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Axcan announces record revenue of $72.8 million for the second quarter of fiscal 2006


May 04, 2006 - 11:59 ET

Attention Business/Financial Editors:



Axcan announces record revenue of $72.8 million for the second quarter of fiscal 2006
TSX SYMBOL (Toronto Stock Exchange): AXP
NASDAQ SYMBOL (NASDAQ National Market): AXCA

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- RECORD REVENUE OF $72.8 MILLION

- DILUTED INCOME PER SHARE INCREASES TO $0.17 VERSUS $0.12
A YEAR EARLIER

- SOLID BASE BUSINESS: REVENUE GROWTH OF 15%
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MONT-SAINT-HILAIRE, QC, May 4 - Axcan Pharma Inc. (NASDAQ:
AXCA - TSX: AXP) today announced financial results for the second quarter of
fiscal 2006, ended March 31, 2006 (all amounts are stated in U.S. dollars).
Highlights for the second quarter are:

- Record revenue of $72.8 million
- Fully diluted income per share increased 42%, compared to the same
period a year earlier
- Revenue growth of 15% illustrates strength of base business

 


"We are delighted to report another strong quarter that once again
highlights the financial and operational strength of the Company," stated
Frank Verwiel, M.D., President and Chief Executive Officer of Axcan. "Axcan's
second quarter results continue to demonstrate the solidity of our base
business, which we believe will in turn allow us to accelerate future growth,"
he concluded.
Total revenue for the three months ended March 31, 2006, was
$72.8 million, compared with $63.4 million for the second quarter of fiscal
2005, an increase of 15%.
Net income for the second quarter of 2006 was $8.3 million or $0.17 per
share in spite of the $3.8 million or $0.07 per share write-down mentioned
below, compared with net income of $5.4 million or $0.12 per share for the
corresponding 2005 period. Following changes in the French pharmaceutical
environment, which led to the re-pricing of certain of the Company's products
in France, as well as to certain other of the Company's products in France to
no longer be reimbursed, the Company decided to write-down a portion of the
carrying value of intangible assets with a finite life associated with these
products, which negatively affected net income by $3.8 million or $0.07 per
share.

PRODUCT DEVELOPMENT PIPELINE UPDATE

An update on Axcan's major projects follows:

ITAX

Results of the International Phase III trial assessing the efficacy of
ITAX (itopride) in the treatment of Functional Dyspepsia did not confirm the
efficacy observed in other studies, including the Phase II clinical trial. The
Company is currently analyzing results of this study and conducting subgroup
analyses in order to better understand the results. The top line results of
the North American Phase III study are expected to be disclosed by the end of
the first half of calendar 2006. In parallel to these studies, the Company is
also conducting Phase I and IIa studies assessing the impact of Itopride on
mechanistic functions in healthy volunteers and diabetic patients. The results
of these studies should be available later in fiscal 2006. Results of the
Functional Dyspepsia study and of the mechanistic study will allow the Company
to decide the direction of the development program for Itopride.

HELIZIDE

Axcan recently filed an amendment to its New Drug Application for
HELIZIDE, its patented capsule therapy for the eradication of Helicobacter
pylori. Depending on the response of the Food and Drug administration ("FDA"),
the Company could launch this product as early as the first half of calendar
2007.

CANASA / SALOFALK RECTAL GEL

Axcan recently completed Phase III studies to confirm the efficacy and
safety of a new mesalamine rectal gel in the treatment of distal ulcerative
colitis. The Company plans to submit regulatory filings for approval in the
United States and Canada in the second half of calendar 2006.

NCX-1000

Axcan and its partner, NicOx S.A., are developing NCX-1000, a patented,
nitric oxide donating derivative of ursodiol, for the treatment of portal
hypertension, a late-stage complication of chronic, advanced liver disease.
The Phase I clinical development program demonstrated the tolerability and
safety of NCX-1000. A therapeutic proof-of-concept Phase IIa study is
currently underway.

URSODIOL DISULFATE

Axcan completed a proof-of-concept study in rats to evaluate the effect
of ursodiol disulfate on the development of colonic tumors. Acute and
subchronic toxicity studies confirmed that the compound is safe and has no
toxicity effect. A clinical, single ascending dose Phase I study evaluating
the safety, tolerability and preliminary pharmacokinetics of this new molecule
has recently been completed ahead of the earlier indicated timeline. Results
are currently being analyzed. Assuming positive results, the Company plans to
initiate a Phase IIa multiple ascending dose study in the second half of
calendar 2006.

ULTRASE-VIOKASE

In April 2004, the FDA formally notified manufacturers of pancreatic
insufficiency products that these drugs must receive approval before April
2008 in order to remain on the market. The FDA decided to require New Drug
Applications for all pancreatic extract drug products after reviewing data
that showed substantial variation among currently marketed products. Axcan has
completed a Phase III study of VIOKASE that will serve as the basis of the New
Drug Application. Additional studies on ULTRASE are currently carried on and
anticipated to be completed and results submitted along with other clinical
and Chemistry, Manufacturing and Control ("CMC") data in the form of a New
Drug Application. The FDA recently published the final guidelines aimed at
assisting manufacturers of exocrine pancreatic insufficiency drug products in
preparing and submitting New Drug Applications. Based on these final
guidelines, the Company is confident it should be able to submit New Drug
Applications for both VIOKASE and ULTRASE by spring 2007.

NMK 150

Axcan and Nordmark GmbH, a German pharmaceutical firm, are collaborating
in the development of NMK 150, a new high protease pancrelipase preparation
developed for the relief of pain in small duct chronic pancreatitis. Dose-
ranging preclinical studies to assess the toxicity of NMK 150, paying special
attention to duodenal irritation, were recently completed, and the results are
being analyzed. NMK 150 was administered daily by oral capsules in these
studies. A Phase I clinical trial was initiated as planned in the second
quarter of fiscal 2006 and should be completed in the second half of calendar
2006.

OUTLOOK

Based on available information, the Company estimates that reductions in
wholesaler inventory levels negatively impacted revenue by approximately
$5 million for the second quarter of fiscal 2006. Although this amount seems
unusually high, based on models and market data, the Company believes this
decline results from a temporary lowering of inventory purchase for one
specific product, by one of its wholesalers. The Company believes this to be
an event that is outside of regular buying patterns and that, for other
products in its portfolio, wholesaler inventory levels remain in the targeted
range of eight to twelve weeks.
As further explained in the Management Discussion & Analysis ("MD&A")
filed with this press release, in connection with a reorganization of its
international operations due to changes in the French pharmaceutical
environment and budgetary initiatives implemented by the French Government,
the Company has undertaken steps to reduce its current workforce in Europe. To
this end, Axcan's French subsidiary recently communicated a reorganization
plan to the employee representatives in France. If this plan is implemented,
it should allow Axcan's European infrastructure to focus its activities on
sales and marketing of its products to gastroenterologists. Although income
was not affected in this quarter, it is expected that income will be affected
in the next quarter as the Company expects to record a one-time charge
currently estimated to be $1.5 million for reorganization related costs.

REVENUE GUIDANCE FOR 2006

Axcan expects its revenue for the fiscal year ending September 30, 2006,
to be in the range of $270 to $280 million, higher than its previously
announced guidance of $260 million to $270 million.
During the second quarter, the Company realized stronger than expected
revenue as some of its products in North America generated higher sales than
initially budgeted. The Company also anticipates that revenue will be
positively impacted in the second half of fiscal 2006, as the launch of a
generic version of ursodiol in Canada, although still anticipated in the third
quarter of Axcan's fiscal year, will occur later than initially expected.
Finally, since the beginning of fiscal 2006, the Company products for which
prescription data is available showed more positive overall prescription
trends than anticipated, which should result in higher sales than initially
budgeted.
Axcan's fiscal 2006 revenue guidance does not include any potential new
product launches, licensing or acquisitions. The revenue guidance consists of
projections, based upon various assumptions, all of which are subject to
uncertainties and risks. Our assumptions include, but are not limited to:
wholesaler inventory levels in fiscal 2006 remaining in the range of eight to
twelve weeks; the absence of any changes to GAAP applicable to revenue
recognition; foreign currency rates remaining stable throughout the year;
reimbursement amounts and policies, related to our products in all markets,
not changing materially during the year; the absence of any material change in
the regulatory status of the Company's current products and the absence of new
competitive products and generic entries. Additional information on
assumptions and risk factors that could cause actual results to differ can be
found in the MD&A accompanying this press release as well as in the Company's
filings with the Securities and Exchange Commission and the Canadian
Securities Regulators.

INTERIM FINANCIAL REPORT

This release includes, by reference, the second quarter interim financial
report incorporating the financial statements in accordance with U.S. GAAP, as
well as the MD&A. The interim report, including the MD&A and financial
statements, is filed with applicable U.S. and Canadian Securities Regulators.

CONFERENCE CALL

Axcan will host a conference call at 8:30 A.M. EST, on May 5, 2006.
Interested parties may also access the conference call by way of a webcast at
www.axcan.com. The webcast will be archived for 90 days. The telephone numbers
to access the conference call are (866) 250-4910 (Canada and United States) or
(416) 644-3425 (international). A replay of the call will be available until
May 12, 2006. The telephone number to access the replay of the call is
(416) 640-1917 code 21186200(pound key).

ABOUT AXCAN PHARMA

Axcan is a leading specialty pharmaceutical company specialized in the
field of gastroenterology. Axcan markets a broad line of prescription products
sold for the treatment of symptoms in a number of gastrointestinal diseases
and disorders such as inflammatory bowel disease, irritable bowel syndrome,
cholestatic liver diseases and complications related to cystic fibrosis.
Axcan's products are marketed by its own sales force in North America and
Europe. Its common shares are listed on the Toronto Stock Exchange under the
symbol "AXP" and on the NASDAQ National Market under the symbol "AXCA".

"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995.

This release contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent any
statements made in this release contain information that is not historical,
these statements are essentially forward-looking and are often identified by
words such as "anticipate," "expect," "estimate," "intend," "project," "plan"
and "believe." Forward-looking statements are subject to risks and
uncertainties, including the difficulty of predicting FDA and other regulatory
approvals, acceptance and demand for new pharmaceutical products, the impact
of competitive products and pricing, new product development and launch,
reliance on key strategic alliances, availability of raw materials, the
regulatory environment, fluctuations in operating results, the protection of
our intellectual property and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission and the Canadian
Securities Regulators.

The names CANASA, CARAFATE, DELURSAN, HELIZIDE, ITAX, LACTEOL, PANZYTRAT,
SALOFALK, TAGAMET, TRANSULOSE, ULTRASE, URSO and VIOKASE appearing in this
press release are trademarks of Axcan Pharma Inc. and its subsidiaries. The
name ADEKs is a registered trademark of Carlsson-Rensselaer Corporation.


KEY PRODUCT INFORMATION
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Sales ($US M) Prescriptions Increase(1)(%)
in the United States only
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Year to 12 months Q2 Year to 12 months
date ended date ended
through March 31, through March 31,
Q2 Q2 2006 Q2 2006
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NORTH AMERICA
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CANASA 9.9 22.0 36.9 10.0 10.0 11.0
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SALOFALK 4.0 8.2 15.8 n/a n/a n/a
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ULTRASE 13.4 21.4 41.8 1.0 2.0 3.0
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URSO 250/FORTE/
DS 13.2 29.5 56.5 13.0(2) 15.0(2) 17.0(2)
-------------------------------------------------------------------------
CARAFATE 11.4 19.9 33.7 6.0 5.0 4.0
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-------------------------------------------------------------------------
EUROPE
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LACTEOL 5.7 10.8 19.5 n/a n/a n/a
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PANZYTRAT 2.7 6.3 14.5 n/a n/a n/a
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DELURSAN 3.3 6.7 13.2 n/a n/a n/a
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(1) Based on IMS Prescription data for products sold in the United
States, as compared to the same period a year earlier
(2) For sales of URSO 250 and URSO Forte, in the United States only


PRODUCTS IN NORTH AMERICA
-------------------------

CANASA

U.S. prescriptions for the first six months of fiscal 2006 were up 10%,
compared to the same period in fiscal 2005.
U.S. sales for the first six months of fiscal 2006 increased 63.0%,
compared to the same period in fiscal 2005, mainly due to the stabilization of
the impact of wholesaler reductions in inventory levels that occurred in
fiscal 2005.

ULTRASE

U.S. prescriptions for the first six months of fiscal 2006 increased
2.0%, compared to the same period in fiscal 2005. The Company expects
prescriptions to continue to increase, as ULTRASE was listed as a single
source product in June 2005, which makes it less likely to be substituted by
generics.
U.S. sales for the first six months of fiscal 2006 increased 28.1%,
compared to the same period in 2005, mainly due to the stabilization of the
impact of wholesaler reductions in inventory levels that occurred in fiscal
2005, as well as price increases that occurred in fiscal 2005.

URSO 250/URSO FORTE

U.S. prescriptions for the first six months of fiscal 2006 were up 15.0%,
compared with the same period a year earlier. During fiscal 2005, Axcan
launched URSO Forte, a 500-mg dosage form of ursodiol, which contributed to
overall prescription growth.
For the first six months of fiscal 2006, total sales in North America
were up 46.7%, compared to the same period in fiscal 2005.

CARAFATE

U.S. prescriptions for the first six months of fiscal 2006 increased
5.0%, compared to the same period in fiscal 2005, following the new marketing
campaign launched at the beginning of fiscal 2006.
For the first six months of fiscal 2006, U.S. sales decreased 14.1%,
compared to the same period in fiscal 2005. However, sales increased 4.8%
during the second quarter of fiscal 2006, compared to the same period in
fiscal 2005.

PRODUCTS IN EUROPE
------------------

LACTEOL

For the first six months of fiscal 2006, sales of LACTEOL decreased 8.5%,
compared to the same period in fiscal 2005. The apparent decrease is due to
the currency exchange rate. In local currency, sales of LACTEOL have remained
stable.

PANZYTRAT

For the first six months of fiscal 2006, sales of PANZYTRAT decreased
5.4%, compared to the same period in 2005. The apparent decrease is due to the
currency exchange rate. In local currency, PANZYTRAT sales increased 3.8%,
compared to the same period in fiscal 2005.

DELURSAN

For the first six months of fiscal 2006, sales of DELURSAN increased
1.7%, compared to the same period in 2005. In local currency, DELURSAN sales
increased 10.8%, compared to the same period in fiscal 2005.



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/URSO 250, URSO
FORTE/URSO DS and DELURSAN for the treatment of certain cholestatic liver
diseases; SALOFALK and CANASA for the treatment of certain inflammatory bowel
diseases; and CARAFATE/SULCRATE for the treatment of gastric duodenal ulcers.
Axcan has a number of pharmaceutical projects in all phases of development,
including ITAX for the treatment of functional dyspepsia.

Further to budgetary initiatives implemented by the French government,
which resulted in the delisting of a number of pharmaceutical products from
government formularies, including LACTEOL, and re-pricing of other
pharmaceuticals, including TAGAMET and TRANSULOSE, according to the reference
pricing guidelines set forth in the TFR ("Tarif Forfaitaire de
Responsabilité"), management has taken these factors into consideration when
reviewing the appropriate carrying value of its French subsidiary's intangible
assets with a finite life associated mainly with TAGAMET and TRANSULOSE. As
such, the Company's earnings for the quarter include a one time charge in the
amount of $5.8 million for the write-down due to the partial impairment of the
carrying value of these assets. The charge is equal to the excess of the
carrying value of intangible assets, including items such as trademarks and
other capitalized costs associated with these products over the estimated
value of cash generated by the same products once adjusted for the effects of
these legislative changes.

In connection with a reorganization of its international operations due
to these budgetary initiatives implemented by the French government, the
Company also has undertaken steps which seek a reduction of its current
workforce in Europe. To this end, on May 2, 2006, the Company's French
subsidiary communicated a reorganization plan to the employee-representatives
in France aimed at reducing its workforce. If this plan is implemented, it
should allow our European infrastructure to focus its activities on the sales
and marketing of its products to gastroenterologists. We also anticipate
recording one time restructuring charges of approximately $1.5 million in the
third quarter of fiscal 2006. This has been disclosed as a subsequent event
note in the Company's quarterly financial statements. In order to adopt and
implement the restructuring plan, the management of the Company's French
subsidiary will comply with local legislation, which includes a consultative
process of the employee-representatives. The charge to earnings for the cost
of the plan includes such items as transition assistance, legal, cash
severance costs to its affected employees as well as other administrative
charges.

Axcan reported revenue of $72.8 million, operating income of
$12.7 million and net income of $8.3 million for the three-month period ended
March 31, 2006. For the six-month period ended March 31, 2006, revenue was
$143.4 million, operating income was $26.9 million and net income was
$17.6 million. Revenue from sales of Axcan's products in the United States was
$96.2 million (67.1% of total revenue) for the six-month period ended
March 31, 2006, compared to $78.5 million (62.8% of total revenue) for the
corresponding period of fiscal 2005. In Canada, revenue was $19.3 million
(13.5% of total revenue) for the six-month period ended March 31, 2006,
compared to $16.9 million (13.5% of total revenue) for the corresponding
period of fiscal 2005. In Europe, revenue was $27.8 million (19.4% of total
revenue) for the six-month period ended March 31, 2006, compared to
$29.5 million (23.6% of total revenue) for the corresponding period of fiscal
2005.

Axcan's revenue historically has been and continues to be principally
derived from sales of pharmaceutical products to large pharmaceutical
wholesalers and large chain pharmacies. Axcan utilizes a "pull-through"
marketing approach that is typical of pharmaceutical companies. Under this
approach, Axcan's sales representatives demonstrate the features and benefits
of its products to gastroenterologists who may write their patients
prescriptions for Axcan's products. The patients, in turn, take the
prescriptions to pharmacies to be filled. The pharmacies then place orders
with the wholesalers or, in the case of large chain pharmacies, their
distribution centers, to whom Axcan sells its products.

Axcan's expenses are comprised primarily of selling and administrative
expenses (including marketing expenses), cost of goods sold (including royalty
payments to those companies from whom Axcan licenses some of its products),
research and development expenses as well as depreciation and amortization.

Axcan's annual and quarterly operating revenues are primarily affected by
three factors: the level of acceptance of Axcan's products by
gastroenterologists and their patients; the ability of Axcan to convince
practitioners to use Axcan products for approved indications; and wholesaler
buying patterns.

Historically, wholesalers' business models in the U.S. were dependent on
drug price inflation. Their profitability and gross margins were directly tied
to speculative purchasing of pharmaceutical products at pre-price increase
prices and selling their product inventory to the trade at the new higher
price. This inventory price arbitrage was predominantly how wholesalers were
compensated for the distribution services they provided and had a dramatic
effect on wholesaler buying patterns as they invested in inventories in
anticipation of generating higher gross margins from price increases from
manufacturers. More recently, for a number of reasons, pharmaceutical
manufacturers have not been increasing drug prices as frequently and the
increases as a percentage have been lower. For these and other reasons, some
wholesalers moved to a fee-for-service type arrangement where fees are now
typically expressed as a percentage of the wholesaler's purchases from the
manufacturer or as an amount per piece or per unit. For wholesalers, fee-for-
service means their compensation will be periodic and volume activity based as
opposed to price increase based.

As a result of the move to a fee-for-service business model, many
wholesalers are no longer investing in inventory ahead of anticipated price
increases and are reducing their carrying levels of inventory from their
historical norms. Under the new model, manufacturers will now realize the
benefit of price increases more rapidly and pay wholesalers for the services
they provide on a fee-for-service basis. This change in wholesaler's business
model has affected Axcan's revenue since fiscal 2005.

Most importantly, the level of patient and physician acceptance of
Axcan's products, as well as the availability of similar therapies, which may
be less effective but also less expensive than some of Axcan's products,
impact Axcan's revenues by driving the level and timing of prescriptions for
its products.

Critical Accounting Policies

Axcan's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
("U.S. GAAP"), applied on a consistent basis. Axcan's critical accounting
policies include the use of estimates, revenue recognition, the recording of
research and development expenses and the determination of the useful lives or
fair value of goodwill and intangible assets. Some of our critical accounting
policies require the use of judgment in their application or require estimates
of inherently uncertain matters. Although our accounting policies are in
compliance with U.S. GAAP, a change in the facts and circumstances of an
underlying transaction could significantly change the application of our
accounting policies to that transaction, which could have an effect on our
financial statements. Discussed below are those policies that we believe are
critical and require the use of complex judgment in their application.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of financial statements and the disclosure of
recognized amounts of revenues and expenses during the year. Significant
estimates and assumptions made by management include the allowance for
accounts receivable and inventories, reserves for product returns, rebates and
chargebacks, the classification of intangible assets between finite and
indefinite life, useful lives of long-lived assets, the expected cash flows
used in evaluating long-lived assets, goodwill and investments for impairment,
contingency provisions and other accrued charges. These estimates were made
using the historical information and various other factors related to each
circumstance available to management. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any adjustments when necessary. Actual results could differ from
those estimates based upon future events, which could include, among other
risks, changes in regulations governing the manner in which we sell our
products, changes in health care environment and managed care consumption
patterns.

Revenue Recognition

Revenue is recognized when the product is shipped to the Company's
customer, provided the Company has not retained any significant risks of
ownership or future obligations with respect to the product shipped.
Provisions for sales discounts and estimates for chargebacks, managed care and
Medicaid rebates and product returns are established as a reduction of product
sales revenues at the time such revenues are recognized. These revenue
reductions are established by us as our best estimate at the time of sale
based on historical experience adjusted to reflect known changes in the
factors that impact such reserves. These revenue reductions are generally
reflected as an addition to accrued expenses.
We do not provide any forms of price protection to our wholesale
customers and permit product returns only if the product is returned within
12 months of expiration. Credit for returns is issued to the original
purchaser at current net pricing less 10%. Accrued liabilities include
reserves of $6.2 million and $7.5 million as of March 31, 2006, and
September 30, 2005, respectively for estimated product returns.
In the United States, we establish and maintain reserves for amounts
payable by us to managed care organizations and state Medicaid programs for
the reimbursement of portions of the retail price of prescriptions filled that
are covered by the respective programs. We also establish and maintain
reserves for amounts payable by us to wholesale distributors for the
difference between their regular sale price and the contract price for the
products sold to our contract customers. The amounts estimated to be paid
relating to products sold are recognized as revenue reductions and as
additions to accrued expenses at the time of sale based on our best estimate
of the product's utilization by these managed care and state Medicaid patients
and sales to our contract customers, using historical experience adjusted to
reflect known changes in the factors that impact such reserves. Accrued
liabilities include reserves of $10.4 million and $4.8 million as of March 31,
2006, and September 30, 2005, respectively, for estimated rebates and
chargebacks.
During the quarter, the reserve for product returns was decreased by
$1.6 million and the reserves for chargebacks and contract rebates were
increased by a total of $4.4 million as a result of a refinement in the method
used in the calculation for such reserves. The refinement was implemented
based on best industry practices as well as additional information available
to the Company compared to prior periods.
If the levels of chargebacks, managed care and Medicaid rebates, product
returns and discounts fluctuate significantly and/or if our estimates do not
adequately reserve for these reductions of net product revenues, our reported
revenue could be negatively affected.

Goodwill and Intangible Assets

We have in the past acquired products and businesses that include
goodwill, trademarks, license agreements and other identifiable intangible
assets. Axcan's goodwill and intangible assets are stated at cost, less
accumulated amortization. Since October 1, 2001, the Company does not amortize
goodwill and intangible assets with an indefinite life. However, management
assesses the impairment of goodwill and intangible assets at least annually
and whenever events or changes in circumstances indicate that the carrying
amounts of these assets may not be recoverable, by comparing the carrying
value of the unamortized portion of goodwill and intangible assets to the
future benefits of the Company's activities or expected sales of
pharmaceutical products. Should there be a permanent impairment in value or if
the unamortized balance exceeds recoverable amounts, a write-down will be
recognized for the current year. To date, Axcan has not recognized any
significant impairment in value on goodwill and intangible assets with an
indefinite life.
Intangible assets with finite life are amortized over their estimated
useful lives according to the straight-line method at annual rates varying
from 4% to 15%. The straight-line method of amortization is used because it
reflects, in the opinion of management, the pattern in which the intangible
assets with finite life are used. In determining the useful life of intangible
assets, the Company considers many factors including the intention of
management to support the asset on a long-term basis by maintaining the level
of expenditure necessary, the use of the asset, the existence and expiration
date of a patent, the existence of a generic or competitor and any legal or
regulatory provisions that could limit the use of the asset. Axcan had not
recognized any significant impairment in value of intangible assets with a
finite life prior to the three-month period ended March 31, 2006 during which
Axcan recognized a write-down of $5.8 million on a French product line
including TAGAMET and TRANSULOSE.

As a result of acquisitions, we included $27.5 million of goodwill on our
consolidated balance sheets as of March 31, 2006, and September 30, 2005.
Also as a result of acquisitions of product rights and other identifiable
intangible assets, we included $375.3 million and $388.9 million as net
intangible assets on our consolidated balance sheets as of March 31, 2006, and
September 30, 2005, respectively. Estimated annual amortization expense for
intangible assets with a finite life, which have a weighted-average remaining
amortization period of approximately 17 years, for the next five fiscal years,
is approximately $15.4 million.

Research and Development Expenses

Research and development expenses are charged to operations in the year
they are incurred. Acquired in-process research and development having no
alternative future use is written off at the time of acquisition. The cost of
intangibles that are acquired from others for a particular research and
development project, with no alternative use, is written off at the time of
acquisition.

Results of Operations

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

For the For the
three-month six-month
periods periods
ended March 31 ended March 31
-------------------- --------------------
2006 2005 2006 2005
-------- --------- --------- --------
% % % %
Revenue 100.0 100.0 100.0 100.0
-------------------------------------------------------------------------

Cost of goods sold 25.4 32.3 25.6 29.8
Selling and administrative
expenses 31.4 33.1 32.4 33.5
Research and development
expenses 10.0 13.1 11.3 11.8
Depreciation and
amortization 7.8 8.4 7.9 8.6
Partial write-down of
intangible assets 8.0 - 4.0 -
-------------------------------------------------------------------------
82.6 86.9 81.2 83.7
-------------------------------------------------------------------------

Operating income 17.4 13.1 18.8 16.3
-------------------------------------------------------------------------

Financial expenses 2.4 3.0 2.4 2.9
Interest income (1.3) (0.5) (1.2) (0.3)
Gain on foreign exchange (0.5) (0.3) (0.4) (0.4)
-------------------------------------------------------------------------
0.6 2.2 0.8 2.2
-------------------------------------------------------------------------

Income before income taxes 16.8 10.9 18.0 14.1
Income taxes 5.4 2.3 5.7 3.5
-------------------------------------------------------------------------
Net income 11.4 8.6 12.3 10.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Periods ended March 31, 2006 compared to periods ended March 31, 2005

Revenue

For the three-month period ended March 31, 2006, revenue was
$72.8 million compared to $63.4 million for the corresponding period of the
preceding fiscal year, an increase of 14.8%. For the six-month period ended
March 31, 2006, revenue was $143.4 million compared to $124.9 million for the
corresponding period of the preceding fiscal year, an increase of 14.8%. These
increases in revenue primarily resulted from higher sales in the United
States. The end-customer prescription demand resulted in positive growth for
most of our products sold in the United States, which was reflected in sales
to our major wholesalers as they work towards reaching their targeted
inventory levels. Major wholesalers in the United States reduced their
inventory levels in fiscal 2005 and fiscal 2006.

Revenue is stated net of deductions for product returns, chargebacks,
contract rebates, discounts and other allowances of $17.0 million (18.9% of
gross revenue) for the three-month period ended March 31, 2006, and
$9.8 million (13.4% of gross revenue) for the three-month period ended
March 31, 2005. Deductions for product returns, chargebacks, contract rebates,
discounts and other allowances were $28.6 million (16.6% of gross revenue) for
the six-month period ended March 31, 2006, and $18.0 million (12.6% of gross
revenue) for the six-month period ended March 31, 2005. These increases of
total deductions as a percentage of gross revenue are primarily due to an
increase in chargebacks and contract rebates reserves. During the quarter the
reserve for product returns, chargebacks, contract rebates, discounts and
other allowances was increased by $2.8 million as a result of a refinement in
the method used in the calculation for such reserves. The refinement was
implemented based on best industry practices as well as additional information
available to the Company compared to prior periods.

Cost of goods sold

Cost of goods sold consists principally of cost of raw materials,
royalties and manufacturing costs. Axcan outsources most of its manufacturing
requirements. For the three-month period ended March 31, 2006, cost of goods
sold decreased $2.0 million (9.8%) to $18.5 million from $20.5 million for the
corresponding period of the preceding fiscal year. As a percentage of revenue,
cost of goods sold for the three-month period ended March 31, 2006 decreased
as compared to the corresponding period of the preceding fiscal year from
32.3% to 25.4%. For the six-month period ended March 31, 2006, cost of goods
sold decreased $0.5 million (1.3%) to $36.7 million from $37.2 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, 2006 decreased as
compared to the corresponding period of the preceding fiscal year from 29.8%
to 25.6%. These decreases in the cost of goods sold as a percentage of revenue
were due mainly to the increases in sales of products with a higher margin and
the fact that cost of goods sold for the six-month period ended March 31, 2005
included $4.7 million 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 $2.0 million (9.6%) to
$22.9 million for the three-month period ended March 31, 2006, from
$20.9 million for the corresponding period of the preceding fiscal year. For
the six-month period ended March 31, 2006, selling and administrative expenses
increased $4.6 million (11.0%) to $46.5 million from $41.9 million for the
corresponding period of the preceding fiscal year. The adoption of the new
accounting rule concerning the compensation cost for share based awards
resulted in an increase in selling and administrative expenses of $0.8 million
(3.8%) for the three-month period ended March 31, 2006 and $1.7 million (4.1%)
for the six-month period ended March 31, 2006. These increases are net of a
reduction in expenses of $2.9 million following the reversal of the pending
legal settlements accrual during the quarter. These increases are also due to
preparation for additional products to be marketed, additional marketing
efforts on our current products, increased distribution cost following the
signing of a new agreement with a major wholesaler and consulting fees for
information technology implementation and regulatory compliance.

Research and development expenses

Research and development expenses consist principally of fees paid to
outside parties that Axcan uses to conduct clinical studies and to submit
governmental approval applications on its behalf as well as the salaries and
benefits paid to its personnel involved in research and development projects.
Research and development expenses decreased $1.0 million (12.0%) to
$7.3 million for the three-month period ended March 31, 2006, from
$8.3 million for the corresponding period of the preceding fiscal year. For
the six-month period ended March 31, 2006, research and development expenses
increased $1.5 million (10.2%) to $16.2 million from $14.7 million for the
corresponding period of the preceding fiscal year. This increase was mainly
due to the Phase III development of ITAX, acquired in August 2003, for the
treatment of functional dyspepsia. Phase III is the most expensive stage of
clinical development.

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 $0.3 million (5.7%) to $5.6 million for the three-month period ended
March 31, 2006, from $5.3 million for the corresponding period of the
preceding fiscal year. For the six-month period ended March 31, 2006,
depreciation and amortization increased $0.6 million (5.6%) to $11.3 million
from $10.7 million for the corresponding period of the preceding fiscal year.
These increases are mainly due to the amortization of LACTEOL and ADEKs which
were reclassified from intangible assets with an indefinite life to intangible
assets with a finite life on October 1, 2005.

Partial write-down of intangible assets

Further to budgetary initiatives implemented by the French government,
which resulted in the delisting of a number of pharmaceutical products from
government formularies and re-pricing of other pharmaceutical products, the
Company reviewed the appropriate carrying value and useful life of its French
subsidiary's intangible assets. Consequently, during the three-month period
ended March 31, 2006, a partial write-down of $5.8 million was recognized on a
French line of products including TAGAMET and TRANSULOSE as the carrying value
of the intangible assets associated with these products, totalling
$18.7 million prior to the write-down, exceeded the estimated value of cash
generated by these same products.

Financial expenses

Financial expenses consist principally of interest and fees paid in
connection with money borrowed for acquisitions. Financial expenses decreased
$0.2 million (10.5%) to $1.7 million from $1.9 million for the corresponding
period of the preceding fiscal year. For the six-month period ended March 31,
2006, financial expenses decreased $0.2 million (5.4%) to $3.5 million from
$3.7 million for the corresponding period of the preceding fiscal year.

Income Taxes

Income taxes amounted to $3.9 million for the three-month period ended
March 31, 2006, compared to $1.5 million for the corresponding period of the
preceding fiscal year. The effective tax rates were 32.1% for the three-month
period ended March 31, 2006 and 21.7% for the three-month period ended March
31, 2005. For the six-month period ended March 31, 2006, income taxes amounted
to $8.2 million compared to $4.4 million for the corresponding period of the
preceding fiscal year. The effective tax rates were 31.7% for the six-month
period ended March 31, 2006 and 25.0% for the six-month period ended March 31,
2005. These increases in effective tax rate are due in part to the research
and development tax credits, deducted from the income taxes expense, of
$0.5 million or 3.8% of reduction in effective tax rate for the three-month
period ended March 31, 2006 compared to $0.5 million or 7.9% of reduction in
effective tax rate for the corresponding period of the preceding fiscal year
and of $1.2 million or 4.6% of reduction in effective tax rate for the six-
month period ended March 31, 2006 compared to $1.1 million or 6.2% of
reduction in effective tax rate for the corresponding period of the preceding
fiscal year. These increases are also due to the fact that a greater part of
our taxable income came from the United States where the income tax rate is
higher. The Company is currently being audited by the Canadian Tax Authority,
mainly on transfer pricing issues, for fiscal year 2002 to fiscal year 2004.

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

Income tax expense For the three-month For the six-month
periods ended March 31 periods ended March 31
---------------------- ----------------------
2006 2005 2006 2005
----------- --------- ---------- ----------
$ $ $ $

Income tax 4,390 2,049 9,354 5,478
Research and development
tax credits (464) (546) (1,195) (1,081)
-------------------------------------------------------------------------
Income tax expense 3,926 1,503 8,159 4,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Income tax rate For the three-month For the six-month
periods ended March 31 periods ended March 31
---------------------- ----------------------
2006 2005 2006 2005
----------- --------- ---------- ----------
% % % %

Income tax 35.9 29.6 36.3 31.2
Research and development
tax credits (3.8) (7.9) (4.6) (6.2)

-------------------------------------------------------------------------
Effective tax rate 32.1 21.7 31.7 25.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income

Net income was $8.3 million or $0.18 of basic income per share and $0.17
of diluted income per share for the three-month period ended March 31, 2006,
compared to $5.4 million or $0.12 of basic and diluted income per share for
the corresponding period of the preceding year. Net income for the three-month
period ended March 31, 2006 takes into account the expensing of stock-based
compensation which amounted to $0.9 million after taxes. Had stock-based
compensation been recorded in the prior year, the impact to net income for the
three-month period ended March 31, 2005 would have been $0.8 million or $0.02
per share of basic and diluted income per share thus reducing net income to
$4.6 million or $0.10 of basic and diluted income per share. The change in net
income for the three-month period ended March 31, 2006 resulted mainly from an
increase in revenue of $9.4 million and an increase in interest income of
$0.7 million, which was offset partly by a $5.0 million increase in operating
expenses and an increase in income taxes of $2.4 million. The weighted average
number of common shares outstanding used to establish the basic per share
amounts increased from 45.6 million for the three-month period ended March 31,
2005 to 45.7 million for the three-month period ended March 31, 2006,
following the exercise of options previously granted pursuant to Axcan's stock
option plan. The weighted average number of common shares used to establish
the diluted per share amounts decreased from 55.4 million for the three-month
period ended March 31, 2005 to 55.2 million for the three-month period ended
March 31, 2006.
Net income was $17.6 million or $0.38 of basic income per share and $0.36
of diluted income per share, for the six-month period ended March 31, 2006,
compared to $13.2 million or $0.29 of basic income per share and $0.28 of
diluted income per share for the corresponding period of the preceding year.
Net income for the six-month period ended March 31, 2006 takes into account
the expensing of stock-based compensation which amounted to $1.8 million after
taxes. Had stock-based compensation been recorded in the prior year, the
impact to net income for the six-month period ended March 31, 2005 would have
been $1.9 million or $0.04 per share of basic income and diluted income per
share thus reducing net income to $11.2 million or $0.25 of basic income per
share and $0.24 of diluted income per share. The change in net income for the
six-month period ended March 31, 2006 resulted mainly from an increase in
revenue of $18.5 million and an increase in interest income of $1.4 million,
which was offset partly by a $12.0 million increase in operating expenses and
an increase in income taxes of $3.8 million.

Canadian GAAP

The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affect net income for the periods ended March 31, 2006 and 2005 are
summarized in the following table:


For the three-month For the six-month
period ended March 31 period ended March 31
---------------------- ----------------------
2006 2005 2006 2005
----------- --------- ---------- ----------
$ $ $ $

Net income in accordance
with U.S. GAAP 8,322 5,425 17,567 13,179

Implicit interest on
convertible debt (1,226) (1,120) (2,455) (2,243)
Stock-based compensation
expense - (1,131) - (2,431)
Amortization of new product
acquisition costs (12) (12) (26) (26)
Income tax impact of the
above adjustments (105) 135 (268) 140
-------------------------------------------------------------------------

Net earnings in accordance
with Canadian GAAP 6,979 3,297 14,818 8,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------


On March 5, 2003, the Company closed an offering of $125.0 million
aggregate principal amount of 4.25% convertible subordinated notes due
April 15, 2008. As a result of the terms of the notes, under Canadian GAAP, an
amount of $24.2 million was included in shareholders' equity as equity
component of the convertible debt and an amount of $100.8 million was included
in long-term debt, as the liability component of the convertible notes. For
the six-month period ended March 31, 2006, implicit interest in the amount of
$2.5 million ($2.2 million in 2005) was accounted for and added to the
liability component.

Since October 1, 2004, under Canadian GAAP, the effect of stock-based
compensation has to be accounted for using the fair value method. Under U.S.
GAAP, the effect of stock-based compensation has to be accounted for using the
fair value method since October 1, 2005.

Under Canadian GAAP, research and development expenses are stated net of
related tax credits which generally constitute between 5% and 10% of the
aggregate amount of such expenses. Under U.S. GAAP, these tax credits are
applied against income taxes.

Liquidity and capital resources

Axcan's cash, cash equivalents and short-term investments increased
$44.1 million (45.2%) to $141.7 million at March 31, 2006 from $97.6 million
at September 30, 2005. As of March 31, 2006, working capital was
$166.0 million, compared to $132.0 million at September 30, 2005, an increase
of $34.0 million (25.8%). These increases were mainly due to the cash flows
from operating activities of $45.3 million for the six-month period ended
March 31, 2006.

Total assets increased $28.7 million (4.5%) to $670.1 million as of
March 31, 2006 from $641.4 million as of September 30, 2005. Shareholders'
equity increased $21.1 million (5.1%) to $438.7 million as of March 31, 2006
from $417.6 million as of September 30, 2005.

Historically, Axcan has financed research and development, operations,
acquisitions, milestone payments and investments out of the proceeds of public
and private sales of its equity and convertible debt, cash flows from
operating activities, and loans from joint venture partners and financial
institutions. Since it went public in Canada in December 1995, Axcan has
raised approximately $243.0 million from sales of its equity and
$125.0 million from sales of convertible notes. Furthermore, Axcan has
borrowed and since repaid funds from financial institutions to finance the
acquisition of Axcan Scandipharm Inc. and from Schwarz Pharma Inc., a former
joint venture partner, to finance the acquisition of URSO.

Axcan's research and development expenses totalled $19.9 million for
fiscal 2004 and $31.9 million for fiscal 2005. Axcan believes that cash, cash
equivalents and short-term investments, together with funds provided by
operations, will be sufficient to meet its operating cash requirements,
including the development of products through research and development
activities, capital expenditures and repayment of its debt. Axcan believes
that regulatory approvals of future products and extension of product
indications, stemming from its research and development efforts, will
significantly contribute to an increase in funds provided by operations.
However, Axcan regularly reviews product and other acquisition opportunities
and may therefore require additional debt or equity financing. Axcan cannot be
certain that such additional financing, if required, will be available on
acceptable terms, or at all.

Line of credit

Effective September 22, 2004, the Company amended its existing credit
facility with a banking syndicate. The amended credit facility consists of a
$125.0 million 364-day extendible revolving facility with a two-year term-out
option maturing on September 21, 2008.
The credit facility is secured by a first priority security interest on
all present and future acquired assets of the Company and its material
subsidiaries, and provides for the maintenance of certain financial ratios.
Among the restrictions imposed by the credit facility is a covenant limiting
cash dividends, share repurchases (other than redeemable shares issued in
connection with a permitted acquisition) and similar distributions to
shareholders to 10% of the Company's net income for the preceding fiscal year.
As of March 31, 2006, Axcan was in compliance with all covenants under the
credit facility.

The interest rate varies, depending on the Company's leverage, between
25 basis points and 100 basis points over Canadian prime rate or U.S. base
rate, and between 125 basis points and 200 basis points over the LIBOR rate or
bankers' acceptances. The line of credit also provides for a stand-by fee of
between 25 and 37.5 basis points. The credit facility may be drawn in
U.S. dollars, in Canadian dollars or Euro equivalents. As of March 31, 2006,
there was no amount outstanding under this credit facility.

Convertible subordinated notes and other long-term debt

Long-term debt, including instalments due within one year, totaled
$127.1 million as of March 31, 2006 compared to $127.8 million as of
September 30, 2005. As of March 31, 2006, the long-term debt included
$1.0 million of bank loans, $1.1 million of obligations under capital leases
contracted by Axcan's French subsidiary and the $125.0 million 4.25%
convertible subordinated notes due 2008, which were issued on March 5, 2003.

The notes are convertible into 8,924,113 common shares during any
quarterly conversion period if the closing price per share for at least
20 consecutive trading days during the 30 consecutive trading-day period
ending on the first day of the conversion period exceeds 110% of the
conversion price in effect on that thirtieth trading day. The notes are also
convertible during the five business-day period following any 10 consecutive
trading-day period in which the daily average of the trading prices for the
notes was less than 95% of the average conversion value for the notes during
that period. The noteholders may also convert their notes upon the occurrence
of specified corporate transactions or if the Company has called the notes for
redemption. On or after April 20, 2006, the Company may at its option, redeem
the notes, in whole or in part at redemption prices varying from 101.70% to
100.85% of the principal amount plus any accrued and unpaid interest to the
redemption date. The notes also include provisions for the redemption of all
the notes for cash at the option of the Company following certain changes in
tax treatment.

Cash Flows

Cash flows from operating activities decreased $2.0 million from
$18.1 million of cash provided by operating activities for the quarter ended
March 31, 2005 to $16.1 million for the quarter ended March 31, 2006. Cash
flows from operating activities increased $18.4 million from $26.9 million of
cash provided by operating activities for the six-month period ended March 31,
2005 to $45.3 million for the six-month period ended March 31, 2006. This
increase is mainly due to the increase in net income and the fact that
accounts receivable decreased by $5.6 million and accounts payable and accrued
liabilities increased by $6.9 million during the six-month period ended
March 31, 2006. Cash flows from financing activities were $0.3 million for the
three-month period ended March 31, 2006. Cash flows used by investment
activities for the three-month period ended March 31, 2006 were $21.0 million
mainly due to the acquisition of short-term investments of $20.4 million and
the cash used for the acquisition of property, plant and equipment for
$0.6 million. Cash flows used by investment activities for the six-month
period ended March 31, 2006 were $14.6 million mainly due to the net
acquisition of short-term investments of $13.4 million and the cash used for
the acquisition of property, plant and equipment for $1.2 million. Cash flows
provided by investment activities for the six-month period ended March 31,
2005 were $7.8 million mainly due to the 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.

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, 2006 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, 2006 or certain other purchase obligations as
discussed below:

For the twelve-month periods ending March 31,
--------------------------------------------------------
2011 and
2007 2008 2009 2010 thereafter
-------- -------- -------- -------- -----------
$ $ $ $ $
Long-term debt 1,365 125,601 153 13 -
Operating leases 1,593 1,070 660 16 -
Other commitments 302 475 716 250 -
-------- -------- -------- -------- -----------
3,260 127,146 1,529 279 0
-------- -------- -------- -------- -----------
-------- -------- -------- -------- -----------

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

Effect of recently issued U.S. accounting pronouncements

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires all entities to recognize compensation cost for share-
based awards, including options, granted to employees. The Statement
eliminates the ability to account for share-based compensation transactions
using APB No. 25, "Accounting for Stock Issued to Employees", and generally
requires instead that such transactions be accounted for using a fair-value
based method. Public companies are required to measure stock-based
compensation classified as equity by valuing the instrument the employee
receives at its grant-date fair value. Previously, such awards were measured
at intrinsic value under both APB No. 25 and SFAS No. 123, "Accounting for
Stock-Based Compensation". The Company applied the Statement beginning in
fiscal 2006 using the modified prospective transition approach. The adoption
resulted in an increase in compensation cost of $2.0 million for the six-month
period ended March 31, 2006.

Earnings coverage

Under U.S. GAAP, for the twelve-month period ended March 31, 2006, our
interest requirements amounted to $6.1 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 8.13 to one.
Under Canadian GAAP, for the twelve-month period ended March 31, 2006,
our interest requirements amounted to $11.4 million on a pro-forma basis, and
our earnings coverage ratio was 4.39 to one. The principal difference between
the earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable
to the inclusion of implicit interest of $5.3 million as required by Canadian
GAAP.

Risk Factors

Axcan is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Axcan does not use derivative
financial instruments for speculative or trading purposes. Axcan does not use
off-balance sheet financing or similar special purpose entities. Inflation has
not had a significant impact on Axcan's results of operations. Risks other
than those described below can be found in Part III - Business of Axcan, of
the Company's Annual Information Form.

Foreign Currency Risk

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

Interest Rate Risk

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

Supply and Manufacture

Axcan depends on third parties for the supply of active ingredients and
for the manufacture of the majority of its products. Although Axcan looks to
secure alternative suppliers, Axcan may not be able to obtain the active
ingredients or products from such third parties, the active ingredients or
products may not comply with specifications, or the prices at which Axcan
purchases them may increase and Axcan may not be able to locate alternative
sources of supply in a reasonable time period, or at all. If any of these
events occur, Axcan may not be able to continue to market certain of its
products, and its sales and profitability would be adversely affected.

Volatility of Share Prices

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

Forward-looking Statements

This document contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent that any
statements in this document contain information that is not historical, the
statements are essentially forward-looking and are often identified by words
such as "anticipate", "expect", "estimate", "intend", "project", "plan" and
"believe". These forward-looking statements include, but are not limited to,
the expected sales growth of the Company's products and the expected increase
in funds from operations resulting from the Company's research and development
expenditures. The forward-looking statements involve risks and uncertainties.
Actual events could differ materially from those projected herein and depend
on a number of factors, including but not limited to the successful and timely
completion of clinical studies, the difficulty of predicting FDA or other
regulatory approvals, the commercialization of a drug or therapy after
regulatory approval is received, the difficulty of predicting acceptance and
demand for pharmaceutical products, the impact of competitive products and
pricing, costs associated with new product development and launch, the
availability of raw materials, the protection of our intellectual property,
fluctuations in our 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 May 2, 2006. Additional information on
the Company is available through regular filing of press releases, quarterly
financial statements and the Annual Information Form on the SEDAR website.

On behalf of Management,

(signed)
Senior Vice President, Finance and Chief Financial Officer


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

March September
31, 2006 30, 2005
---------- -----------
(unaudited)
ASSETS $ $

Current assets
Cash and cash equivalents 110,612 79,969
Short-term investments available for sale 31,040 17,619
Accounts receivable, net 31,993 37,587
Income taxes receivable 8,630 8,351
Inventories (Note 3) 39,430 36,016
Prepaid expenses and deposits 3,723 1,771
Deferred income taxes 6,845 9,044
-------------------------------------------------------------------------
Total current assets 232,273 190,357

Property, plant and equipment, net 29,916 31,673
Intangible assets, net (Note 4) 375,340 388,921
Goodwill, net 27,467 27,467
Deferred debt issue expenses, net 2,022 2,577
Deferred income taxes 3,049 412
-------------------------------------------------------------------------
Total assets 670,067 641,407
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 59,521 52,990
Income taxes payable 3,994 3,247
Instalments on long-term debt 1,365 1,497
Deferred income taxes 1,398 602
-------------------------------------------------------------------------
Total current liabilities 66,278 58,336

Long-term debt 125,767 126,332
Deferred income taxes 39,346 39,135
-------------------------------------------------------------------------
Total liabilities 231,391 223,803
-------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock
Preferred shares, without par value; unlimited
shares authorized: no shares issued. - -
Series A preferred shares, without par value;
shares authorized: 14,175,000; no shares issued. - -
Series B preferred shares, without par value;
shares authorized: 12,000,000; no shares issued. - -
Common shares, without par value; unlimited shares
authorized; 45,769,214 issued as at March 31, 2006
and 45,682,175 as at September 30, 2005. 262,468 261,714
Retained earnings 156,354 138,787
Additional paid-in capital 3,376 1,329
Accumulated other comprehensive income 16,478 15,774
-------------------------------------------------------------------------
Total shareholders' equity 438,676 417,604
-------------------------------------------------------------------------
Total liabilities and shareholders' equity 670,067 641,407
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


AXCAN PHARMA INC.
Consolidated Shareholders' Equity
-------------------------------------------------------------------------
(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 period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------

Common shares (number)
Balance, beginning of
period 45,688,344 45,581,050 45,682,175 45,562,336
Shares issued pursuant
to the stock option
plan 80,870 37,201 87,039 55,915
-------------------------------------------------------------------------
Balance, end of period 45,769,214 45,618,251 45,769,214 45,618,251
-------------------------------------------------------------------------
-------------------------------------------------------------------------

$ $ $ $
Common shares
Balance, beginning of
period 261,780 260,799 261,714 260,643
Shares issued pursuant
to the stock option
plan 688 401 754 557
-------------------------------------------------------------------------
Balance, end of period 262,468 261,200 262,468 261,200
-------------------------------------------------------------------------

Retained earnings
Balance, beginning of
period 148,032 120,116 138,787 112,362
Net income 8,322 5,425 17,567 13,179
-------------------------------------------------------------------------
Balance, end of period 156,354 125,541 156,354 125,541
-------------------------------------------------------------------------

Additional paid-in capital
Balance, beginning of
period 2,401 980 1,329 -
Stock-based
compensation expense 918 - 1,990 -
Income tax deductions
on stock options
exercise 57 130 57 1,110
-------------------------------------------------------------------------
Balance, end of period 3,376 1,110 3,376 1,110
-------------------------------------------------------------------------

Accumulated other comprehensive income (loss)
Balance, beginning of
period 13,599 29,919 15,774 19,071
Foreign currency
translation adjustments 2,879 (5,494) 704 5,354
-------------------------------------------------------------------------
Balance, end of period 16,478 24,425 16,478 24,425
-------------------------------------------------------------------------
Total shareholders'
equity 438,676 412,276 438,676 412,276
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Comprehensive income (loss)
Foreign currency
translation adjustments 2,879 (5,494) 704 5,354
Net income 8,322 5,425 17,567 13,179
-------------------------------------------------------------------------
Total comprehensive
income 11,201 (69) 18,271 18,533
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 thousands of U.S. dollars)
(unaudited)

For the For the For the For the
three-month three-month six-month six-month
period period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
Operations $ $ $ $
Net income 8,322 5,425 17,567 13,179
Non-cash items
Amortization of
deferred debt
issue expenses 280 275 555 550
Other depreciation
and amortization 5,649 5,330 11,283 10,694
Partial write-down
of intangible assets 5,800 - 5,800 -
Stock-based
compensation expense 918 - 1,990 -
Foreign currency
fluctuation 273 (126) (10) (142)
Deferred income taxes (1,357) (1,886) (78) (1,285)
Changes in working
capital items
Accounts receivable (7,259) (2,646) 5,617 (2,784)
Income taxes receivable (735) 3,383 (329) 2,701
Inventories (3,299) 3,418 (2,977) 2,293
Prepaid expenses and
deposits (137) 550 (1,861) (172)
Accounts payable and
accrued liabilities 8,477 4,825 6,908 (424)
Income taxes payable (878) (451) 849 2,304
-------------------------------------------------------------------------
Cash flows from
operating activities 16,054 18,097 45,314 26,914
-------------------------------------------------------------------------
Financing
Repayment of long-term
debt (371) (488) (739) (957)
Deferred debt issue
expenses - - - (589)
Issue of shares 688 401 754 557
-------------------------------------------------------------------------
Cash flows from
financing activities 317 (87) 15 (989)
-------------------------------------------------------------------------
Investment
Acquisition of
short-term investments (20,418) (1,395) (20,418) (1,395)
Disposal of short-term
investments - - 6,997 12,822
Acquisition of property,
plant and equipment (587) (1,752) (1,153) (3,586)
Acquisition of
intangible assets (20) (14) (20) (22)
-------------------------------------------------------------------------
Cash flows from
investment activities (21,025) (3,161) (14,594) 7,819
-------------------------------------------------------------------------
Foreign exchange gain
(loss) on cash held in
foreign currencies 28 (114) (92) 61
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents (4,626) 14,735 30,643 33,805
Cash and cash
equivalents, beginning
of period 115,238 41,049 79,969 21,979
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 110,612 55,784 110,612 55,784
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 948 286 1,845 385
Interest paid 33 176 2,713 2,874
Income taxes paid 7,000 2,103 7,814 3,372
-------------------------------------------------------------------------

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 Operations
-------------------------------------------------------------------------
(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 period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
$ $ $ $

Revenue 72,770 63,364 143,409 124,947
-------------------------------------------------------------------------

Cost of goods sold
excluding depreciation
and amortization 18,466 20,469 36,695 37,226
Selling and
administrative expenses 22,888 20,948 46,530 41,905
Research and
development expenses 7,288 8,313 16,182 14,702
Depreciation and
amortization 5,649 5,330 11,283 10,694
Partial write-down of
intangible assets 5,800 - 5,800 -
-------------------------------------------------------------------------
60,091 55,060 116,490 104,527
-------------------------------------------------------------------------

Operating income 12,679 8,304 26,919 20,420
-------------------------------------------------------------------------

Financial expenses 1,737 1,869 3,495 3,656
Interest income (971) (286) (1,757) (372)
Gain on foreign currency (335) (207) (545) (440)
-------------------------------------------------------------------------
431 1,376 1,193 2,844
-------------------------------------------------------------------------

Income before income
taxes 12,248 6,928 25,726 17,576
Income taxes 3,926 1,503 8,159 4,397
-------------------------------------------------------------------------
Net income 8,322 5,425 17,567 13,179
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Income per common share
Basic 0.18 0.12 0.38 0.29
Diluted 0.17 0.12 0.36 0.28
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average number
of common shares
Basic 45,712,790 45,599,780 45,711,291 45,582,668
Diluted 55,215,847 55,442,988 55,140,379 55,367,112
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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
-------------------------------------------------------------------------
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)

1. Significant Accounting Policies

The accompanying unaudited financial statements are prepared in
accordance with U.S. GAAP for interim financial statements and do not include
all the information required for complete financial statements. They are
consistent with the policies outlined in the Company's audited financial
statements for the year ended September 30, 2005 except for the change
mentioned in note 2. The interim financial statements and related notes should
be read in conjunction with the Company's audited financial statements for the
year ended September 30, 2005. When necessary, the financial statements
include amounts based on informed estimates and best judgements of management.
The results of operations for the interim periods reported are not necessarily
indicative of results to be expected for the year.

2. Change in Accounting Policies

In December 2004, The Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". SFAS No. 123R requires all entities to recognize compensation cost
for share-based awards, including options, granted to employees. The Statement
eliminates the ability to account for share-based compensation transactions
using the Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued To Employees", and generally requires instead that such
transactions be accounted for using a fair-value based method. Public
companies are required to measure stock-based compensation classified as
equity by valuing the instrument the employee receives at its grant-date fair
value. Previously such awards were measured at intrinsic value under both APB
No. 25 and SFAS No. 123, "Accounting for Stock-Based Compensation". The
Company applied the Statement beginning in fiscal 2006 using the modified
prospective transition approach.

If this change in accounting policy had been applied to the previous
fiscal year, the Company's net income, basic income per share and diluted
income per share for the periods ended March 31, 2005 would have been reduced
on a pro-forma basis as follows:

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

Net income 5,425 4,580 13,179 11,237
Basic income per share 0.12 0.10 0.29 0.25
Diluted income
per share 0.12 0.10 0.28 0.24

The estimated fair value of granted stock options for the periods ended
March 31, 2006 and 2005 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 period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------

Fair value per option $7.67 $7.45 $6.61 $7.09
Assumptions used
Expected volatility 42% 43% 42% 43%
Risk-free interest
rate 4.12% 3.76% 4.28% 4.08%
Expected option
life (years) 6 6 6 6
Expected dividend - - - -


3. Inventories
March September
31, 2006 30, 2005
---------- -----------
$ $

Raw materials and packaging material 17,008 18,710
Work in progress 1,456 1,547
Finished goods 20,966 15,759
-------------------------------------------------------------------------
39,430 36,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------


4. Intangible Assets

-------------------------------------------------------------------------
March 31, 2006
-------------------------------------------------------------------------
Accumulated
amorti-
Cost zation Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 339,634 50,970 288,664
Indefinite life 98,726 12,050 86,676
-------------------------------------------------------------------------
438,360 63,020 375,340
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
September 30, 2005
-------------------------------------------------------------------------
Accumulated
amorti-
Cost zation Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 334,749 45,841 288,908
Indefinite life 112,430 12,417 100,013
-------------------------------------------------------------------------
447,179 58,258 388,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Further to budgetary initiatives implemented by the French government,
which resulted in the delisting of a number of pharmaceutical products from
government formularies and re-pricing of other pharmaceutical products, the
Company reviewed the appropriate carrying value and useful life of its French
subsidiary's intangible assets.
During the three-month period ended March 31, 2006, a partial write-down
of $5,800,000 was recognized on a French line of products including TAGAMET
and TRANSULOSE as the carrying value of the intangible assets associated with
these products exceeded the estimated value of cash generated by these same
products.
The cost of the products LACTEOL and ADEKs has been transferred from
intangible assets with an indefinite life to intangible assets with a finite
life following changes in the regulatory rules applicable to these products
and resulting in the modification of their useful life. The net cost of these
products as of October 1, 2005, which amounted to $13,520,565, is therefore
amortized over a 15-year period.


5. Segmented Information

The Company considers that it operates in a single reportable segment,
the pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.

The Company operates in the following geographic areas:

For the For the For the For the
three-month three-month six-month six-month
period period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
$ $ $ $
Revenue
Canada
Domestic sales 9,143 7,710 19,327 16,900
Foreign sales - - - -
United States
Domestic sales 48,089 39,100 92,998 76,128
Foreign sales 1,850 1,182 3,196 2,339
Europe
Domestic sales 11,007 12,525 23,152 24,268
Foreign sales 2,614 2,769 4,636 5,192
Other 67 78 100 120
-------------------------------------------------------------------------
72,770 63,364 143,409 124,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------

March September
31, 2006 30, 2005
---------- -----------
$ $
Property, plant, equipment, intangible assets
and goodwill
Canada 38,455 39,506
United States 125,777 127,915
Europe 241,060 252,509
Other 27,431 28,131
-------------------------------------------------------------------------
432,723 448,061
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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


6. Financial Information Included in the Consolidated Operations

a) Financial expenses

For the For the For the For the
three-month three-month six-month six-month
period period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
$ $ $ $

Interest on
long-term debt 1,347 1,448 2,722 2,882
Bank charges 31 41 60 48
Financing fees 79 105 158 176
Amortization of
deferred debt issue
expenses 280 275 555 550
-------------------------------------------------------------------------
1,737 1,869 3,495 3,656
-------------------------------------------------------------------------
-------------------------------------------------------------------------

b) Selling and administrative expenses

Selling and administrative expenses include the following:

For the For the For the For the
three-month three-month six-month six-month
period period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
$ $ $ $

Shipping and handling
expenses 2,644 1,271 3,902 2,275
Advertising expenses 1,920 4,104 5,989 8,729

c) Other information

For the For the For the For the
three-month three-month six-month six-month
period period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
$ $ $ $

Rental expenses 568 287 858 574
Depreciation of
property, plant
and equipment 1,426 1,298 2,832 2,599
Amortization of
intangible assets 4,223 4,032 8,451 8,095

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 period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
$ $ $ $
Net income available
to common shareholders
Basic 8,322 5,425 17,567 13,179
Interest and
amortization of
deferred debt issue
expenses relating to
the convertible
subordinated notes,
net of income taxes 1,069 1,055 2,190 2,134
-------------------------------------------------------------------------
Net income available
to common shareholders
on a diluted basis 9,391 6,480 19,757 15,313
-------------------------------------------------------------------------
-------------------------------------------------------------------------

For the For the For the For the
three-month three-month six-month six-month
period period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
Weighted average
number of common
shares
Weighted average
number of common
shares outstanding 45,712,790 45,599,780 45,711,291 45,582,668
Effect of dilutive
stock options 578,944 919,095 504,975 860,331
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 55,215,847 55,442,988 55,140,379 55,367,112
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares outstanding as at May 1, 2006 45,769,214
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Options to purchase 883,450 and 271,200 common shares were outstanding as
at March 31, 2006 and 2005 respectively but were not included in the
computation of diluted income per share for the six-month periods ended
March 31, 2006 and 2005 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 certain 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, 2006, the Company made matching contributions to the Plan
totalling $222,262 ($272,185 in 2005).

7. Contingencies

The Company's subsidiary, Axcan Scandipharm, had been named along with
other third parties, as defendants in several legal proceedings related to the
product line it markets under the name ULTRASE. In addition, the product
line's manufacturer and other defendant companies had claimed a right to
recover amounts paid defending and settling these claims. This claim was based
on contractual and indemnity issues and the parties had agreed to settle their
dispute through binding arbitration. The Company accrued $2,900,000 to cover
any future settlements in connection with the indemnification claim and the
lawsuits discussed above. Following a series of decisions rendered by the
arbitrator in favour of Axcan Scandipharm, the Company revaluated its exposure
and this accrual was reversed in the three-month period ended March 31, 2006,
thus reducing the selling and administrative expenses by the same amount.

8. Subsequent Event

In connection with a reorganization of its international operations due
to budgetary initiatives implemented by the French government, the Company has
undertaken steps which seek a reduction of its current workforce in Europe. To
this end, on May 2, 2006, the Company's French subsidiary communicated a
reorganization plan to the employee-representatives in France aimed at
reducing its workforce. If this plan is implemented, the Company anticipates
recording one time restructuring charges of approximately $1,500,000 during
the three-month period ending June 30, 2006.

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
material 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 period period period
ended ended ended ended
March March March March
31, 2006 31, 2005 31, 2006 31, 2005
------------ ----------- ----------- ------------
Operations adjustments $ $ $ $

Net income in
accordance with U.S.
GAAP 8,322 5,425 17,567 13,179
Implicit interest on
convertible debt (1,226) (1,120) (2,455) (2,243)
Stock-based
compensation expense - (1,131) - (2,431)
Amortization of new
product acquisition
costs (12) (12) (26) (26)
Income tax impact of
the above adjustments (105) 135 (268) 140
-------------------------------------------------------------------------
Net earnings in
accordance with
Canadian GAAP 6,979 3,297 14,818 8,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Earnings per share in
accordance with
Canadian GAAP
Basic 0.15 0.07 0.32 0.19
Diluted 0.15 0.07 0.32 0.19


March 31, 2006 September 30, 2005
--------------------- ---------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
-------- ----------- --------- ----------
Balance sheet adjustments $ $ $ $

Current assets 232,273 232,273 190,357 190,357
Property, plant and
equipment 29,916 29,916 31,673 31,673
Intangible assets 375,340 387,622 388,921 401,229
Goodwill 27,467 28,862 27,467 28,862
Deferred debt issue
expenses 2,022 2,022 2,577 2,577
Deferred income tax asset 3,049 2,770 412 412
Current liabilities 66,278 66,278 58,336 58,336
Long-term debt 125,767 115,140 126,332 113,250
Deferred income tax
liability 39,346 40,435 39,135 40,234
Shareholders' equity
Equity component of
convertible debt - 24,239 - 24,239
Capital stock 262,468 274,181 261,714 273,022
Additional paid-in
capital 3,376 14,934 1,329 13,293
Retained earnings 156,354 127,624 138,787 112,806
Accumulated foreign
currency translation
adjustments 16,478 20,634 15,774 19,930
 




For further information: Isabelle Adjahi, Director, Investor Relations,
Axcan Pharma Inc., (450) 467-2600 ext. 2000, www.axcan.com; Source: Axcan
Pharma Inc.;