TSX SYMBOL (Toronto Stock Exchange): AXP
NASDAQ SYMBOL (NASDAQ National Market): AXCA
MONT-SAINT-HILAIRE, QC May 4 /CNW Telbec/ - Axcan Pharma Inc. ("Axcan" or
the "Company") announced today operating results for the quarter ended March
31, 2005, the Company's second quarter of the fiscal year ending September 30,
2005. Net sales were $63.4 million compared with $63.2 million in the second
quarter of 2004. Research and development expenses increased $4.3 million to
$8.3 million for the quarter ended March 31, 2005 from $4.0 million for the
corresponding quarter of the preceding fiscal year. Net income for the three-
month period ended March 31, 2005 was $5.4 million compared with $12.4 million
for the same period of fiscal 2004. Diluted earnings per share were $0.12
compared with $0.24 in 2004 (all amounts stated in U.S. dollars).
"To assure Axcan's long-term growth, we are totally committed to meeting
our milestones for the development of ITAX," stated LDeon F. Gosselin,
President and Chief Executive Officer. "These milestones include completing
patient enrolment in our two Phase III clinical trials for this product
candidate in June 2005 and completing the clinical trials themselves by
September of this year. As a result, our R&D expenses rose to 13% of revenues
in the second quarter compared to 10% in the first quarter and to an average
of 6%-8% in previous years. This, coupled with an inventory write-down, has
had a negative impact on net income and earnings per share for the quarter. We
are, however, very pleased with the progress we are making on advancing ITAX
to a filing for regulatory approval that should take place by year-end."
RECENT DEVELOPMENTS
PRODUCT LAUNCHES
1000 MG MESALAMINE SUPPOSITORY
In November 2004, Axcan received approval from the U.S. Food and Drug
Administration ("FDA") for the use of a new, 1000-milligram mesalamine
suppository dosage form, to be administered once-per-day, for the treatment of
ulcerative proctitis. Axcan received three-year marketing exclusivity for the
new dosage form under the non-patent exclusivity provisions of the Federal
Food, Drug and Cosmetic Act. The product was launched in February in the
United States under the brand name Canasa 1000mg.
URSO FORTE
In July 2004, Axcan received approval from the FDA for the use of a new,
double-strength tablet formulation of URSO (ursodiol, URSO 500mg tablets).
This new formulation simplifies the dosing regimen used in the treatment of
Primary Biliary Cirrhosis. The product was launched in November 2004 in the
United States under the brand name URSO Forte.
PENDING APPROVALS
HELIZIDE
The Company is finalizing the qualification of a manufacturer of
biskalcitrate potassium (bismuth salt) a component of the Helizide combination
therapy for the eradication of Helicobacter Pylori bacterium. Axcan
anticipates FDA re-submission during the 2005 fiscal year. Assuming approval,
the Company expects to launch the product in the United States, Canada and
Europe during the second half of fiscal 2006.
SALOFALK 750 MG TABLETS
Axcan completed a Phase III trial, for the Canadian market, on the
efficacy and safety of a new 750-milligram mesalamine (5-ASA) tablet for the
oral treatment of ulcerative colitis. The Company filed a supplemental New
Drug Submission ("sNDS") for approval in Canada in the first quarter of fiscal
2004. Recently, Axcan received a non-approval letter from the Therapeutic
Products Directorate ("TPD") of Health Canada containing a list of questions
and comments for both the clinical and Chemistry, Manufacturing and Controls
("CMC") aspects of the original sNDS submission. Axcan intends to respond to
all questions in the non-approvable letter as well as request a meeting with
TPD of Health Canada to discuss their decision.
RESEARCH AND DEVELOPMENT UPDATE
PHASE III STUDIES
ITAX
In May 2004, Axcan obtained the approval of the TPD of Health Canada and
Investigational New Drug clearance from the Gastro-intestinal division of the
FDA, required to initiate Phase III clinical trials to demonstrate the safety
and efficacy of ITAX (itopride hydrochloride) in the treatment of functional
dyspepsia.
Enrollment for the two Phase III studies, which are being conducted in
North America and Europe, is well underway and should be completed in the
third fiscal quarter of 2005. More recently, Axcan announced positive cardiac
safety results of a high dose (supratherapeutic) study. In this study, ITAX
was shown to have no clinically relevant effects on heart rate, cardiac
conduction and cardiac repolarization. Axcan expects to file a New Drug
Application during the first quarter of fiscal 2006
Axcan also plans to study ITAX in the treatment of diabetic gastropathy.
As previously announced, Axcan believes that, if approved by the FDA, ITAX has
the potential to become its largest selling product, and expects to launch
this product in the United States, Canada, Germany, U.K. and France in fiscal
2007.
CANASA / SALOFALK rectal gel
Axcan completed Phase III studies to confirm the efficacy and safety of a
new mesalamine rectal gel in the treatment of distal ulcerative colitis. Final
results are expected to be available during the second half of fiscal 2005.
Assuming the results of the Phase III studies are positive, the Company plans
to submit regulatory filings for approvals in the United States and Canada and
expects to launch the rectal gel in the United States and Canada in the second
half of fiscal 2006.
HEPENAX
L-Ornithine L-Aspartate salt , which is known as HEPENAX, was developed
by Merz Pharmaceuticals GmbH in Germany and is licensed to Axcan. The Company
intends to further develop HEPENAX in North America and Europe for patients
suffering from Porto-Systemic Encephalopathy ("PSE"), a condition used to
describe the deleterious effects of liver failure on the central nervous
system. The Company plans to conduct a Phase II/III clinical development
program for HEPENAX and plans to seek approval of the intravenous formulation
to treat the acute symptoms of PSE. The Company initiated its clinical
research program in the third quarter of fiscal 2004 and expects to complete
such studies in the second half of fiscal 2007.
PHOTOFRIN
PHOTOFRIN is approved in a number of countries for the treatment of
different forms of cancers. Axcan is currently investigating the use of
PHOTOFRIN for the treatment of cholangiocarcinoma, a serious bile duct (liver)
cancer with a high mortality rate. The treatment under investigation combines
PHOTOFRIN with PDT and the stenting of the bile ducts. It is anticipated that
the proposed Phase III study will start in the third quarter of fiscal 2005.
PRE-CLINICAL, PHASE I AND PHASE II
NCX-1000
The FDA has accepted an Investigational New Drug Application for NCX-
1000, a patented, nitric oxide donating derivative of ursodiol, for the
treatment of portal hypertension, a late-stage complication of chronic,
advanced liver disease. The Phase I clinical development program, which is
designed to demonstrate the tolerability and safety of NCX-1000, has been
completed. Phase II studies are planned to begin during fiscal 2005.
Ursodiol Disulfate
Axcan recently completed a proof of concept study in rats to evaluate the
effect of ursodiol disulfate on the development of colonic tumors. Axcan
initiated animal toxicity studies in the fourth quarter of fiscal 2004, which
will be followed by clinical Phase I studies. Also, Axcan intends to pursue
the development of an intravenous ursodiol disulfate to be used in the domain
of organ preservation in liver transplants.
NMK 150
Axcan and Nordmark GmbH, a German pharmaceutical firm, have set up a
joint-venture, Norax, in order to develop NMK 150, a new high protease
pancrelipase preparation. This product will be developed for the relief of
pain in small duct chronic pancreatitis. It is expected that NMK 150 will
enter clinical development in the fiscal year 2005.
NMK 250
Norax is also developing NMK 250, a bacterial lipase intended to correct
steatorrhea in patients suffering from diverse causes of pancreatic
insufficiency (e.g., following surgery for cancer or due to cystic fibrosis).
Norax expects to complete the formulation work during the second half of
fiscal 2005.
INTERIM FINANCIAL REPORT
This release includes, by reference, the second quarter interim financial
report incorporating the financial statements in accordance with both U.S. and
Canadian GAAP as well as the full Management Discussion & Analysis ("MD&A")
including the reconciliation to Canadian GAAP of the U.S. GAAP presentation.
The interim report, including the MD&A and financial statements, is filed with
applicable U.S. and Canadian regulatory authorities.
CONFERENCE CALL
Axcan will host a conference call at 4:30 P.M. ET, on May 4, 2005.
Interested parties may also access the conference call by way of web cast at
www.axcan.com . The telephone numbers to access the conference call are (800)
814-4890 (Canada and United States) or (416) 640-4127 (international). A
replay of the call will be available until May 11, 2005. The telephone number
to access the replay of the call is (416) 640-1917 code: 21122352.
ABOUT AXCAN PHARMA
Axcan is a leading specialty pharmaceutical company involved in the field
of gastroenterology. Axcan markets a broad line of prescription products sold
for the treatment of symptoms in a number of gastrointestinal diseases and
disorders such as inflammatory bowel disease, irritable bowel syndrome,
cholestatic liver diseases and complications related to cystic fibrosis.
Axcan's products are marketed by its own sales force in North America and
Europe. Its common shares are listed on the Toronto Stock Exchange under the
symbol "AXP" and on the NASDAQ National Market under the symbol "AXCA".
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995.
This release contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent any
statements made in this release contain information that is not historical,
these statements are essentially forward looking and are often identified by
words such as "anticipate," "expect," "estimate," "intend," "project," "plan"
and "believe." Forward-looking statements are subject to risks and
uncertainties, including the difficulty of predicting FDA and other regulatory
approvals, acceptance and demand for new pharmaceutical products, the impact
of competitive products and pricing, new product development and launch,
reliance on key strategic alliances, availability of raw materials, the
regulatory environment, fluctuations in operating results, the protection of
our intellectual property and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission and the Canadian
securities regulatory authorities.
The names ITAX, , Salofalk, Hepenax, Helizide, Urso, Urso Forte,
Photofrin and Canasa appearing in this press release are trademarks of Axcan
Pharma Inc. and its subsidiaries.
Management Discussion and Analysis (MD&A), Financial Statements and Notes
Attached
Management's discussion and analysis of financial condition and results
of operations
This discussion should be read in conjunction with the information
contained in Axcan's consolidated financial statements and the related notes
thereto. All amounts are in U.S. dollars.
Overview
Axcan is a leading specialty pharmaceutical company concentrating in the
field of gastroenterology, with operations in North America and Europe. Axcan
markets and sells pharmaceutical products used in the treatment of a variety
of gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO 250, URSO FORTE and
DELURSAN for the treatment of certain cholestatic liver diseases; SALOFALK and
CANASA for the treatment of certain inflammatory bowel diseases; and PHOTOFRIN
for the treatment of certain types of gastrointestinal cancers and other
conditions. Axcan has a number of pharmaceutical projects in all phases of
development including ITAX for the treatment of functional dyspepsia. In the
first quarter of fiscal 2004, Axcan filed a supplemental New Drug Submission
for a new 750-milligram Mesalamine (5-ASA) tablet for the oral treatment of
ulcerative colitis. On March 24, 2005, Axcan received a non-approval letter
from the Therapeutic Products Directorate of Health Canada containing a list
of questions and comments for both the clinical and Chemistry, Manufacturing
and Controls aspects of the original New Drug Submission. Axcan intends to
respond to all questions in the non-approvable letter as well as request a
meeting with Therapeutic Products Directorate of Health Canada.
Axcan reported revenue of $63.4 million, operating income of $8.3 million
and net income of $5.4 million for the three-month period ended March 31,
2005. For the six-month period ended March 31,2005, revenue was
$124.9 million, operating income was $20.4 million and net income was
$13.2 million. Revenue from sales of Axcan's products in the United States was
$78.5 million (62.8% of total revenue) for the six-month period ended
March 31, 2005, compared to $81.1 million (67.2% of total revenue) for the
same period of fiscal 2004. In Canada, revenue was $16.9 million (13.5% of
total revenue) for the six-month period ended March 31, 2005, compared to
$13.4 million (11.1% of total revenue) for the same period of fiscal 2004. In
Europe, revenue was $29.5 million (23.6% of total revenue) for the six-month
period ended March 31, 2005, compared to $26.1 million (21.6% of total
revenue) for the same period of fiscal 2004.
Axcan's revenue historically has been and continues to be principally
derived from sales of pharmaceutical products to large pharmaceutical
wholesalers and large chain pharmacies. Axcan utilizes a "pull-through"
marketing approach that is typical of pharmaceutical companies. Under this
approach, Axcan's sales representatives demonstrate the features and benefits
of its products to gastroenterologists who may write their patients
prescriptions for Axcan's products. The patients, in turn, take the
prescriptions to pharmacies to be filled. The pharmacies then place orders
with the wholesalers or, in the case of large chain pharmacies, their
distribution centres, to whom Axcan sells its products.
Axcan's expenses are comprised primarily of selling and administrative
expenses (including marketing expenses), cost of goods sold (including royalty
payments to those companies from whom Axcan licenses some of its products),
research and development expenses as well as depreciation and amortization.
Axcan's annual and quarterly operating results are primarily affected by
three factors: wholesaler buying patterns; the level of acceptance of Axcan's
products by gastroenterologists and their patients; and the extent of Axcan's
control over the marketing of its products. Wholesaler buying patterns,
including a tendency to increase inventory levels prior to an anticipated or
announced price increase, affect Axcan's operating results by shifting revenue
between quarters. To maintain good relations with wholesalers, Axcan typically
gives prior notice of price increases. The level of patient and physician
acceptance of Axcan's products, as well as the availability of similar
therapies, which may be less effective but also less expensive than some of
Axcan's products, impact Axcan's revenues by driving the level and timing of
prescriptions for its products.
Critical Accounting Policies
Axcan's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
("U.S. GAAP"), applied on a consistent basis. Axcan's critical accounting
policies include the use of estimates, revenue recognition, the recording of
research and development expenses and the determination of the useful lives or
fair value of goodwill and intangible assets. Some of our critical accounting
policies require the use of judgment in their application or require estimates
of inherently uncertain matters. Although our accounting policies are in
compliance with U.S. GAAP, a change in the facts and circumstances of an
underlying transaction could significantly change the application of our
accounting policies to that transaction, which could have an effect on our
financial statements. Discussed below are those policies that we believe are
critical and require the use of complex judgment in their application.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities as of the date of the financial statements and the disclosure of
recognized amounts of revenues and expenses during the year. Significant
estimates and assumptions made by management include the allowance for
accounts receivable and inventories, reserves for product returns, rebates and
chargebacks, the classification of intangible assets between finite and
indefinite life, useful lives of long-lived assets, the expected cash flows
used in evaluating long-lived assets, goodwill and investments for impairment,
contingency provisions and other accrued charges. These estimates were made
using the historical information available to management. The Company reviews
all significant estimates affecting the financial statements on a recurring
basis and records the effect of any adjustment when necessary. Actual results
could differ from those estimates.
Revenue Recognition
Revenue is recognized when the product is shipped to the Company's
customer, provided the Company has not retained any significant risks of
ownership or future obligations with respect to the product shipped. Revenue
from product sales is recognized net of sales discounts, allowances, returns,
rebates and chargebacks. In certain circumstances, returns or exchanges of
products are allowed under the Company's policy, and provisions are maintained
accordingly. Amounts received from customers as prepayments for products to be
shipped in the future are reported as deferred revenue.
Goodwill and Intangible Assets
Axcan's goodwill and intangible assets are stated at cost, less
accumulated amortization. Since October 1, 2001, the Company does not amortize
goodwill and intangible assets with an indefinite life. However, management
evaluates the value of the unamortized portion of goodwill and intangible
assets annually, by comparing the carrying value to the future benefits of the
Company's activities or the expected sale of pharmaceutical products. Should
there be a permanent impairment in value or if the unamortized balance exceeds
recoverable amounts, a write-down will be recognized for the current year. To
date, Axcan has not recognized any significant permanent impairment in value
except for an amount of $83,000 of goodwill for the year ended September 30,
2004. Intangible assets with finite life are amortized over their estimated
useful lives.
Research and Development Expenses
Research and development expenses are charged to operations in the year
they are incurred. Acquired in-process research and development having no
alternative future use is written off at the time of acquisition. The cost of
intangibles that are acquired from others for a particular research and
development project, with no alternative use, are written off at the time of
acquisition.
Acquisition of Products
On November 18, 2003, the Company acquired the rights to a group of
products from Aventis Pharma S.A. ("Aventis"). The $145.0 million purchase
price was paid out of Axcan's cash on hand. These products are CARAFATE and
BENTYL for the U.S. market and SULCRATE, BENTYLOL and PROCTOSEDYL for the
Canadian market (collectively, "AVAX" product line).
On August 29, 2003, the Company acquired an exclusive license for North
America, the European Union and Latin America, from Abbott Laboratories
("Abbott") to develop, manufacture and market ITAX, a patented
gastroprokinetic drug. Under the terms of this license agreement, the Company
paid $10.0 million in cash and assumed $2.0 million in research contract
liability. This product is in development, has not reached technological
feasibility and has no known alternative uses; therefore, its acquisition was
deemed to be acquired in-process research and was expensed in the period of
acquisition.
On December 10, 2002, the Company acquired the rights to the Ursodiol
250 mg tablets DELURSAN for the French market from Aventis, for a cash
purchase price of $22.8 million.
On December 3, 2002, the Company acquired the worldwide rights to the
PANZYTRAT enzyme product line from Abbott for a cash purchase price of
$45.0 million.
During a transition period, the seller in some of these acquisition
transactions acts as selling agent for the management of these products. For
the six-month period ended March 31, 2005, sales of some of these products
were still managed in part by the sellers. Axcan includes in its revenue the
net sales from such products less corresponding cost of goods sold and other
seller related expenses. Consequently, although net sales of such products for
the six-month period ended March 31, 2005 were $1,194,522 ($5,315,913 in
2004), the Company only included in its revenue an amount of $467,078
($3,440,421 in 2004) representing the net sales less cost of goods sold and
other seller related expenses.
<<
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of revenue represented by items in Axcan's consolidated statements of
operations:
For the three-month periods For the six-month periods
ended March 31, ended March 31,
--------------------------- -------------------------
2005 2004 2005 2004
------------ ------------ ----------- ----------
% % % %
Revenue 100.0 100.0 100.0 100.0
-------------------------------------------------------------------------
Cost of goods sold 32.3 23.7 29.8 24.5
Selling and
administrative
expenses 33.1 31.7 33.5 31.8
Research and
development expenses 13.1 6.3 11.8 6.6
Depreciation and
amortization 8.4 6.6 8.6 6.5
-------------------------------------------------------------------------
86.9 68.3 83.7 69.4
-------------------------------------------------------------------------
Operating income 13.1 31.7 16.3 30.6
-------------------------------------------------------------------------
Financial expenses 3.0 2.7 2.9 2.8
Interest income (0.5) - (0.3) (0.2)
Loss (gain) on foreign
exchange (0.3) 0.4 (0.4) 0.3
-------------------------------------------------------------------------
2.2 3.1 2.2 2.9
-------------------------------------------------------------------------
Income before income
taxes 10.9 28.6 14.1 27.7
Income taxes 2.3 8.9 3.5 8.8
-------------------------------------------------------------------------
Net income 8.6 19.7 10.6 18.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Periods ended March 31, 2005 compared to periods ended March 31, 2004
Revenue
For the three-month period ended March 31, 2005, revenue was
$63.4 million compared to $63.2 million for the corresponding quarter of the
preceding fiscal year, an increase of 0.3%. For the six-month period ended
March 31, 2005, revenue was $124.9 million compared to $120.8 million for the
corresponding quarter of the preceding fiscal year, an increase of 3.3%. This
increase in revenue primarily resulted from the U.S. and Canadian sales of the
AVAX product line that was acquired in November 2003.
Cost of goods sold
Cost of goods sold consists principally of costs of raw materials,
royalties and manufacturing costs. Axcan outsources most of its manufacturing
requirements. Cost of goods sold increased $5.5 million (36.7%) to
$20.5 million for the three-month period ended March 31, 2005 from
$15.0 million for the corresponding quarter of the preceding fiscal year. As a
percentage of revenue, cost of goods sold for the quarter ended March 31, 2005
increased as compared to the corresponding quarter of the preceding fiscal
year from 23.7% to 32.3%. For the six-month period ended March 31, 2005, cost
of goods sold increased $7.7 million (26.1%) to $37.2 million from
$29.5 million for the corresponding period of the preceding fiscal year. As a
percentage of revenue, cost of goods sold for the six-month period ended March
31, 2005 increased as compared to the corresponding period of the preceding
fiscal year from 24.4% to 29.8%. This increase in the cost of goods sold as a
percentage of revenue was due mainly to the write-down of inventory of
finished goods with less than twelve months of shelf life. Cost of goods sold
includes $3.9 million for the quarter and $4.7 million for the six-month
period ended March 31, 2005 related to the write-down of inventory of finished
goods for one product line sold in the United States.
Selling and administrative expenses
Selling and administrative expenses consist principally of salaries and
other costs associated with Axcan's sales force and marketing activities.
Selling and administrative expenses increased $0.9 million (4.5%) to
$20.9 million for the three-month period ended March 31, 2005 from
$20.0 million for the corresponding quarter of the preceding fiscal year. For
the six-month period ended March 31, 2005, selling and administrative expenses
increased $3.5 million (9.1%) to $41.9 million from $38.4 million for the
corresponding period of the preceding fiscal year. This increase is mainly due
to an increase in our sales force in preparation for additional products to be
marketed, including ITAX, and additional marketing efforts on our current
products.
Research and development expenses
Research and development expenses consist principally of fees paid to
outside parties that Axcan uses to conduct clinical studies and to submit
governmental approval applications on its behalf as well as the salaries and
benefits paid to its personnel involved in research and development projects.
Research and development expenses increased $4.3 million (107.5%) to
$8.3 million for the quarter ended March 31, 2005 from $4.0 million for the
corresponding quarter of the preceding fiscal year. For the six-month period
ended March 31, 2005, research and development expenses increased $6.8 million
(86.1%) to $14.7 million from $7.9 million for the corresponding period of the
preceding fiscal year. This increase is mainly due to the Company's decision
to accelerate the development of ITAX, acquired in August 2003, for the
treatment of functional dyspepsia.
Depreciation and amortization
Depreciation and amortization consists principally of the amortization of
intangible assets with a finite life. Intangible assets include trademarks,
trademark licenses and manufacturing rights. Depreciation and amortization
increased $1.1 million (26.2%) to $5.3 million for the quarter ended March 31,
2005 from $4.2 million for the corresponding quarter of the preceding fiscal
year. For the six-month period ended March 31, 2005, depreciation and
amortization increased $2.8 million (35.4%) to $10.7 million from $7.9 million
for the corresponding period of the preceding fiscal year. The increase is
mainly due to the amortization of the AVAX product line acquired from Aventis
on November 18, 2003 and of PANZYTRAT which was reclassified from intangible
assets with an indefinite life to intangible assets with a finite life on
October 1, 2004.
Financial expenses
Financial expenses consist principally of interest and fees paid in
connection with money borrowed for acquisitions. Financial expenses increased
$0.2 million (11.8%) to $1.9 million for the quarter ended March 31, 2005 from
$1.7 million for the corresponding quarter of the preceding fiscal year. For
the six-month period ended March 31, 2005, financial expenses increased
$0.3 million (8.8%) to $3.7 million from $3.4 million for the corresponding
period of the preceding fiscal year.
Income Taxes
Income taxes amounted to $1.5 million for the quarter ended March 31,
2005, compared to $5.7 million for the quarter ended March 31, 2004. The
effective tax rates were 21.7% for the quarter ended March 31, 2005 and 31.3%
for the quarter ended March 31, 2004. The decrease in effective tax rate is
mainly due to the research and development tax credits, deducted from the
income taxes expense, of $0.5 million for the quarter ended March 31, 2005
compared to $0.1 million for the corresponding quarter of the preceding fiscal
year. For the six-month period ended March 31, 2005, income taxes amounted to
$4.4 million compared to $10.6 million for the corresponding period of the
preceding fiscal year. The effective tax rates were 25.0% for the six-month
period ended March 31, 2005 and 31.7% for the six-month period ended March 31,
2004. The decrease in effective tax rate is mainly due to the research and
development tax credits, deducted from the income taxes expense, of
$1.1 million for the six-month period ended March 31, 2005 compared to
$0.3 million for the corresponding period of the preceding fiscal year.
<<
The income tax expense and corresponding tax rate are summarized in the
following tables:
Income tax For the three-month period For the six-month period
expense ended March 31 ended March 31
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ----------- -------------
$ $ $ $
Income tax 2,049 5,758 5,478 10,937
Research and
development tax
credits (546) (104) (1,081) (322)
-------------------------------------------------------------------------
Income tax expense 1,503 5,654 4,397 10,615
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income tax rate For the three-month period For the six-month period
ended March 31 ended March 31
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ----------- -------------
% % % %
Income tax 29.6 31.9 31.2 32.7
Research and
development
tax credits (7.9) (0.6) (6.2) (1.0)
-------------------------------------------------------------------------
Effective tax rate 21.7 31.3 25.0 31.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Net income
Net income was $5.4 million or $0.12 of basic and diluted income per
share, for the quarter ended March 31, 2005, compared to $12.4 million or
$0.27 of basic income per share and $0.24 of diluted income per share for the
corresponding quarter of the preceding year. The weighted average number of
common shares outstanding used to establish the basic per share amounts
increased from 45.2 million for the quarter ended March 31, 2004 to
45.6 million for the quarter ended March 31, 2005, following the exercise of
options previously granted pursuant to Axcan's stock option plan. The weighted
average number of common shares used to establish the diluted per share
amounts increased from 55.1 million for the quarter ended March 31, 2004 to
55.4 million for the quarter ended March 31, 2005.
Net income was $13.2 million or $0.29 of basic income per share and $0.28
of diluted income per share, for the six-month period ended March 31, 2005,
compared to $22.9 million or $0.51 of basic income per share and $0.46 of
diluted income per share for the corresponding period of the preceding year.
Canadian GAAP
The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affect net income for the periods ended March 31, 2005 and 2004 are
summarized in the following table:
<<
For the three-month period For the six-month period
ended March 31 ended March 31
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ----------- -------------
$ $ $ $
Net income in
accordance with
U.S. GAAP 5,425 12,421 13,179 22,856
Implicit interest
on convertible debt (1,120) (1,023) (2,243) (2,049)
Stock-based
compensation expense (1,131) - (2,431) -
Amortization of new
product acquisition
costs (12) (13) (26) (26)
Income tax impact of
the above adjustments 135 5 140 10
-------------------------------------------------------------------------
Net earnings in
accordance with
Canadian GAAP 3,297 11,390 8,619 20,791
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
On March 5, 2003, the Company closed an offering of $125.0 million
aggregate principal amount of 4 1/4% convertible subordinated notes due
April 15, 2008. As a result of the terms of the notes, under Canadian GAAP, an
amount of $24,238,899 was included in shareholders' equity as equity component
of the convertible debt and an amount of $100,761,101 was included in long-
term debt, as the liability component of the convertible notes. For the six-
month period ended March 31, 2005, implicit interest in the amount of
$2,242,724 ($2,049,057 in 2004) was accounted for and added to the liability
component.
Since October 1, 2004, under Canadian GAAP, the effect of stock-based
compensation has to be accounted for using the fair value method.
Under Canadian GAAP, research and development expenses are stated net of
related tax credits which generally constitute between 10% and 15% of the
aggregate amount of such expenses. Under U.S. GAAP, these tax credits are
applied against income taxes.
Liquidity and capital resources
Axcan's cash, cash equivalents and short-term investments increased
$22.4 million (59.1%) to $60.3 million at March 31, 2005 from $37.9 million at
September 30, 2004. As of March 31, 2005, working capital was $109.6 million,
compared to $87.7 million at September 30, 2004. These increases are mainly
due to the cash flows from operating activities of the six-month period ended
March 31, 2005.
Total assets increased $22.7 million (3.7%) to $632.3 million as of
March 31, 2005 from $609.6 million as of September 30, 2004. Shareholders'
equity increased $20.2 million (5.2%) to $412.3 million as of March 31, 2005
from $392.1 million as of September 30, 2004.
Historically, Axcan has financed research and development, operations,
acquisitions, milestone payments and investments out of the proceeds of public
and private sales of its equity and convertible debt, cash flows from
operating activities, and loans from joint venture partners and financial
institutions. Since it went public in Canada in December 1995, Axcan has
raised approximately $243.0 million from sales of its equity and
$125.0 million from sales of convertible notes. Furthermore, Axcan has
borrowed and since repaid funds from financial institutions to finance the
acquisition of Axcan Scandipharm Inc. and from Schwarz Pharma Inc., a former
joint venture partner, to finance the acquisition of Axcan URSO.
Axcan's research and development expenses totalled $19.9 million for
fiscal 2004 and $14.7 million for the six-month period ended March 31, 2005.
Axcan believes that cash, cash equivalents and short-term investments,
together with funds provided by operations, will be sufficient to meet its
operating cash requirements, including the development of products through
research and development activities, capital expenditures and repayment of its
debt. Assuming regulatory approvals of future products and indications
stemming from its research and development efforts, Axcan believes that these
will also significantly contribute to an increase in funds provided by
operations. However, Axcan regularly reviews product and other acquisition
opportunities and may therefore require additional debt or equity financing.
Axcan cannot be certain that such additional financing, if required, will be
available on acceptable terms, or at all.
Line of credit
Since September 22, 2004, the Company has had an amended credit facility
with a banking syndicate. The amended credit facility consists in a
$125.0 million 364-day extendible revolving facility with a two-year term-out
option maturing on September 22, 2007.
The credit facility is secured by a first priority security interest on
all present and future acquired assets of the Company and its material
subsidiaries, and provides for the maintenance of certain financial ratios.
Among the restrictions imposed by the credit facility is a covenant limiting
cash dividends, share repurchases (other than redeemable shares issued in
connection with a permitted acquisition) and similar distributions to
shareholders to 10% of the Company's net income for the preceding fiscal year.
As of March 31, 2005, Axcan was in compliance with all covenants under the
credit facility.
The interest rate varies, depending on the Company's leverage, between 25
basis points and 100 basis points over Canadian prime rate or U.S. base rate,
and between 125 basis points and 200 basis points over the LIBOR rate or
bankers acceptances. The credit facility may be drawn in U.S. dollars or in
Canadian dollar equivalents. As of March 31, 2005, there was no amount
outstanding under this credit facility.
Convertible subordinated notes and other long-term debt
Long-term debt including instalments due within one year totalled
$129.0 million as of March 31, 2005 compared to $129.7 million as of
September 30, 2004. As of March 31, 2005, the long-term debt included,
$1.9 million of bank loans, $2.1 million of obligations under capital leases
contracted by Axcan's French subsidiary and the $125.0 million 4 1/4%
convertible subordinated notes due 2008 which were issued on March 5, 2003.
The notes are convertible into 8,924,113 common shares during any
quarterly conversion period if the closing price per share for at least 20
consecutive trading days during the 30 consecutive trading-day period ending
on the first day of the conversion period exceeds 110% of the conversion price
in effect on that thirtieth trading day. The notes are also convertible during
the five business-day period following any 10 consecutive trading-day period
in which the daily average of the trading prices for the notes was less than
95% of the average conversion value for the notes during that period. The note
holders may also convert their notes upon the occurrence of specified
corporate transactions or if the Company has called the notes for redemption.
On or after April 20, 2006, the Company may at its option, redeem the notes,
in whole or in part at redemption prices varying from 101.70% to 100.85% of
the principal amount plus any accrued and unpaid interest to the redemption
date. The notes also include provisions for the redemption of all the notes
for cash at the option of the Company following certain changes in tax
treatment.
Cash Flows
Cash flows from operating activities decreased $0.2 million from
$18.3 million of cash provided by operating activities for the quarter ended
March 31, 2004 to $18.1 million for the quarter ended March 31, 2005. Cash
flows from operating activities increased $9.7 million from $17.1 million of
cash provided by operating activities for the six-month period ended March 31,
2004 to $26.8 million for the six-month period ended March 31, 2005. This
increase is mainly due to the fact that the accounts receivable and
inventories remained relatively stable during the six-month period ended
March 31, 2005 compared to the corresponding period of the previous fiscal
year when they increased following the increase in sales and the acquisition
of new products. Cash flows used by financing activities were $0.1 million for
the quarter ended March 31, 2005 and $1.0 million for the six-month period
ended March 31, 2005. Cash flows used for investment activities for the
quarter ended March 31, 2005 were $3.2 million mainly due to the net cash used
for the acquisition of property, plant and equipment for $1.8 million and the
acquisition of short term investments for $1.4 million. Cash flows from
investment activities for the six-month period ended March 31, 2005 were
$7.8 million mainly due to the net disposal of short-term investments of
$11.4 million less the cash used for the acquisition of property plant and
equipment for $3.6 million. Cash flows used for investment activities for the
six-month period ended March 31, 2004 were $22.1 million mainly due to the net
cash used for the acquisition of intangible assets for $145.6 million with the
proceeds from the disposal of short-term investments.
Off-Balance Sheet Arrangements
Axcan does not have any transactions, arrangements and other
relationships with unconsolidated entities that are likely to affect its
operating results, its liquidity or capital resources. Axcan has no special
purpose or limited purpose entities that provide off balance sheet financing,
liquidity or market or credit risk support, engage in leasing, hedging,
research and development services, or other relationships that expose the
Company to liability that is not reflected on the face of the consolidated
financial statements.
Contractual Obligations
The following table summarizes Axcan's significant contractual
obligations (in thousands of dollars) as of March 31, 2005 and the effect such
obligations are expected to have on our liquidity and cash flows in future
years. This table excludes amounts already recorded on the balance sheet as
current liabilities at March 31, 2005 or certain other purchase obligations as
discussed below:
<<
For the twelve-month period ending March 31,
------------------------------------------------------
2010 and
2006 2007 2008 2009 thereafter
---------- ---------- ---------- ---------- ----------
$ $ $ $ $
Long-term debt 1,793 967 125,782 267 168
Operating leases 1,199 139 102 64 79
Other commitments 1,579 150 150 150 -
---------- ---------- ---------- ---------- ----------
4,571 1,256 126,034 481 247
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
>>
Purchase orders for raw materials, finished goods and other goods and
services are not included in the above table. Management is not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this table,
contractual obligations for purchase of goods or services are defined as
agreements that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Axcan's purchase orders are based on current needs
and are fulfilled by our vendors with relatively short timetables. The Company
does not have significant agreements for the purchase of raw materials or
finished goods specifying minimum quantities or set prices that exceed its
short-term expected requirements. Axcan also enters into contracts for
outsourced services; however, the obligations under these contracts are not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty except for a sales management
services contract included in the above table. As milestone payments are
primarily contingent on receiving regulatory approval for products under
development, they do not have defined maturities.
The expected timing of payment of the obligations discussed above is
estimated based on current information. Timing of payments and actual amounts
paid may be different depending on the time of receipt of goods or services,
or for some obligations, changes to agreed-upon amounts.
Effect of recently issued U.S. accounting pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition to SFAS No. 123's fair value method
of accounting for stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and Accounting Principles Board
Opinion ("APB") No. 28, "Interim Financial Reporting", to require disclosure
in the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value method,
the disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB No. 25. As allowed by SFAS No. 123, the Company elected to
continue to utilize the accounting method prescribed by APB No. 25 and applies
the disclosure requirements of SFAS No. 123.
On March 31, 2004, the FASB issued an Exposure Draft, "Share-Based
Payment, an Amendment of FASB Statements No. 123 and 95". The Exposure Draft
would require all entities to recognize compensation cost for share-based
awards, including options, granted to employees. The proposed Statement would
eliminate the ability to account for share-based compensation transactions
using APB No. 25, "Accounting for Stock Issued to Employees", and generally
would require instead that such transactions be accounted for using a
fair-value based method. Public companies would be required to measure
stock-based compensation classified as equity by valuing the instrument the
employee receives at its grant-date fair value. Share-based awards classified
as liabilities, would be measured at fair value and remeasured at fair value
at each reporting period. Currently such awards are measured at intrinsic
value under both APB No. 25 and SFAS 123, "Accounting for Stock-Based
Compensation". The Company would apply the proposed Statement for fiscal years
beginning after June 15, 2005 using the modified prospective transition
approach.
During the September 2004 meeting of the Emerging Issues Task Force
("EITF") a consensus was reached on EITF Issue 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share". The EITF 04-8
requires Companies to include certain convertible debt and equity instruments,
that were previously excluded, into their calculations of diluted earnings per
share. The EITF concluded that Issue 04-8 will be effective for periods ending
after December 15, 2004, and must be applied by restating all periods during
which time the applicable convertible instruments were outstanding. The 4 1/4%
convertible subordinated notes, issued in 2003 will always be included in the
Company's diluted earnings per share calculation.
Earnings coverage
Under U.S. GAAP, for the twelve months ended March 31, 2005, our interest
requirements amounted to $6.3 million on a pro-forma basis and our earnings
coverage ratio, defined as the ratio of earnings before interest and income
taxes to pro-forma interest requirements, was 9.8 to one.
Under Canadian GAAP, for the twelve months ended March 31, 2005, our
interest requirements amounted to $11.0 million on a pro-forma basis, and our
earnings coverage ratio was 5.5 to one. The principal difference between the
earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable to
the inclusion of implicit interest of $4.7 million as required by Canadian
GAAP.
Risk Factors
Axcan is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Axcan does not use derivative
financial instruments for speculative or trading purposes. Axcan does not use
off-balance sheet financing or similar special purpose entities. Inflation has
not had a significant impact on Axcan's results of operations.
Foreign Currency Risk
Axcan operates internationally; however, a substantial portion of the
revenue and expense activities and capital expenditures are transacted in
U.S. dollars. Axcan's exposure to exchange rate fluctuation is reduced
because, in general, Axcan's revenues denominated in currencies other than the
U.S. dollar are matched by a corresponding amount of costs denominated in the
same currency. Axcan expects this matching to continue.
Interest Rate Risk
The primary objective of Axcan's investment policy is the protection of
capital. Accordingly, investments are made in high-grade government and
corporate securities with varying maturities, but typically, less than
180 days. Therefore, Axcan does not have a material exposure to interest rate
risk, and a 100 basis-point adverse change in interest rates would not have a
material effect on Axcan's consolidated results of operations, financial
position or cash flows. Axcan is exposed to interest rate risk on borrowings
under the credit facility. The credit facility bears interest based on LIBOR,
U.S. dollar base rate, Canadian dollar prime rate, or Canadian dollar
Bankers' Acceptances. Based on projected advances under the credit facility, a
100 basis-point adverse change in interest rates would not have a material
effect on Axcan's consolidated results of operations, financial position, or
cash flows.
Supply and Manufacture
Axcan depends on third parties for the supply of active ingredients and
for the manufacture of the majority of its products. Although Axcan looks to
secure alternative suppliers, Axcan may not be able to obtain the active
ingredients or products from such third parties, the active ingredients or
products may not comply with specifications, or the prices at which Axcan
purchases them may increase and Axcan may not be able to locate alternative
sources of supply in a reasonable time period, or at all. If any of these
events occur, Axcan may not be able to continue to market certain of its
products, and its sales and profitability would be adversely affected.
Volatility of Share Prices
The market price of Axcan's shares is subject to volatility. Deviations
in actual financial or scientific results, as compared to expectations of
securities analysts who follow our activities can have a significant effect on
the trading price of Axcan's shares.
Forward-looking Statements
This document contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent that any
statements in this document contain information that is not historical, the
statements are essentially forward-looking and are often identified by words
such as "anticipate", "expect", "estimate", "intend", "project", "plan" and
"believe". These forward-looking statements include, but are not limited to,
the expected sales growth of the Company's products and the expected increase
in funds from operations resulting from the Company's research and development
expenditures. The forward-looking statements involve risks and uncertainties.
Actual events could differ materially from those projected herein and depend
on a number of factors, including but not limited to the successful and timely
completion of clinical studies, the difficulty of predicting FDA or other
regulatory approvals, the commercialization of a drug or therapy after
regulatory approval is received, the difficulty of predicting acceptance and
demand for pharmaceutical products, the impact of competitive products and
pricing, new product development and launch, the availability of raw
materials, the protection of our intellectual property, fluctuations in our
operating results and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission and the Canadian
Securities Commissions. The reader is cautioned not to rely on these forward
looking statements. The Company disclaims any obligation to update these
forward-looking statements.
This MD&A has been prepared as of April 3, 2005. Additional information
on the Company is available through regular filing of press releases,
quarterly financial statements and Annual Information Form on the SEDAR
website.
On behalf of Management,
(signed)
Jean VDezina
Vice President, Finance and Chief Financial Officer
<<
AXCAN PHARMA INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
March 31, September 30,
2005 2004
------------- --------------
(unaudited)
ASSETS $ $
Current assets
Cash and cash equivalents 55,784 21,979
Short-term investments available for sale 4,495 15,922
Accounts receivable 49,892 46,585
Income taxes receivable 6,995 9,196
Inventories (Note 4) 35,670 37,270
Prepaid expenses and deposits 3,859 3,494
Deferred income taxes 6,467 4,586
-------------------------------------------------------------------------
Total current assets 163,162 139,032
Property, plant and equipment, net 32,482 31,252
Intangible assets, net (Note 5) 404,352 407,875
Goodwill, net 27,467 27,467
Deferred debt issue expenses, net 3,126 3,088
Deferred income taxes 1,676 930
-------------------------------------------------------------------------
Total assets 632,265 609,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 48,553 47,917
Income taxes payable 1,921 731
Instalments on long-term debt 1,793 1,778
Deferred income taxes 1,271 936
-------------------------------------------------------------------------
Total current liabilities 53,538 51,362
Long-term debt 127,184 127,916
Deferred income taxes 39,267 38,290
-------------------------------------------------------------------------
Total liabilities 219,989 217,568
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock
Series A preferred shares, without par value,
shares authorized: 14,175,000; no shares issued.
Series B preferred shares, without par value,
shares authorized: 12,000,000; no shares issued.
Common shares, without par value, unlimited
shares authorized; 45,618,251 issued as at
March 31, 2005 and 45,562,336 as at
September 30, 2004. 261,200 260,643
Retained earnings 125,541 112,362
Contributed surplus 1,110 -
Accumulated other comprehensive income 24,425 19,071
-------------------------------------------------------------------------
Total shareholders' equity 412,276 392,076
-------------------------------------------------------------------------
Total liabilities and shareholders' equity 632,265 609,644
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Statements of Shareholders' Equity
-------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Common shares
(number)
Balance, beginning
of period 45,581,050 45,061,531 45,562,336 45,004,320
Exercise of
options 37,201 266,571 55,915 323,782
-------------------------------------------------------------------------
Balance, end of
period 45,618,251 45,328,102 45,618,251 45,328,102
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Common shares
Balance, beginning
of period 260,799 256,178 260,643 255,743
Exercise of
options 401 2,389 557 2,824
-------------------------------------------------------------------------
Balance, end of
period 261,200 258,567 261,200 258,567
-------------------------------------------------------------------------
Retained earnings
Balance, beginning
of period 120,116 74,069 112,362 63,634
Net income 5,425 12,421 13,179 22,856
-------------------------------------------------------------------------
Balance, end of
period 125,541 86,490 125,541 86,490
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning
of period 980 - - -
Income tax savings
on stock options
exercise 130 - 1,110 -
-------------------------------------------------------------------------
Balance, end of
period 1,110 - 1,110 -
-------------------------------------------------------------------------
Accumulated other
comprehensive
income (loss)
Balance, beginning
of period 29,919 20,161 19,071 11,634
Foreign currency
translation
adjustments (5,494) (2,266) 5,354 6,261
-------------------------------------------------------------------------
Balance, end of
period 24,425 17,895 24,425 17,895
-------------------------------------------------------------------------
Total shareholders'
equity 412,276 362,952 412,276 362,952
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive income (loss)
Foreign currency
translation
adjustments (5,494) (2,266) 5,354 6,261
Net income 5,425 12,421 13,179 22,856
-------------------------------------------------------------------------
Total comprehensive
income (loss) (69) 10,155 18,533 29,117
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Operations $ $ $ $
Net income 5,425 12,421 13,179 22,856
Non-cash items
Amortization of
deferred debt
issue expenses 275 258 550 516
Other depreciation
and amortization 5,330 4,196 10,694 7,919
Loss (gain) on
disposal of
assets - (47) - 40
Foreign currency
fluctuation (126) (120) (142) (120)
Deferred income
taxes (1,886) 1,582 (1,285) 2,885
Share in net loss
of joint ventures - 60 - 60
Changes in working
capital items
Accounts
receivable (2,646) (2,429) (2,784) (11,293)
Income taxes
receivable 3,383 1,241 2,701 (1,365)
Inventories 3,418 203 2,293 (8,173)
Prepaid expenses
and deposits 550 419 (172) (630)
Accounts payable
and accrued
liabilities 4,825 6,203 (424) 4,817
Income taxes
payable (451) (5,733) 2,304 (410)
-------------------------------------------------------------------------
Cash flows from
operating activities 18,097 18,254 26,914 17,102
-------------------------------------------------------------------------
Financing
Repayment of
long-term debt (488) (408) (957) (950)
Deferred debt
issue expenses - - (589) -
Issue of shares 401 2,389 557 2,824
-------------------------------------------------------------------------
Cash flows from
financing activities (87) 1,981 (989) 1,874
-------------------------------------------------------------------------
Investment
Acquisition of
short-term
investments (1,395) - (1,395) -
Disposal of
short-term
investments - 2,030 12,822 128,390
Disposal of
investments - 1,101 - 1,239
Acquisition of
property, plant
and equipment (1,752) (4,151) (3,586) (6,514)
Disposal of
property, plant
and equipment - 52 - 378
Acquisition of
intangible assets (14) (14) (22) (145,604)
-------------------------------------------------------------------------
Cash flows from
investment activities (3,161) (982) 7,819 (22,111)
-------------------------------------------------------------------------
Foreign exchange gain
(loss) on cash held
in foreign
currencies (114) (32) 61 199
-------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents 14,735 19,221 33,805 (2,936)
Cash and cash
equivalents,
beginning of period 41,049 15,616 21,979 37,773
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 55,784 34,837 55,784 34,837
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 286 64 385 284
Interest paid 176 72 2,874 3,438
Income taxes paid 2,103 10,421 3,372 11,373
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Statements of Operations
-------------------------------------------------------------------------
In accordance with U.S. GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
REVENUE 63,364 63,192 124,947 120,757
-------------------------------------------------------------------------
Cost of goods sold 20,469 14,972 37,226 29,544
Selling and
administrative
expenses 20,948 20,043 41,905 38,410
Research and
development expenses 8,313 3,991 14,702 7,924
Depreciation and
amortization 5,330 4,196 10,694 7,919
-------------------------------------------------------------------------
55,060 43,202 104,527 83,797
-------------------------------------------------------------------------
Operating income 8,304 19,990 20,420 36,960
-------------------------------------------------------------------------
Financial expenses 1,869 1,706 3,656 3,387
Interest income (286) (55) (372) (246)
Loss (gain) on
foreign currency (207) 264 (440) 348
-------------------------------------------------------------------------
1,376 1,915 2,844 3,489
-------------------------------------------------------------------------
Income before income
taxes 6,928 18,075 17,576 33,471
Income taxes 1,503 5,654 4,397 10,615
-------------------------------------------------------------------------
NET INCOME 5,425 12,421 13,179 22,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per common share
Basic 0.12 0.27 0.29 0.51
Diluted 0.12 0.24 0.28 0.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of common
shares
Basic 45,599,780 45,188,011 45,582,668 45,105,013
Diluted 55,442,988 55,124,302 55,367,112 54,802,916
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------
In accordance with U.S. GAAP
(amounts in tables are stated in thousands of U.S. dollars, except
share related data)
(unaudited)
1. Significant Accounting Policies
The accompanying unaudited financial statements are prepared in
accordance with U.S. GAAP for interim financial statements and do not include
all the information required for complete financial statements. They are
consistent with the policies outlined in the Company's audited financial
statements for the year ended September 30, 2004 except for the change
mentioned in note 2. The interim financial statements and related notes should
be read in conjunction with the Company's audited financial statements for the
year ended September 30, 2004. When necessary, the financial statements
include amounts based on informed estimates and best judgements of management.
The results of operations for the interim periods reported are not necessarily
indicative of results to be expected for the year. Consolidated financial
statements prepared in U.S. dollars and in accordance with Canadian GAAP are
available to shareholders and filed with regulatory authorities.
2. Change in Accounting Policies
During the September 2004 meeting of the Emerging Issues Task Force
("EITF") a consensus was reached on EITF Issue 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share". The EITF 04-8
requires companies to include certain convertible debt and equity instruments,
that were previously excluded, into their calculations of diluted earnings per
share. The EITF concluded that Issue 04-8 is effective for periods ending
after December 15, 2004, and must be applied by restating all periods during
which time the applicable convertible instruments were outstanding. The 4.25%
convertible subordinated notes issued in 2003, is therefore included in the
Company's diluted income per share calculation. For the six-month period ended
March 31, 2004, the weighted number of common shares used in the calculation
of the diluted income per share has been increased from 50,316,477 to
54,802,916 and the diluted income per share has been reduced from $0.48 to
$0.46.
3. Product Acquisition
On November 18, 2003, the Company acquired the rights to a group of
products from Aventis Pharma S.A. for a cash purchase price of $145,000,000.
The acquired products are CARAFATE and BENTYL for the U.S. market and
SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market. On December 3,
2002, the Company acquired the worldwide rights to the PANZYTRAT enzyme
product line from Abbott Laboratoires.
During a transition period, the sellers may act as agents for the
management of the products sales. For the six-month period ended March 31,
2005, a portion of the sales of some of these products is still managed by the
sellers. Axcan includes in its revenue the net sales from such products less
corresponding cost of goods sold and other seller related expenses.
Consequently, although net sales of such products for the six-month period
ended March 31, 2005 were $1,194,522 ($5,315,913 in 2004), the Company only
included in its revenue an amount of $467,078 ($3,440,421 in 2003)
representing the net sales less cost of goods sold and other seller related
expenses.
4. Inventories
March 31, September 30,
2005 2004
------------- --------------
$ $
Raw materials and packaging material 11,176 10,311
Work in progress 1,890 1,781
Finished goods 22,604 25,178
-------------------------------------------------------------------------
35,670 37,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Intangible Assets
-------------------------------------------------------------------------
March 31, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses
and manufacturing rights with a:
Finite life 340,089 38,007 302,082
Indefinite life 114,687 12,417 102,270
-------------------------------------------------------------------------
454,776 50,424 404,352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2004
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses
and manufacturing rights with a:
Finite life 280,034 29,869 250,165
Indefinite life 170,127 12,417 157,710
-------------------------------------------------------------------------
450,161 42,286 407,875
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of the product PANZYTRAT has been transferred from intangible
assets with an indefinite life to intangible assets with a finite life
following changes in the regulatory rules applicable to this product and
resulting in the modification of its useful life. The net cost of this product
as of October 1, 2004, which amounted to $56,817,802, is therefore amortized
over a 25-year period.
6. Segmented Information
The Company considers that it operates in a single reportable segment,
the pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Revenue
Canada
Domestic sales 7,710 6,865 16,900 13,417
Foreign sales - - - -
United States
Domestic sales 39,100 41,958 76,128 79,769
Foreign sales 1,182 1,363 2,339 1,363
Europe
Domestic sales 12,525 11,877 24,268 24,522
Foreign sales 2,769 1,060 5,192 1,589
Other 78 69 120 97
-------------------------------------------------------------------------
63,364 63,192 124,947 120,757
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, September 30,
2005 2004
---------- ------------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 40,109 40,401
United States 129,556 131,242
Europe 265,803 265,417
Other 28,833 29,534
-------------------------------------------------------------------------
464,301 466,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to geographic segments based on the sales country
of origin.
7. Financial Information Included in the Consolidated Statement of
Operations
a) Financial expenses
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Interest on
long-term debt 1,448 1,347 2,882 2,729
Bank charges 41 54 48 78
Financing fees 105 47 176 64
Amortization of
deferred debt
issue expenses 275 258 550 516
-------------------------------------------------------------------------
1,869 1,706 3,656 3,387
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Selling and administrative expenses
Selling and administrative expenses include the followings:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Shipping and
handling
expenses 1,271 1,245 2,275 2,225
Advertising expenses 4,104 3,537 8,729 6,380
c) Other information
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Rental expenses 287 274 574 548
Depreciation of
property, plant
and equipment 1,298 789 2,599 2,039
Amortization of
intangible assets 4,032 3,407 8,095 5,880
Share in net loss
of joint ventures - 60 - 60
Investments tax
credits applied
against current
income taxes 546 104 1,081 322
d) Income per common share
The following tables reconcile the numerators and the denominators of the
basic and diluted income per common share computations:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Net income available
to common
shareholders
Basic 5,425 12,421 13,179 22,856
Financial expenses
relating to the
convertible
subordinated
notes 1,055 1,071 2,134 2,150
-------------------------------------------------------------------------
Net income available
to common
shareholders
on a diluted basis 6,480 13,492 15,313 25,006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Weighted average
number of common
shares
Weighted average
number of common
shares
outstanding 45,599,780 45,188,011 45,582,668 45,105,013
Effect of dilutive
stocks options 919,095 1,012,178 860,331 773,790
Effect of dilutive
convertible
subordinated
notes 8,924,113 8,924,113 8,924,113 8,924,113
-------------------------------------------------------------------------
Adjusted weighted
average number
of common
shares
outstanding 55,442,988 55,124,302 55,367,112 54,802,916
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares outstanding as at April 30, 2005 45,620,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options to purchase 271,200 and 404,950 common shares were outstanding as
at March 31, 2005 and 2004 respectively but were not included in the
computation of diluted income per share for the six-month periods ended March
31, 2005 and 2004 respectively because the exercise price of the options was
greater than the average market price of the common shares.
The $125,000,000 subordinated notes are convertible into 8,924,113 common
shares. The noteholders may convert their notes during any quarterly
conversion period if the closing price per share for at the least 20
consecutive trading days during the 30 consecutive trading-day period ending
on the first day of the conversion period exceeds 110% of the conversion price
in effect on that thirtieth trading day. The noteholders may also convert
their notes during the five business-day period following any 10 consecutive
trading-day period in which the daily average of the trading prices for the
notes was less than 95% of the average conversion value for the notes during
that period. Finally, the noteholders may also convert their notes upon the
occurrence of specified corporate transactions or, if the company has called
the notes for redemption. On or after April 20, 2006, the Company may at its
option, redeem the notes, in whole or in part at redemption prices varying
from 101.70% to 100.85% of the principal amount plus any accrued and unpaid
interest to the redemption date. The notes also include provisions for the
redemption of all the notes for cash at the option of the Company following
some changes in tax treatment.
e) Employee benefit plan
A subsidiary of the Company has a defined contribution plan ("The Plan")
for its U.S. employees. Participation is available to substantially all U.S.
employees. Employees may contribute up to 15% of their gross pay and up to
limits set by the U.S. Internal Revenue Service. For the six-month period
ended March 31, 2005, the Company made matching contributions to the Plan
totalling $272,185 ($151,943 in 2004).
8. Stock Options
The estimated fair value of stock options at the time of grant using the
Black-Scholes option pricing model was as follows:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Fair value
per option $7.45 $8.71 $7.09 $6.34
Assumptions used
Expected volatility 43% 44% 43% 44%
Risk-free interest
rate 3.76% 3.67% 4.08% 4.28%
Expected option
life (years) 6 6 6 6
Expected dividend - - - -
The Company's net income, basic income per share and diluted income per
share would have been reduced on a pro-forma basis as follows:
For the For the For the For the
three-month three-month three-month three-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2005 2004 2004
------------- ------------- ------------- --------------
As reported Pro-forma As reported Pro-forma
------------- ------------- ------------- --------------
$ $ $ $
Net income 5,425 4,424 12,421 11,282
Basic income
per share 0.12 0.10 0.27 0.25
Diluted income
per share 0.12 0.10 0.24 0.22
For the For the For the For the
six-month six-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2005 2004 2004
------------- ------------- ------------- --------------
As reported Pro-forma As reported Pro-forma
------------- ------------- ------------- --------------
$ $ $ $
Net income 13,179 10,878 22,856 20,747
Basic income
per share 0.29 0.24 0.51 0.46
Diluted income
per share 0.28 0.24 0.46 0.42
9. Summary of Differences Between Generally Accepted Accounting
Principles in the United States and in Canada
The consolidated interim financial statements have been prepared in
accordance with U.S. GAAP which, in the case of the Company, conform in all
materials respects with Canadian GAAP, except as set forth below:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Operations $ $ $ $
adjustments
Net income in
accordance with
U.S. GAAP 5,425 12,421 13,179 22,856
Implicit interest
on convertible
debt (1,120) (1,023) (2,243) (2,049)
Stock-based
compensation
expense (1,131) - (2,431) -
Amortization of
new product
acquisition costs (12) (13) (26) (26)
Income tax impact
of the above
adjustments 135 5 140 10
-------------------------------------------------------------------------
Net earnings in
accordance with
Canadian GAAP 3,297 11,390 8,619 20,791
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share in
accordance with
Canadian GAAP
Basic 0.07 0.25 0.19 0.46
Diluted 0.07 0.24 0.19 0.45
March 31, 2005 September 30, 2004
------------------- ---------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
----- ------ ----- --------
Balance sheet $ $ $ $
adjustments
Current assets 163,162 163,162 139,032 139,054
Property, plant
and equipment 32,482 32,482 31,252 31,265
Intangible assets 404,352 416,686 407,875 420,235
Goodwill 27,467 28,862 27,467 28,862
Deferred debt
issue expenses 3,126 3,126 3,088 3,088
Deferred income
tax asset 1,676 1,676 930 930
Current liabilities 53,538 53,538 51,362 51,430
Long-term debt 127,184 111,714 127,916 110,203
Deferred income
tax liability 39,267 40,376 38,290 39,376
Shareholders' equity
Equity component
of convertible
debt - 24,239 - 24,239
Capital stock 261,200 271,945 260,643 267,288
Contributed
surplus 1,110 11,664 - -
Retained earnings 125,541 103,937 112,362 107,671
Accumulated
foreign
currency
translation
adjustments 24,425 28,581 19,071 23,227
AXCAN PHARMA INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
March 31, September 30,
2005 2004
------------- --------------
ASSETS (unaudited)
$ $
Current assets
Cash and cash equivalents 55,784 22,063
Short-term investments 4,495 15,922
Accounts receivable 49,892 46,518
Income taxes receivable 6,995 9,196
Inventories (Note 4) 35,670 37,270
Prepaid expenses and deposits 3,859 3,499
Future income taxes 6,467 4,586
-------------------------------------------------------------------------
Total current assets 163,162 139,054
Property, plant and equipment, net 32,481 31,265
Intangible assets, net (Note 5) 416,686 420,235
Goodwill, net 28,862 28,862
Deferred debt issue expenses, net 3,127 3,088
Future income taxes 1,676 930
-------------------------------------------------------------------------
645,994 623,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 48,553 47,985
Income taxes payable 1,921 731
Instalments on long-term debt 1,793 1,778
Future income taxes 1,271 936
-------------------------------------------------------------------------
Total current liabilities 53,538 51,430
Long-term debt 111,714 110,203
Future income taxes 40,376 39,376
-------------------------------------------------------------------------
205,628 201,009
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Equity component of convertible debt (Note 6) 24,239 24,239
Capital stock 271,945 267,288
Contributed surplus 11,664 -
Retained earnings 103,937 107,671
Accumulated foreign currency translation
adjustments 28,581 23,227
-------------------------------------------------------------------------
440,366 422,425
-------------------------------------------------------------------------
645,994 623,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Cash Flows
-------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Operations
Net earnings 3,297 11,390 8,619 20,791
Non-cash items
Implicit interest
on convertible debt 1,120 1,024 2,243 2,050
Amortization of
deferred debt issue
expenses 275 258 550 516
Other depreciation
and amortization 5,342 4,213 10,720 7,949
Loss (gain) on
disposal of assets - (47) - 40
Foreign currency
fluctuation (126) (120) (142) (120)
Future income taxes (1,891) 1,577 (1,295) 2,875
Stock-based
compensation
expense 1,131 - 2,431 -
Changes in working
capital items
Accounts
receivable (2,646) (2,317) (2,784) (11,181)
Income taxes
receivable 3,253 1,262 2,571 (1,344)
Inventories 3,418 203 2,293 (8,173)
Prepaid expenses
and deposits 550 437 (172) (612)
Accounts payable
and accrued
liabilities 4,825 6,034 (508) 4,648
Income taxes
payable (451) (5,733) 2,304 (410)
-------------------------------------------------------------------------
Cash flows from
operating activities 18,097 18,181 26,830 17,029
-------------------------------------------------------------------------
Financing
Repayment of
long-term debt (488) (408) (957) (950)
Deferred debt issue
expenses - - (589) -
Issue of shares 401 2,389 557 2,824
-------------------------------------------------------------------------
Cash flows from
financing activities (87) 1,981 (989) 1,874
-------------------------------------------------------------------------
Investment
Acquisition of
short-term
investments (1,395) - (1,395) -
Disposal of
short-term
investments - 2,030 12,822 128,390
Disposal of
investments - 1,101 - 1,239
Acquisition of
property, plant
and equipment (1,752) (4,151) (3,586) (6,514)
Disposal of
property, plant
and equipment - 52 - 378
Acquisition of
intangible assets (14) (14) (22) (145,604)
-------------------------------------------------------------------------
Cash flows from
investment activities (3,161) (982) 7,819 (22,111)
-------------------------------------------------------------------------
Foreign exchange gain
(loss) on cash held in
foreign currencies (114) (32) 61 199
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents 14,735 19,148 33,721 (3,009)
Cash and cash
equivalents,
beginning of period 41,049 15,729 22,063 37,886
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 55,784 34,877 55,784 34,877
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 286 64 385 284
Interest paid 176 72 2,874 3,438
Income taxes paid 2,103 10,421 3,372 11,373
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Earnings
-------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars, except share related data)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
REVENUE 63,364 63,213 124,947 120,928
-------------------------------------------------------------------------
Cost of goods sold 20,546 14,972 37,391 29,544
Selling and
administrative
expenses 21,848 20,021 43,840 38,538
Research and
development expenses 7,921 3,931 13,952 7,646
Depreciation and
amortization 5,342 4,213 10,720 7,949
-------------------------------------------------------------------------
55,657 43,137 105,903 83,677
-------------------------------------------------------------------------
Operating income 7,707 20,076 19,044 37,251
-------------------------------------------------------------------------
Financial expenses 2,989 2,736 5,899 5,443
Interest income (286) (58) (372) (249)
Loss (gain) on foreign
currency (207) 264 (440) 348
-------------------------------------------------------------------------
2,496 2,942 5,087 5,542
-------------------------------------------------------------------------
Earnings before income
taxes 5,211 17,134 13,957 31,709
Income taxes 1,914 5,744 5,338 10,918
-------------------------------------------------------------------------
NET EARNINGS 3,297 11,390 8,619 20,791
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share
Basic 0.07 0.25 0.19 0.46
Diluted 0.07 0.24 0.19 0.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of common
shares
Basic 45,599,780 45,188,011 45,582,668 45,105,013
Diluted 46,518,875 55,124,302 46,442,999 50,316,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AXCAN PHARMA INC.
Consolidated Retained Earnings
-------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Balance, beginning
of period 100,640 72,612 107,671 63,211
Retroactive
adjustment for
stock-based
compensation (Note 2) - - (12,353) -
Net earnings 3,297 11,390 8,619 20,791
-------------------------------------------------------------------------
Balance, end of
period 103,937 84,002 103,937 84,002
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Contributed Surplus
-------------------------------------------------------------------------
In accordance with Canadian GAAP
(in thousands of U.S. dollars)
(unaudited)
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Balance, beginning
of period 10,533 - - -
Retroactive
adjustment for
stock-based
compensation (Note 2) - - 8,723 -
Tax benefit from
exercise of stock
options - - 510 -
Stock-based
compensation expense 1,131 - 2,431 -
-------------------------------------------------------------------------
Balance, end of
period 11,664 - 11,664 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------
In accordance with Canadian GAAP
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)
1. Significant Accounting Policies
The accompanying unaudited financial statements are prepared in
accordance with Canadian GAAP for interim financial statements and do not
include all the information required for complete financial statements. They
are consistent with the policies outlined in the Company's audited financial
statements for the year ended September 30, 2004 except for the change
mentioned in note 2. The interim financial statements and related notes should
be read in conjunction with the Company's audited financial statements for the
year ended September 30, 2004. When necessary, the financial statements
include amounts based on informed estimates and best judgements of management.
The results of operations for the interim periods reported are not necessarily
indicative of results to be expected for the year. Consolidated financial
statements prepared in U.S. dollars and in accordance with U.S. GAAP are
available to shareholders and filed with regulatory authorities.
2. Change in Accounting Policies
Stock-based compensation
In September and November 2003, the Accounting Board made amendments to
CICA Handbook Section 3870 to require that the fair value based method be
applied to awards granted to employees, which previously had not been
accounted for at fair value. Thus, enterprises are required to account for the
effect of such awards in their financial statements for fiscal years beginning
on or after January 1, 2004. The Company adopted the fair value based method
in its fiscal year 2005 with a retroactive application, without restating
prior periods. As at October 1, 2004, the retained earnings of the Company
have been reduced by $12,353,000, the capital stock has been increased by
$4,100,233, the contributed surplus has been increased by $8,722,767 and the
income taxes receivable have been increased by $470,000. Stock-based
compensation expense charged to the consolidated statement of earnings for the
six-month period ended March 31, 2005 was $2,431,258.
If this change in accounting policy had been applied to the previous
fiscal year, the Company's net earnings, basic earnings per share and diluted
earnings per share for the periods ended March 31, 2004 would have been
reduced on a pro-forma basis as follows:
For the three-month period For the six-month period
ended March 31, 2004 ended March 31, 2004
--------------------------- ---------------------------
As reported Pro-forma As reported Pro-forma
------------- ------------- ------------- -------------
$ $ $ $
Net earnings 11,390 10,251 20,791 18,682
Basic earnings
per share 0.25 0.23 0.46 0.41
Diluted earnings
per share 0.24 0.22 0.45 0.41
The estimated fair value of granted stock options for the periods ended
March 31, 2005 and 2004 using the Black-Scholes model was as follows:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Fair value per
option $7.45 $8.71 $7.09 $6.34
Assumptions used
Expected volatility 43% 44% 43% 44%
Risk-free interest
rate 3.76% 3.67% 4.08% 4.28%
Expected options
life (years) 6 6 6 6
Expected dividend - - - -
3. Product Acquisition
On November 18, 2003, the Company acquired the rights to a group of
products from Aventis Pharma S.A. for a cash purchase price of $145,000,000.
The acquired products are CARAFATE and BENTYL for the U.S. market and
SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market. On December 3,
2002, the Company acquired the worldwide rights to PANZYTRAT enzyme product
line from Abbott Laboratories.
During a transition period, the sellers may act as agents for the
management of the products sales. For the six-month period ended March 31,
2005, a portion of the sales of some of these products is still managed by the
sellers. Axcan includes in its revenue the net sales from such products less
corresponding cost of goods sold and other seller related expenses.
Consequently, although net sales of such products for the three-month period
ended March 31, 2005 were $1,194,522 ($5,315,913 in 2004), the Company only
included in its revenue an amount of $467,078 ($3,440,421 in 2004)
representing the net sales less cost of goods sold and other seller related
expenses.
4. Inventories
March 31, September 30,
2005 2004
------------- --------------
$ $
Raw materials and packaging material 11,176 10,311
Work in progress 1,890 1,781
Finished goods 22,604 25,178
-------------------------------------------------------------------------
35,670 37,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Intangible Assets
-------------------------------------------------------------------------
March 31, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses
and manufacturing rights with a:
Finite life 352,919 38,502 314,417
Indefinite life 114,686 12,417 102,269
-------------------------------------------------------------------------
467,605 50,919 416,686
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2004
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses
and manufacturing rights with a:
Finite life 292,863 30,338 262,525
Indefinite life 170,127 12,417 157,710
-------------------------------------------------------------------------
462,990 42,755 420,235
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of the product PANZYTRAT has been transferred from intangible
assets with an indefinite life to intangible assets with a finite life
following changes in the regulatory rules applicable to this product and
resulting in the modification of its useful life. The net cost of this product
as of October 1, 2004, which amounted to $56,817,802, is therefore amortized
over a 25-year period.
6. Equity Component of Convertible Debt
The Company issued convertible subordinated notes for $125,000,000 on
March 5, 2003. According to the features of this debt, an amount of
$24,238,899, representing the estimated value of the right of conversion, was
included in the shareholders' equity as equity component of convertible debt
and an amount of $100,761,101 was included in the long-term debt as liability
component of convertible debt. As of September 30, 2004, implicit interest of
9.17% and totaling $6,526,246 was accounted for and added to the liability
component. For the six-month period ended March 31, 2005, implicit interest in
the amount of $2,242,724 ($2,049,057 in 2004) was accounted for and added to
the liability component.
7. Segmented Information
The Company considers that it operates in a single reportable segment,
the pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Revenue
Canada
Domestic sales 7,710 6,865 16,900 13,417
Foreign sales - - - -
United States
Domestic sales 39,100 41,958 76,128 79,769
Foreign sales 1,182 1,363 2,339 1,363
Europe
Domestic sales 12,525 11,898 24,268 24,693
Foreign sales 2,769 1,060 5,192 1,589
Other 78 69 120 97
-------------------------------------------------------------------------
63,364 63,213 124,947 120,928
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, September 30,
2005 2004
------------- --------------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 44,384 44,676
United States 129,890 131,602
Europe 265,803 265,431
Other 37,953 38,653
-------------------------------------------------------------------------
478,030 480,362
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to geographic segments based on the sales country
of origin.
8. Financial Information Included in the Consolidated Statement of
Earnings
a) Financial expenses
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Interest on
long-term debt 2,568 2,370 5,125 4,778
Bank charges 41 61 48 85
Financing fees 105 47 176 64
Amortization of
deferred debt
issue expenses 275 258 550 516
-------------------------------------------------------------------------
2,989 2,736 5,899 5,443
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Selling and administrative expenses
Selling and administrative expenses include the followings:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Shipping and
handling expenses 1,271 1,245 2,275 2,225
Advertising expenses 4,104 3,377 8,729 6,220
c) Other information
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Rental expenses 287 274 574 548
Depreciation of
property, plant
and equipment 1,298 793 2,599 2,043
Amortization of
intangible assets 4,044 3,420 8,121 5,906
Investments tax
credits applied
against research
and development
expenses 546 104 1,081 322
d) Earnings per common share
The following tables reconcile the numerators and the denominators of the
basic and diluted earnings per common share computations:
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
$ $ $ $
Net income available
to common
shareholders
Basic 3,297 11,390 8,619 20,791
Financial expenses
relating to the
convertible
subordinated notes - 2,024 - 2,024
-------------------------------------------------------------------------
Net income available
to common
shareholders
on a diluted basis 3,297 13,414 8,619 22,815
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the For the For the For the
three-month three-month six-month six-month
period ended period ended period ended period ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Weighted average
number of common
shares
Weighted average
number of
common shares
outstanding 45,599,780 45,188,011 45,582,668 45,105,013
Effect of
dilutive stock
options 919,095 1,012,178 860,331 773,790
Effect of
dilutive
convertible
subordinated
notes - 8,924,113 - 4,437,674
-------------------------------------------------------------------------
Adjusted weighted
average number
of common
shares
outstanding 46,518,875 55,124,302 46,442,999 50,316,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common
shares outstanding
at the end of the
period 45,618,251 45,328,102
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares outstanding as at April 30, 2005 45,620,283
-------------------------------------------------------------------------
>>
Options to purchase 271,200 and 404,950 common shares were outstanding as
at March 31, 2005 and 2004 respectively but were not included in the
computation of diluted earnings per share for the six-month periods ended
March 31, 2005 and 2004 respectively, because the exercise price of the
options was greater than the average market price of the common shares.
The $125,000,000 subordinated notes are convertible into 8,924,113 common
shares. The noteholders may convert their notes during any quarterly
conversion period if the closing price per share for at least 20 consecutive
trading days during the 30 consecutive trading-day period ending on the first
day of the conversion period exceeds 110% of the conversion price in effect on
that thirtieth trading day. The noteholders may also convert their notes
during the five business-day period following any 10 consecutive trading-day
period in which the daily average of the trading prices for the notes was less
than 95% of the average conversion value for the notes during that period.
Finally, the noteholders may also convert their notes upon the occurrence of
specified corporate transactions or, if the company has called the notes for
redemption. On or after April 20, 2006, the Company may at its option, redeem
the notes, in whole or in part at redemption prices varying from 101.70% to
100.85% of the principal amount plus any accrued and unpaid interest to the
redemption date. The notes also include provisions for the redemption of all
the notes for cash at the option of the Company following some changes in tax
treatment.
e) Employee benefit plan
A subsidiary of the Company has a defined contribution plan ("The Plan")
for its U.S. employees. Participation is available to substantially all U.S.
employees. Employees may contribute up to 15% of their gross pay and up to
limits set by the U.S. Internal Revenue Service. For the six-month period
ended March 31, 2005, the Company made matching contributions to the Plan
totalling $272,185 ($151,943 in 2004).
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