Axcan Pharma Announces Record Revenue Of $70.6 Million For The First Quarter Of Fiscal 2006

MONT-SAINT-HILAIRE, QC, Feb. 9 /PRNewswire-FirstCall/ - Axcan Pharma Inc.

today announced financial results for the first quarter of fiscal 2006, ended December 31, 2005 (all amounts are stated in U.S. dollars). Highlights for the first quarter were:

- Record revenue of $70.6 million reported - Fully diluted income per share increased 18.8%, compared to the same period a year earlier - Patient randomization for both ITAX Phase III trials is now completed

Total revenue for the three months ended December 31, 2005, was $70.6 million, compared with $61.6 million for the first quarter of fiscal 2005, an increase of 14.6%.

Net income for the first quarter of 2006 was $9.2 million, compared with net income of $7.8 million for the corresponding 2005 period. Diluted income per share for the first quarter of 2006 was $0.19, versus diluted income per share of $0.16 for the same period in 2005. This was the first quarter that stock-based compensation was expensed, which had a negative impact on income per share of $0.02 for this quarter.

"As we begin fiscal 2006, we are pleased with the progress we have made so far. Our record revenues reflect the strength of our current product portfolio. We estimate that increases in wholesaler inventory levels positively impacted our revenue by less than $1.5 million, which confirms our previous assumptions that wholesaler inventory levels have stabilized in our currently desired eight-to-twelve-week target range," stated Frank Verwiel, M.D., President and Chief Executive Officer of Axcan.

"On the research and development front, we reached another important milestone by completing randomization for the Itopride North American pivotal Phase III trial with more than 600 patients randomized in this study," Dr. Verwiel concluded.

PRODUCT DEVELOPMENT PIPELINE UPDATE An update on Axcan's major projects follows: ITAX

As previously announced, randomization for both pivotal Phase III trials for Itopride is now complete, with more than 500 patients in the International trial and more than 600 patients in the North American trial. The Company expects to release the overall outcome of the International Phase III trial during the first half of calendar 2006, followed shortly afterwards by that of the North American Phase III trial. Detailed results of the studies will most likely be subsequently presented at a major scientific gastroenterology conference. The clinical work on all of the additional Phase I studies needed to complement the New Drug Application to be submitted to the Food and Drug Administration is now complete.

HELIZIDE

Axcan finalized qualification of a new manufacturer of bismuth salt, a component of the HELIZIDE combination therapy for the eradication of the Helicobacter pylori bacterium. The final results of stability tests performed on the bismuth salts were positive. Further, the Food and Drug Administration has accepted Axcan's answers to all questions concerning the Chemistry, Manufacturing and Control portion of the file that was previously submitted to the FDA. As previously disclosed, the Company plans to submit an amendment to its New Drug Application by the end of the second quarter of fiscal 2006.

CANASA / SALOFALK RECTAL GEL

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

SALOFALK 750 MILLIGRAM TABLETS

Axcan submitted a New Drug Submission in Canada for the use of SALOFALK 750 mg tablets for the treatment of ulcerative colitis. The Therapeutic Products Directorate of Health Canada has indicated that additional clinical information would be needed prior to potential approval of SALOFALK 750 milligram tablets in Canada. In light of these requirements, the Company has decided to withdraw its New Drug Submission for SALOFALK 750 milligram tablets in Canada, and will continue to focus efforts in Canada on the currently marketed SALOFALK 500 milligram tablets.

NCX-1000

Axcan and its partner, NicOx S.A., are developing NCX-1000, a patented, nitric oxide donating derivative of ursodiol, for the treatment of portal hypertension, a late-stage complication of chronic, advanced liver disease. The Phase I clinical development program, which is designed to demonstrate the tolerability and safety of NCX-1000, has been completed, and the Company is pleased to report that results confirmed the safety profile of this drug. A therapeutic proof-of-concept Phase IIa study is currently underway.

URSODIOL DISULFATE

Axcan completed a proof-of-concept study in rats to evaluate the effect of ursodiol disulfate on the development of colonic tumors. Acute and subchronic toxicity studies confirmed that the compound is safe and has no toxicity effect. As previously announced, a clinical, single ascending dose Phase I study has recently been initiated to evaluate the safety, tolerability and preliminary pharmacokinetics of this new molecule. This study should be completed in the second half of fiscal 2006.

ULTRASE-VIOKASE

In April 2004, the Food and Drug Administration formally notified manufacturers of pancreatic insufficiency products that these drugs must receive approval before April 2008 in order to remain on the market. The Food and Drug Administration decided to require New Drug Applications for all pancreatic extract drug products after reviewing data that showed substantial variation among currently marketed products. Axcan has completed a Phase III study of VIOKASE that will serve as the basis of the New Drug Application. The Company expects to submit a New Drug Application by spring of 2007. Data is currently being analyzed. Additional studies on ULTRASE are in process and anticipated to be completed and submitted along with other clinical and CMC data in the form of a New Drug Application by spring 2007.

NMK 150

Axcan and Nordmark GmbH, a German pharmaceutical firm, are collaborating in the development of NMK 150, a new high protease pancrelipase preparation developed for the relief of pain in small duct chronic pancreatitis. As previously announced, dose-ranging preclinical studies were initiated in the first quarter of fiscal 2006 to assess the toxicity, with special attention to duodenal irritation of NMK 150, administered daily by oral capsule administration. A Phase I clinical trial will begin in the second quarter of fiscal 2006.

REVENUE GUIDANCE FOR 2006

Axcan reiterates its previously announced revenue guidance for 2006. Based on its best estimates, Axcan believes that overall revenue for fiscal 2006 will be in the range of $260 to $270 million, which represents growth of approximately 4% to 8% relative to fiscal 2005. Axcan's fiscal 2006 guidance does not include any potential new product launches, licensing or acquisitions; nor does it provide for revenue from the completion of any potential partnering agreement for ITAX.

The revenue guidance consists of projections, based upon various assumptions, all of which are subject to uncertainties and risks. Our assumptions include, but are not limited to: wholesaler inventory levels in fiscal 2006 remaining in the range of eight to twelve weeks; the absence of any changes to GAAP applicable to revenue recognition; foreign currency rates remaining stable throughout the year; reimbursement amounts and policies, related to our products, in all markets not changing materially during the year; the absence of any material change in the regulatory status of the Company's current products and the absence of new competitive products and generic entries.

INTERIM FINANCIAL REPORT

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

CONFERENCE CALL

Axcan will host a conference call at 8:30 A.M. EST, on February 10, 2006. Interested parties may also access the conference call by way of a webcast at www.axcan.com. The webcast will be archived for 90 days. The telephone numbers to access the conference call are (866) 250-4910 (Canada and United States) or (416) 644-3425 (international). A replay of the call will be available until February 17, 2006. The telephone number to access the replay of the call is (416) 640-1917 code 21174075.

ABOUT AXCAN PHARMA

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

"Safe Harbor" statement under the Private Securities Litigation Reform

Act of 1995.

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

The names CANASA, CARAFATE, DELURSAN, HELIZIDE, ITAX, LACTEOL, PANZYTRAT, SALOFALK, SULCRATE, ULTRASE and URSO appearing in this press release are trademarks of Axcan Pharma Inc. and its subsidiaries.

<< KEY PRODUCT INFORMATION ------------------------------------------------------------------------- ------------------------------------------------------------------------- Sales(1)($US M) Sales Growth(2) Rx(3)Growth(2) (U.S.) ------------------------------------------------------------------------- NORTH AMERICA ------------------------------------------------------------------------- CANASA 36.8 13.0% 8.9% ------------------------------------------------------------------------- SALOFALK 15.0 18.1% n/a ------------------------------------------------------------------------- ULTRASE 36.4 14.6% 2.0% ------------------------------------------------------------------------- URSO 250/FORTE/DS 51.0 6.5% 15.0% ------------------------------------------------------------------------- CARAFATE 34.9 -17.5% 3.1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- EUROPE ------------------------------------------------------------------------- LACTEOL 19.3 7.8% n/a ------------------------------------------------------------------------- PANZYTRAT 16.1 34.4% n/a ------------------------------------------------------------------------- DELURSAN 13.1 12.6% n/a ------------------------------------------------------------------------- (1) Sales for the 12-month period ended December 31, 2005 (2) Compared with the 12-month period ended December 31, 2004 (3) Based on IMS Prescription Data for products sold in the United States >> PRODUCTS IN NORTH AMERICA ------------------------- CANASA

U.S. prescriptions for the 12-month period ended December 31, 2005, were up 8.9% compared to the same period in 2004.

Sales for the 12-month period ended December 31, 2005, increased 13.0%, compared to the 12-month period ended December 31, 2004, mainly due to the stabilization of the impact of wholesaler reductions in inventory levels that occurred in fiscal 2005.

ULTRASE

U.S. prescriptions for the 12-month period ended December 31, 2005, increased 2.0% compared to the same period in 2004.

U.S. sales for ULTRASE for the 12-month period ended December 31, 2005, increased 14.6%, compared to the 12-month period ended December 31, 2004, mainly due to the stabilization of the impact of wholesaler reductions in inventory levels that occurred in fiscal 2005, as well as price increases that occurred in 2005.

URSO 250/URSO FORTE

In the U.S., prescriptions for the 12-month period ended December 31, 2005, were up 15.0% compared with the same period a year earlier. During fiscal 2005, Axcan launched URSO Forte, a 500-mg dosage form of Ursodiol, which contributed to overall prescription growth.

For the 12-month period ended December 31, 2005, total sales in North America were up 6.5% compared to the 12-month period ended December 31, 2004.

CARAFATE

U.S. prescriptions for the 12-month period ended December 31, 2005, increased 3.1% compared to the same period in 2004.

For the 12-month period ended December 31, 2005, U.S. sales decreased 17.5% compared to the 12-month period ended December 31, 2004.

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

For the 12-month period ended December 31, 2005, sales of LACTEOL increased 7.8% compared to the prior year. In local currency, the increase was 7.6%.

PANZYTRAT

For the 12-month period ended December 31, 2005, sales of PANZYTRAT increased 34.4% compared to the prior year, as most of PANZYTRAT sales have now been transferred to Axcan from Abbott Laboratories. In local currency, the increase was 32.9%.

DELURSAN

For the 12-month period ended December 31, 2005, sales of DELURSAN increased 12.6% compared to the prior year. In local currency, the increase was 11.2%.

Management's discussion and analysis of financial condition and results of operations

This discussion should be read in conjunction with the information contained in Axcan's consolidated financial statements and the related notes thereto. All amounts are in U.S. dollars.

Overview

Axcan is a leading speciality pharmaceutical company concentrating in the field of gastroenterology, with operations in North America and Europe. Axcan markets and sells pharmaceutical products used in the treatment of a variety of gastrointestinal diseases and disorders. The Company seeks to expand its gastrointestinal franchise by in-licensing products and acquiring products or companies, as well as developing additional products and expanding indications for existing products. Axcan's current products include ULTRASE, PANZYTRAT and VIOKASE for the treatment of certain gastrointestinal symptoms, related to cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO/URSO 250, URSO FORTE/URSO DS and DELURSAN for the treatment of certain cholestatic liver diseases; SALOFALK and CANASA for the treatment of certain inflammatory bowel diseases; and CARAFATE/SULCRATE for the treatment of gastric duodenal ulcers. Axcan has a number of pharmaceutical projects in all phases of development, including ITAX for the treatment of functional dyspepsia.

For the three-month period ended December 31, 2005, revenue was $70.6 million, operating income was $14.2 million and net income was $9.2 million. Revenue from sales of Axcan's products in the United States was $46.2 million (65.5% of total revenue) for the three-month period ended December 31, 2005, compared to $38.2 million (62.0% of total revenue) for the corresponding period of fiscal 2005. In Canada, revenue was $10.2 million (14.4% of total revenue) for the three-month period ended December 31, 2005, compared to $9.2 million (14.9% of total revenue) for the corresponding period of fiscal 2005. In Europe, revenue was $14.2 million (20.1% of total revenue) for the three-month period ended December 31, 2005, compared to $14.2 million (23.1% of total revenue) for the corresponding period of fiscal 2005.

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

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

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

Historically, wholesalers' business models in the U.S. were dependent on drug price inflation. Their profitability and gross margins were directly tied to speculative purchasing pharmaceutical products at pre-price increase prices and selling their product 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 increase more rapidly and pay wholesalers for the services they provide on a fee-for-service basis. This change in wholesaler's business model has affected Axcan's revenue since fiscal 2005.

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

Critical Accounting Policies

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

Use of Estimates

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

Revenue Recognition

Revenue is recognized when the product is shipped to the Company's customer, provided the Company has not retained any significant risks of ownership or future obligations with respect to the product shipped. Provisions for sales discounts and estimates for chargebacks, managed care and Medicaid rebates and product returns are established as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by us as our best estimate at the time of sale based on historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected as an addition to accrued expenses.

We do not provide any forms of price protection to our wholesale customers and permit product returns only if the product is returned within 12 months after expiration. Credit for returns is issued to the original purchaser at current net pricing less 10%. Accrued liabilities include reserves of $7.6 million and $7.5 million as of December 31, 2005, and September 30, 2005, respectively for estimated product returns.

In the United States, we establish and maintain reserves for amounts payable by us to managed care organizations and state Medicaid programs for the reimbursement of portions of the retail price of prescriptions filled that are covered by the respective programs. We also establish and maintain reserves for amounts payable by us to wholesale distributors for the difference between their regular sale price and the contract price for the products sold to our contract customers. The amounts estimated to be paid relating to products sold are recognized as revenue reductions and as additions to accrued expenses at the time of sale based on our best estimate of the product's utilization by these managed care and state Medicaid patients and sales to our contract customers, using historical experience adjusted to reflect known changes in the factors that impact such reserves. Accrued liabilities include reserves of $6.3 million and $4.8 million as of December 31, 2005, and September 30, 2005, respectively, for estimated rebates and chargebacks.

If the levels of chargebacks, managed care and Medicaid rebates, product returns and discounts fluctuate significantly and/or if our estimates do not adequately reserve for these reductions of net product revenues, our reported revenue could be negatively affected.

Goodwill and Intangible Assets

We have in the past acquired products and businesses that include goodwill, trademarks, license agreements and other identifiable intangible assets. Axcan's goodwill and intangible assets are stated at cost, less accumulated amortization. Since October 1, 2001, the Company has not amortized 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.

Intangible assets with finite life are amortized over their estimated useful lives according to the straight-line method at annual rates varying from 4% to 15%. The straight-line method of amortization is used because it reflects, in the opinion of management, the pattern in which the intangible assets with finite life are used. In determining the useful life of intangible assets, the Company considers many factors including the intention of management to support the asset on a long-term basis by maintaining the level of expenditure necessary, the use of the asset, the existence and expiration date of a patent, the existence of a generic or competitor and any legal or regulatory provisions that could limit the use of the asset.

As a result of acquisitions, we included $27.5 million of goodwill on our consolidated balance sheets as of December 31, 2005, and September 30, 2005.

Also as a result of acquisitions of product rights and other identifiable intangible assets, we included $383.0 million and $388.9 million as net intangible assets on our consolidated balance sheets as of December 31, 2005, and September 30, 2005, respectively. Estimated annual amortization expense for intangible assets with a finite life, which have a weighted-average remaining amortization period of approximately 17 years, for the next five fiscal years, is approximately $16.9 million.

Research and Development Expenses

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

Results of Operations

The following table sets forth, for the periods indicated, the percentage of revenue represented by items in Axcan's consolidated statements of operations: << For the three-month periods ended December 31 ------------------------------ 2005 2004 ------------------ ---------- % % Revenue 100.0 100.0 ------------------------------------------------------------------------- Cost of goods sold 25.8 27.2 Selling and administrative expenses 33.4 34.0 Research and development expenses 12.6 10.4 Depreciation and amortization 8.0 8.7 ------------------------------------------------------------------------- 79.8 80.3 ------------------------------------------------------------------------- Operating income 20.2 19.7 ------------------------------------------------------------------------- Financial expenses 2.5 2.9 Interest income (1.1) (0.1) Gain on foreign exchange (0.3) (0.4) ------------------------------------------------------------------------- 1.1 2.4 ------------------------------------------------------------------------- Income before income taxes 19.1 17.3 Income taxes 6.0 4.7 ------------------------------------------------------------------------- Net income 13.1 12.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three-month period ended December 31, 2005 compared to the three-month period ended December 31, 2004 Revenue

For the three-month period ended December 31, 2005, revenue was $70.6 million compared to $61.6 million for the corresponding period of the preceding fiscal year, an increase of 14.6%. This increase in revenue primarily resulted from higher sales in the United States. The end-customer prescription demand resulted in positive growth for most of our products sold in the United States, which was reflected in sales to our major wholesalers as they work towards reaching their targeted inventory levels. Major wholesalers in the United States reduced their inventory levels in fiscal 2005.

Revenue is stated net of deductions for product returns, chargebacks, contract rebates, discounts and other allowances of $11.7 million (14.2% of gross revenue) for the three-month period ended December 31, 2005, and $8.2 million (11.7% of gross revenue) for the three-month period ended December 31, 2004. This increa

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