MONT-SAINT-HILAIRE, QC, May 4 /PRNewswire-FirstCall/ - Axcan Pharma Inc. 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Sales ($US M) Prescriptions Increase(1)(%) in the United States only ------------------------------------------------------------------------- Year to 12 months Q2 Year to 12 months date ended date ended through March 31, through March 31, Q2 Q2 2006 Q2 2006 ------------------------------------------------------------------------- NORTH AMERICA ------------------------------------------------------------------------- CANASA 9.9 22.0 36.9 10.0 10.0 11.0 ------------------------------------------------------------------------- SALOFALK 4.0 8.2 15.8 n/a n/a n/a ------------------------------------------------------------------------- ULTRASE 13.4 21.4 41.8 1.0 2.0 3.0 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EUROPE ------------------------------------------------------------------------- LACTEOL 5.7 10.8 19.5 n/a n/a n/a ------------------------------------------------------------------------- PANZYTRAT 2.7 6.3 14.5 n/a n/a n/a ------------------------------------------------------------------------- DELURSAN 3.3 6.7 13.2 n/a n/a n/a ------------------------------------------------------------------------- (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 Responsabilite”), 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.
See Company Website for Rest of Story: http://micro.newswire.ca/release.cgi?rkey=1405043643&view=65742-0&Start=0
