Axcan Pharma Reports Fourth Quarter And Year-End 2005 Financial Results - Company Generates Record Revenues Of $67.0 Million For The Quarter

MONT-SAINT-HILAIRE, QC, Nov. 10 /PRNewswire-FirstCall/ - Axcan Pharma Inc. , a leading gastroenterology specialty pharmaceutical company, today announced its operating results for the fourth quarter and fiscal year ended September 30, 2005. All amounts are stated in U.S. dollars.

Sales for the fourth quarter are the highest quarterly sales ever recorded in the history of Axcan. Total revenues for the three months ended September 30, 2005 were $67.0 million, compared with $60.9 million for the fourth quarter of 2004, an increase of 10.0%. Total revenues for the 12-month period ended September 30, 2005, were $251.3 million, compared with $243.6 million for 2004, an increase of 3.2%.

Fourth-quarter 2005 net income was $9.1 million, compared with net income of $13.3 million for the corresponding 2004 period. Net income for the year ended September 30, 2005 totaled $26.4 million, compared with net income of $48.7 million in 2004. Diluted earnings per share (EPS) for the fourth quarter of 2005 were $0.19, versus diluted earnings per share of $0.26 for the same period in 2004. Diluted EPS for the fiscal year 2005 were $0.56, compared with diluted earnings per share of $0.96 the prior year.

"Axcan's record fourth quarter and full year revenues reflect the strength of our current product portfolio. We are pleased to report that, for fiscal 2005, the products that we promote for which prescription data is available, showed overall prescription growth of approximately 8%," said Dr. Frank Verwiel, President and Chief Executive Officer of Axcan. "Based on our best estimate, at September 30, 2005, the overall wholesaler inventory levels were within our target range and relatively stable during the fourth quarter. Our models indicate that the total impact of changes in wholesaler inventories resulted in increased revenues of less than $1 million during the quarter. Going forward, we will continue to work on enhanced monitoring of wholesaler inventory levels. At the same time, our sales and marketing teams are committed to increasing prescriptions of our current products, both in North America and Europe," he added.

"Our ITAX development is currently on track with our previously disclosed, revised timeline and we are happy to report that randomization for the International Phase III trial has been completed with more than 500 patients randomized. We are taking all steps necessary to achieve our objective of submitting the New Drug Application with the U.S. Food and Drug Administration in the summer of 2006. In order to enhance our ability to meet this important milestone we have amongst others increased the number of sites in the North American trial by 50%. These sites are currently finalizing administrative procedures, and the first of these new sites have started screening and randomizing patients, while the remaining few are completing the final steps of their administrative procedures. To date, more than 400 patients have been randomized in the North American Phase III trial. We expect 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 gastroenterology conference," Dr. Verwiel concluded.

PRODUCT DEVELOPMENT PIPELINE UPDATE

Axcan's product development efforts will remain focused on compounds and products that meet medical needs in the field of gastroenterology, have a competitive advantage and allow Axcan to leverage its infrastructure or build infrastructure in certain markets.

Management recently conducted an exhaustive review of Axcan's product pipeline in order to reprioritize projects and focus resources on highest value opportunities.

An update on Axcan's major projects follows: ITAX

In addition to the milestones that have been reached in the Phase III trials, all patients required for the supplementary 6-month and 1-year safety studies have been enrolled. Furthermore, the clinical work on most of the additional Phase I studies to complement the New Drug Application to be submitted to the FDA is now complete. Data are currently being analyzed.

HELIZIDE

The Company has successfully qualified a manufacturer of biskalcitrate potassium (bismuth salt), a component of the HELIZIDE combination therapy for the eradication of the Helicobacter pylori bacterium. Final results of stability tests on the bismuth salt should be available shortly, which should allow Axcan to file an amendment to the New Drug Application during the second quarter of fiscal 2006.

SALOFALK 750 MG TABLETS

Axcan applied for a Supplemental New Drug Submission to the Therapeutic Products Directorate of Health Canada for a new 750-milligram mesalamine (5-ASA) tablet for the oral treatment of ulcerative colitis in Canada. The Company received, and responded to, questions in a non-approvable letter from Health Canada during the third quarter of fiscal 2005. Axcan anticipates a response in the first half 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. Data is currently being analyzed. The Company plans to submit regulatory filings for approvals in the United States and Canada in the first 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, 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. The protocol of a pilot, therapeutic proof-of-concept Phase IIa study was recently approved by the relevant Ethical Review Board. The center where the study will be conducted has started the identification of potential patients. This study should be completed by the end of fiscal 2006.

URSODIOL DISULFATE

Axcan completed a proof-of-concept study in rats to evaluate the effect of ursodiol disulfate on the development of colonic tumors. The Company initiated animal toxicity studies in the fourth quarter of fiscal 2004. Both acute and subchronic toxicity studies have been completed. The Company is pleased to announce that, based on the currently available data, the compound is safe and has no toxicity effect. Clinical Phase I studies should be initiated in the first half of fiscal 2006.

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. It is expected that NMK 150 will enter dose-ranging preclinical studies in the first quarter of fiscal 2006 to confirm the absence of mucosal irritation associated with the use of high doses of the drug. Phase I clinical trials will begin in the second quarter of fiscal 2006.

REVENUE GUIDANCE FOR 2006

The following 2006 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 generics entries.

Based on its best estimates, Axcan believes overall revenue for fiscal 2006 will be in the range of $260 to $270 million, which would represent 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 completion of any potential partnering agreement for ITAX.

BOARD MEMBERSHIP

Mr. Daniel Labrecque, President and CEO of Rothschild Canada, has resigned his position on Axcan's Board of Directors, effective November 9, 2005. In order to maintain Axcan's corporate governance objectives of director independence, Mr. Labrecque decided to resign further to his firm being granted an advisory mandate by the Company, which would no longer allow him to qualify as an independent director under applicable rules and Company guidelines. Axcan is grateful for his contribution to its success during his tenure.

INTERIM FINANCIAL REPORT

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

The audited financial statements and MD&A for fiscal 2005 to be included in the Company's annual report, will be in accordance with U.S. GAAP and will include a reconciliation to Canadian GAAP of the U.S. GAAP presentation.

CONFERENCE CALL

Axcan will host a conference call at 8:30 A.M. EST, on November 11, 2005. 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 416-640-4127 (international). A replay of the call will be available until November 18, 2005. The telephone number to access the replay of the call is (416) 640-1917 code: 21159496.

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 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.

Management Discussion and Analysis (MD&A), Financial Statements and Notes Attached KEY PRODUCT INFORMATION FOR FISCAL 2005 --------------------------------------- --------------------------------------- ------------------------------------------------------------------------- Sales ($US M) Sales Growth(1) Rx(2)Growth(1) ------------------------------------------------------------------------- NORTH AMERICA ------------------------------------------------------------------------- CANASA 28.7 - 25.5% 8.7% ------------------------------------------------------------------------- SALOFALK 14.5 22.9% 5.9% ------------------------------------------------------------------------- ULTRASE 36.0 0.3% 0% ------------------------------------------------------------------------- URSO 250/FORTE/DS 47.1 4.0% 14.3% ------------------------------------------------------------------------- CARAFATE/SULCRATE 38.5 12.2% 3.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- EUROPE ------------------------------------------------------------------------- LACTEOL 20.3 24.5% n/a ------------------------------------------------------------------------- PANZYTRAT 14.8 9.6% n/a ------------------------------------------------------------------------- DELURSAN 13.1 21.3% n/a ------------------------------------------------------------------------- (1) Compared with fiscal 2004 (2) IMS Prescription Data PRODUCTS IN NORTH AMERICA ------------------------- CANASA

U.S. prescriptions for fiscal 2005 were up 8.7% compared to the same period in 2004. The increase was largely due to the impact of the 1000 mg dosage form launched in the second quarter of fiscal 2005.

Sales for fiscal 2005 declined 25.5%, compared to the same period in 2004 mainly due to the impact of wholesaler reductions in inventory levels during the year.

SALOFALK

Canadian prescriptions for fiscal 2005 were up 5.9% compared with the same period in 2004.

ULTRASE

U.S. prescriptions for ULTRASE for fiscal 2005 were flat, in line with the pancreatic enzyme market that increased 1%. The Company expects prescriptions to increase going forward, as ULTRASE was listed as a single source product in June 2005, which makes it less likely to be substituted by generics.

URSO 250/URSO FORTE

Total prescriptions in North America were up 14.3% compared with fiscal 2004. In the U.S. alone, prescriptions for fiscal 2005 were up 16.1% compared with the same period in 2004. During fiscal 2005, Axcan launched URSO Forte, a 500-mg dosage form of Ursodiol, which contributed to overall prescription growth.

In the U.S. alone, sales for fiscal 2005 were up 7.3% compared with the same period in 2004. The impact of wholesaler inventory reductions resulted in less than anticipated sales during the year.

CARAFATE/SULCRATE

U.S. prescriptions for fiscal 2005 were up 3% compared with fiscal 2004. This limited growth was due primarily to limited promotion of this line of products during the year. The Company recently launched a marketing campaign for CARAFATE suspension in the U.S. market.

Sales growth was 12.2%, due mainly to the impact of a price increase in March 2005.

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

Sales of LACTEOL increased 24.5% compared to the prior year. In local currency, the increase was 18.4%.

PANZYTRAT

Sales of PANZYTRAT increased 9.6% compared to the prior year In local currency, the increase was 5.1%.

DELURSAN

Sales of DELURSAN increased 21.3% compared to the prior year. In local currency, the increase was 15.1%.

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

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

Axcan reported revenue of $67.0 million, operating income of $13.9 million and net income of $9.1 million for the three-month period ended September 30, 2005. For the year ended September 30, 2005, revenue was $251.3 million, operating income was $40.4 million and net income was $26.4 million. Revenue from sales of Axcan's products in the United States was $159.7 million (63.5% of total revenue) for the year ended September 30, 2005, compared to $166.7 million (68.4% of total revenue) for fiscal 2004. In Canada, revenue was $34.4 million (13.7% of total revenue) for the year ended September 30, 2005, compared to $28.0 million (11.5% of total revenue) for fiscal 2004. In Europe, revenue was $57.1 million (22.7% of total revenue) for the year ended September 30, 2005, compared to $48.7 million (20.0% of total revenue) for fiscal 2004.

Axcan's revenue historically has been and continues to be principally derived from sales of pharmaceutical products to large pharmaceutical wholesalers and large chain pharmacies. Axcan utilizes a "pull-through" marketing approach that is typical of pharmaceutical companies. Under this approach, Axcan's sales representatives demonstrate the features and benefits of its products to gastroenterologists who may write their patients prescriptions for Axcan's products. The patients, in turn, take the prescriptions to pharmacies to be filled. The pharmacies then place orders with the wholesalers or, in the case of large chain pharmacies, their distribution 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 results are primarily affected by three factors: the level of acceptance of Axcan's products by gastroenterologists and their patients; the extent of Axcan's control over the marketing of its products and wholesaler buying patterns. Wholesaler buying patterns, including a tendency to increase inventory levels prior to an anticipated or announced price increase, affect Axcan's operating results by shifting revenue between quarters. To maintain good relations with wholesalers, Axcan typically gives prior notice of price increases. The level of patient and physician acceptance of Axcan's products, as well as the availability of similar therapies, which may be less effective but also less expensive than some of Axcan's products, impact Axcan's revenues by driving the level and timing of prescriptions for its products.

Critical Accounting Policies

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

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities 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 record 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 products 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 $7.5 million and $6.1 million as of September 30, 2005 and September 30, 2004 respectively for estimated products 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 products 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 $4.8 million and $2.8 million as of September 30, 2005 and September 30, 2004, 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 made acquisition of products and businesses that include goodwill, trademarks, licence 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 assess 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 our acquisitions, we included $27.5 million of goodwill on our consolidated balance sheets as of September 30, 2005 and September 30, 2004.

As a result of our acquisitions of products rights and other identifiable intangible assets, we included $388.9 million and $407.9 million as net intangible assets on our consolidated balance sheets as of September 30, 2005 and September 30, 2004. Estimated annual amortization expenses 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 $16.6 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, are written off at the time of acquisition.

Acquisition of Products

On November 18, 2003, the Company acquired the rights to a group of products from Aventis Pharma S.A. ("Aventis"). The $145.0 million purchase price was paid out of Axcan's cash on hand. These products are CARAFATE and BENTYL for the U.S. market and SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market (collectively, "AVAX" product line).

On August 29, 2003, the Company acquired an exclusive license for North America, the European Union and Latin America, from Abbott Laboratories ("Abbott") to develop, manufacture and market ITAX, a patented gastroprokinetic drug. Under the terms of this license agreement, the Company paid $10.0 million in cash and assumed $2.0 million in research contract liability.

On December 10, 2002, the Company acquired the rights to the Ursodiol 250 mg tablets DELURSAN for the French market from Aventis, for a cash purchase price of $22.8 million.

On December 3, 2002, the Company acquired the worldwide rights to the PANZYTRAT enzyme product line from Abbott for a cash purchase price of $45.0 million.

During a transition period, the seller in certain of these acquisition transactions acts as selling agent for the management of these products. For the year ended September 30, 2005 sales of some of these products were still managed in part by the sellers. Axcan includes in its revenue the net sales from such products less corresponding cost of goods sold and other seller related expenses. Consequently, although net sales of such products for the year ended September 30, 2005 were $2,431,789 ($7,667,940 in 2004), the Company only included in its revenue an amount of $949,866 ($4,685,673 in 2004) representing the net sales less cost of goods sold and other seller related expenses.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of revenue represented by items in Axcan's consolidated statements of operations: For the three-month For the years periods ended ended September 30, September 30, ------------------------ ----------------------- 2005 2004 2005 2004 ------------ ----------- ----------- ----------- % % % % Revenue 100.0 100.0 100.0 100.0 ------------------------------------------------------------------------- Cost of goods sold 27.3 18.2 28.5 22.2 Selling and administrative expenses 31.5 30.2 34.2 31.4 Research and development expenses 12.2 11.1 12.7

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