accounts receivable                              49,892        46,518
      Income taxes receivable                           6,995         9,196
      Inventories (Note 4)                             35,670        37,270
      Prepaid expenses and deposits                     3,859         3,499
      Future income taxes                               6,467         4,586
    -------------------------------------------------------------------------
    Total current assets                              163,162       139,054

    Property, plant and equipment, net                 32,481        31,265
    Intangible assets, net (Note 5)                   416,686       420,235
    Goodwill, net                                      28,862        28,862
    Deferred debt issue expenses, net                   3,127         3,088
    Future income taxes                                 1,676           930
    -------------------------------------------------------------------------
                                                      645,994       623,434
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES

    Current liabilities
      Accounts payable and accrued liabilities         48,553        47,985
      Income taxes payable                              1,921           731
      Instalments on long-term debt                     1,793         1,778
      Future income taxes                               1,271           936
    -------------------------------------------------------------------------
    Total current liabilities                          53,538        51,430

    Long-term debt                                    111,714       110,203
    Future income taxes                                40,376        39,376
    -------------------------------------------------------------------------
                                                      205,628       201,009
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY

    Equity component of convertible debt (Note 6)      24,239        24,239
    Capital stock                                     271,945       267,288
    Contributed surplus                                11,664             -
    Retained earnings                                 103,937       107,671
    Accumulated foreign currency translation
     adjustments                                       28,581        23,227
    -------------------------------------------------------------------------
                                                      440,366       422,425
    -------------------------------------------------------------------------
                                                      645,994       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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    Operations
    Net earnings            3,297        11,390         8,619        20,791
    Non-cash items
      Implicit interest
       on convertible debt  1,120         1,024         2,243         2,050
      Amortization of
       deferred debt issue
       expenses               275           258           550           516
      Other depreciation
       and amortization     5,342         4,213        10,720         7,949
      Loss (gain) on
       disposal of assets       -           (47)            -            40
      Foreign currency
       fluctuation           (126)         (120)         (142)         (120)
      Future income taxes  (1,891)        1,577        (1,295)        2,875
      Stock-based
       compensation
       expense              1,131             -         2,431             -
      Changes in working
       capital items
        Accounts
         receivable        (2,646)       (2,317)       (2,784)      (11,181)
        Income taxes
         receivable         3,253         1,262         2,571        (1,344)
        Inventories         3,418           203         2,293        (8,173)
        Prepaid expenses
         and deposits         550           437          (172)         (612)
        Accounts payable
         and accrued
         liabilities        4,825         6,034          (508)        4,648
        Income taxes
         payable             (451)       (5,733)        2,304          (410)
    -------------------------------------------------------------------------
    Cash flows from
     operating activities  18,097        18,181        26,830        17,029
    -------------------------------------------------------------------------

    Financing
      Repayment of
       long-term debt        (488)         (408)         (957)         (950)
      Deferred debt issue
       expenses                 -             -          (589)            -
      Issue of shares         401         2,389           557         2,824
    -------------------------------------------------------------------------
    Cash flows from
     financing activities     (87)        1,981          (989)        1,874
    -------------------------------------------------------------------------
    Investment
      Acquisition of
       short-term
       investments         (1,395)            -        (1,395)            -
      Disposal of
       short-term
       investments              -         2,030        12,822       128,390
      Disposal of
       investments              -         1,101             -         1,239
      Acquisition of
       property, plant
       and equipment       (1,752)       (4,151)       (3,586)       (6,514)
      Disposal of
       property, plant
       and equipment            -            52             -           378
      Acquisition of
       intangible assets      (14)          (14)          (22)     (145,604)
    -------------------------------------------------------------------------
    Cash flows from
     investment activities (3,161)         (982)        7,819       (22,111)
    -------------------------------------------------------------------------

    Foreign exchange gain
     (loss) on cash held in
     foreign currencies      (114)          (32)           61           199
    -------------------------------------------------------------------------

    Net increase (decrease)
     in cash and cash
     equivalents           14,735        19,148        33,721        (3,009)
    Cash and cash
     equivalents,
     beginning of period   41,049        15,729        22,063        37,886
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end
     of period             55,784        34,877        55,784        34,877
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Additional information
      Interest received       286            64           385           284
      Interest paid           176            72         2,874         3,438
      Income taxes paid     2,103        10,421         3,372        11,373
    -------------------------------------------------------------------------

    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    REVENUE                63,364        63,213       124,947       120,928
    -------------------------------------------------------------------------

    Cost of goods sold     20,546        14,972        37,391        29,544
    Selling and
     administrative
     expenses              21,848        20,021        43,840        38,538
    Research and
     development expenses   7,921         3,931        13,952         7,646
    Depreciation and
     amortization           5,342         4,213        10,720         7,949
    -------------------------------------------------------------------------
                           55,657        43,137       105,903        83,677
    -------------------------------------------------------------------------

    Operating income        7,707        20,076        19,044        37,251
    -------------------------------------------------------------------------

    Financial expenses      2,989         2,736         5,899         5,443
    Interest income          (286)          (58)         (372)         (249)
    Loss (gain) on foreign
     currency                (207)          264          (440)          348
    -------------------------------------------------------------------------
                            2,496         2,942         5,087         5,542
    -------------------------------------------------------------------------

    Earnings before income
     taxes                  5,211        17,134        13,957        31,709
    Income taxes            1,914         5,744         5,338        10,918
    -------------------------------------------------------------------------
    NET EARNINGS            3,297        11,390         8,619        20,791
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings per common share
      Basic                  0.07          0.25          0.19          0.46
      Diluted                0.07          0.24          0.19          0.45
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Weighted average
     number of common
     shares
      Basic            45,599,780    45,188,011    45,582,668    45,105,013
      Diluted          46,518,875    55,124,302    46,442,999    50,316,477
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    Balance, beginning
     of period            100,640        72,612       107,671        63,211
    Retroactive
     adjustment for
     stock-based
     compensation (Note 2)      -             -       (12,353)            -
    Net earnings            3,297        11,390         8,619        20,791
    -------------------------------------------------------------------------
    Balance, end of
     period               103,937        84,002       103,937        84,002
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Balance, beginning
     of period             10,533             -             -             -
    Retroactive
     adjustment for
     stock-based
     compensation (Note 2)      -             -         8,723             -
    Tax benefit from
     exercise of stock
     options                    -             -           510             -
    Stock-based
     compensation expense   1,131             -         2,431             -
    -------------------------------------------------------------------------
    Balance, end of
     period                11,664             -        11,664             -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    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
six-month period ended March 31, 2005 was $2,431,258.
    
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 March 31, 2004 would have been
reduced on a pro-forma basis as follows:

                      For the three-month period    For the six-month period
                         ended March 31, 2004         ended March 31, 2004
                      --------------------------- ---------------------------
                       As reported    Pro-forma    As reported    Pro-forma
                      ------------- ------------- ------------- -------------
                                $             $             $             $
    Net earnings           11,390        10,251        20,791        18,682
    Basic earnings
     per share               0.25          0.23          0.46          0.41
    Diluted earnings
     per share               0.24          0.22          0.45          0.41

The estimated fair value of granted stock options for the periods ended
March 31, 2005 and 2004 using the Black-Scholes model was as follows:

                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------

    Fair value per
     option                 $7.45         $8.71         $7.09         $6.34
    Assumptions used
      Expected volatility      43%           44%           43%           44%
      Risk-free interest
       rate                  3.76%         3.67%         4.08%         4.28%
      Expected options
       life (years)             6             6             6             6
      Expected dividend         -             -             -             -

3. Product Acquisition

On November 18, 2003, the Company acquired the rights to a group of
products from Aventis Pharma S.A. for a cash purchase price of $145,000,000.
The acquired products are CARAFATE and BENTYL for the U.S. market and
SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market. On December 3,
2002, the Company acquired the worldwide rights to PANZYTRAT enzyme product
line from Abbott Laboratories.
    
During a transition period, the sellers may act as agents for the
management of the products sales. For the six-month period ended March 31,
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 three-month period
ended March 31, 2005 were $1,194,522 ($5,315,913 in 2004), the Company only
included in its revenue an amount of $467,078 ($3,440,421 in 2004)
representing the net sales less cost of goods sold and other seller related
expenses.

4. Inventories

                                                     March 31, September 30,
                                                         2005          2004
                                                 ------------- --------------
                                                            $             $

    Raw materials and packaging material               11,176        10,311
    Work in progress                                    1,890         1,781
    Finished goods                                     22,604        25,178
    -------------------------------------------------------------------------
                                                       35,670        37,270
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5. Intangible Assets

    -------------------------------------------------------------------------
                                                  March 31, 2005
    -------------------------------------------------------------------------
                                                  Accumulated
                                           Cost  amortization           Net
    -------------------------------------------------------------------------
                                              $             $             $
    Trademarks, trademark licenses
     and manufacturing rights with a:
      Finite life                       352,919        38,502       314,417
      Indefinite life                   114,686        12,417       102,269
    -------------------------------------------------------------------------
                                        467,605        50,919       416,686
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                               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 six-month period ended March 31, 2005, implicit interest in
the amount of $2,242,724 ($2,049,057 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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    Revenue
      Canada
        Domestic sales      7,710         6,865        16,900        13,417
        Foreign sales           -             -             -             -
      United States
        Domestic sales     39,100        41,958        76,128        79,769
        Foreign sales       1,182         1,363         2,339         1,363
      Europe
        Domestic sales     12,525        11,898        24,268        24,693
        Foreign sales       2,769         1,060         5,192         1,589
      Other                    78            69           120            97
    -------------------------------------------------------------------------
                           63,364        63,213       124,947       120,928
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                     March 31, September 30,
                                                         2005          2004
                                                 ------------- --------------
                                                            $             $
    Property, plant, equipment, intangible
     assets and goodwill
      Canada                                           44,384        44,676
      United States                                   129,890       131,602
      Europe                                          265,803       265,431
      Other                                            37,953        38,653
    -------------------------------------------------------------------------
                                                      478,030       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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Interest on
     long-term debt         2,568         2,370         5,125         4,778
    Bank charges               41            61            48            85
    Financing fees            105            47           176            64
    Amortization of
     deferred debt
     issue expenses           275           258           550           516
    -------------------------------------------------------------------------
                            2,989         2,736         5,899         5,443
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b) Selling and administrative expenses

    Selling and administrative expenses include the followings:

                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Shipping and
     handling expenses      1,271         1,245         2,275         2,225
    Advertising expenses    4,104         3,377         8,729         6,220

    c) Other information

                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $

    Rental expenses           287           274           574           548
    Depreciation of
     property, plant
     and equipment          1,298           793         2,599         2,043
    Amortization of
     intangible assets      4,044         3,420         8,121         5,906
    Investments tax
     credits applied
     against research
     and development
     expenses                 546           104         1,081           322

    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     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------
                                $             $             $             $
    Net income available
     to common
     shareholders
      Basic                 3,297        11,390         8,619        20,791
      Financial expenses
       relating to the
       convertible
       subordinated notes       -         2,024             -         2,024
    -------------------------------------------------------------------------
    Net income available
     to common
     shareholders
     on a diluted basis     3,297        13,414         8,619        22,815
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                          For the       For the       For the       For the
                      three-month   three-month     six-month     six-month
                     period ended  period ended  period ended  period ended
                         March 31,     March 31,     March 31,     March 31,
                             2005          2004          2005          2004
                     ------------- ------------- ------------- --------------

    Weighted average
     number of common
     shares
      Weighted average
       number of
       common shares
       outstanding     45,599,780    45,188,011    45,582,668    45,105,013
      Effect of
       dilutive stock
       options            919,095     1,012,178       860,331       773,790
      Effect of
       dilutive
       convertible
       subordinated
       notes                    -     8,924,113             -     4,437,674
    -------------------------------------------------------------------------
    Adjusted weighted
     average number
     of common
     shares
     outstanding       46,518,875    55,124,302    46,442,999    50,316,477
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Number of common
     shares outstanding
     at the end of the
     period                                        45,618,251    45,328,102
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Number of common shares outstanding as at April 30, 2005     45,620,283
    -------------------------------------------------------------------------

/T/

Options to purchase 271,200 and 404,950 common shares were outstanding as
at March 31, 2005 and 2004 respectively but were not included in the
computation of diluted earnings per share for the six-month periods ended
March 31, 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 six-month period
ended March 31, 2005, the Company made matching contributions to the Plan
totalling $272,185 ($151,943 in 2004).


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