TSX SYMBOL (Toronto Stock Exchange): AXP
NASDAQ SYMBOL (NASDAQ National Market): AXCA
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- RECORD REVENUE OF $70.6 MILLION
- NET INCOME PER SHARE INCREASES TO $0.19 VERSUS $0.16
A YEAR EARLIER
- PATIENT RANDOMIZATION FOR ITAX PIVOTAL PHASE III TRIALS
COMPLETED
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MONT-SAINT-HILAIRE, QC, Feb. 9 /CNW Telbec/ - Axcan Pharma Inc.
(NASDAQ: AXCA - TSX: AXP) today announced financial results for the first
quarter of fiscal 2006, ended December 31, 2005 (all amounts are stated in
U.S. dollars). Highlights for the first quarter were:
- Record revenue of $70.6 million reported
- Fully diluted income per share increased 18.8%, compared to the same
period a year earlier
- Patient randomization for both ITAX Phase III trials is now
completed
Total revenue for the three months ended December 31, 2005, was
$70.6 million, compared with $61.6 million for the first quarter of fiscal
2005, an increase of 14.6%.
Net income for the first quarter of 2006 was $9.2 million, compared with
net income of $7.8 million for the corresponding 2005 period. Diluted income
per share for the first quarter of 2006 was $0.19, versus diluted income per
share of $0.16 for the same period in 2005. This was the first quarter that
stock-based compensation was expensed, which had a negative impact on income
per share of $0.02 for this quarter.
"As we begin fiscal 2006, we are pleased with the progress we have made
so far. Our record revenues reflect the strength of our current product
portfolio. We estimate that increases in wholesaler inventory levels
positively impacted our revenue by less than $1.5 million, which confirms our
previous assumptions that wholesaler inventory levels have stabilized in our
currently desired eight-to-twelve-week target range," stated Frank Verwiel,
M.D., President and Chief Executive Officer of Axcan.
"On the research and development front, we reached another important
milestone by completing randomization for the Itopride North American pivotal
Phase III trial with more than 600 patients randomized in this study," Dr.
Verwiel concluded.
PRODUCT DEVELOPMENT PIPELINE UPDATE
An update on Axcan's major projects follows:
ITAX
As previously announced, randomization for both pivotal Phase III trials
for Itopride is now complete, with more than 500 patients in the International
trial and more than 600 patients in the North American trial. The Company
expects to release the overall outcome of the International Phase III trial
during the first half of calendar 2006, followed shortly afterwards by that of
the North American Phase III trial. Detailed results of the studies will most
likely be subsequently presented at a major scientific gastroenterology
conference. The clinical work on all of the additional Phase I studies needed
to complement the New Drug Application to be submitted to the Food and Drug
Administration is now complete.
HELIZIDE
Axcan finalized qualification of a new manufacturer of bismuth salt, a
component of the HELIZIDE combination therapy for the eradication of the
Helicobacter pylori bacterium. The final results of stability tests performed
on the bismuth salts were positive. Further, the Food and Drug Administration
has accepted Axcan's answers to all questions concerning the Chemistry,
Manufacturing and Control portion of the file that was previously submitted to
the FDA. As previously disclosed, the Company plans to submit an amendment to
its New Drug Application by the end of the second quarter of fiscal 2006.
CANASA / SALOFALK RECTAL GEL
Axcan recently completed Phase III studies to confirm the efficacy and
safety of a new mesalamine rectal gel in the treatment of distal ulcerative
colitis. The Company plans to submit regulatory filings for approvals in the
United States and Canada in the second half of calendar 2006.
SALOFALK 750 MILLIGRAM TABLETS
Axcan submitted a New Drug Submission in Canada for the use of SALOFALK
750 mg tablets for the treatment of ulcerative colitis. The Therapeutic
Products Directorate of Health Canada has indicated that additional clinical
information would be needed prior to potential approval of SALOFALK 750
milligram tablets in Canada. In light of these requirements, the Company has
decided to withdraw its New Drug Submission for SALOFALK 750 milligram tablets
in Canada, and will continue to focus efforts in Canada on the currently
marketed SALOFALK 500 milligram tablets.
NCX-1000
Axcan and its partner, NicOx S.A., are developing NCX-1000, a patented,
nitric oxide donating derivative of ursodiol, for the treatment of portal
hypertension, a late-stage complication of chronic, advanced liver disease.
The Phase I clinical development program, which is designed to demonstrate the
tolerability and safety of NCX-1000, has been completed, and the Company is
pleased to report that results confirmed the safety profile of this drug. A
therapeutic proof-of-concept Phase IIa study is currently underway.
URSODIOL DISULFATE
Axcan completed a proof-of-concept study in rats to evaluate the effect
of ursodiol disulfate on the development of colonic tumors. Acute and
subchronic toxicity studies confirmed that the compound is safe and has no
toxicity effect. As previously announced, a clinical, single ascending dose
Phase I study has recently been initiated to evaluate the safety, tolerability
and preliminary pharmacokinetics of this new molecule. This study should be
completed in the second half of fiscal 2006.
ULTRASE-VIOKASE
In April 2004, the Food and Drug Administration formally notified
manufacturers of pancreatic insufficiency products that these drugs must
receive approval before April 2008 in order to remain on the market. The Food
and Drug Administration decided to require New Drug Applications for all
pancreatic extract drug products after reviewing data that showed substantial
variation among currently marketed products. Axcan has completed a Phase III
study of VIOKASE that will serve as the basis of the New Drug Application. The
Company expects to submit a New Drug Application by spring of 2007. Data is
currently being analyzed. Additional studies on ULTRASE are in process and
anticipated to be completed and submitted along with other clinical and CMC
data in the form of a New Drug Application by spring 2007.
NMK 150
Axcan and Nordmark GmbH, a German pharmaceutical firm, are collaborating
in the development of NMK 150, a new high protease pancrelipase preparation
developed for the relief of pain in small duct chronic pancreatitis. As
previously announced, dose-ranging preclinical studies were initiated in the
first quarter of fiscal 2006 to assess the toxicity, with special attention to
duodenal irritation of NMK 150, administered daily by oral capsule
administration. A Phase I clinical trial will begin in the second quarter of
fiscal 2006.
REVENUE GUIDANCE FOR 2006
Axcan reiterates its previously announced revenue guidance for 2006.
Based on its best estimates, Axcan believes that overall revenue for fiscal
2006 will be in the range of $260 to $270 million, which represents growth of
approximately 4% to 8% relative to fiscal 2005. Axcan's fiscal 2006 guidance
does not include any potential new product launches, licensing or
acquisitions; nor does it provide for revenue from the completion of any
potential partnering agreement for ITAX.
The revenue guidance consists of projections, based upon various
assumptions, all of which are subject to uncertainties and risks. Our
assumptions include, but are not limited to: wholesaler inventory levels in
fiscal 2006 remaining in the range of eight to twelve weeks; the absence of
any changes to GAAP applicable to revenue recognition; foreign currency rates
remaining stable throughout the year; reimbursement amounts and policies,
related to our products, in all markets not changing materially during the
year; the absence of any material change in the regulatory status of the
Company's current products and the absence of new competitive products and
generic entries.
INTERIM FINANCIAL REPORT
This release includes, by reference, the first quarter interim financial
report incorporating the financial statements in accordance with U.S. GAAP as
well as the full Management Discussion & Analysis ("MD&A"). The interim
report, including the MD&A and financial statements, is filed with applicable
U.S. and Canadian regulatory authorities.
CONFERENCE CALL
Axcan will host a conference call at 8:30 A.M. EST, on February 10, 2006.
Interested parties may also access the conference call by way of a webcast at
www.axcan.com. The webcast will be archived for 90 days. The telephone numbers
to access the conference call are (866) 250-4910 (Canada and United States) or
(416) 644-3425 (international). A replay of the call will be available until
February 17, 2006. The telephone number to access the replay of the call is
(416) 640-1917 code 21174075.
ABOUT AXCAN PHARMA
Axcan is a leading specialty pharmaceutical company specialized in the
field of gastroenterology. Axcan markets a broad line of prescription products
sold for the treatment of symptoms in a number of gastrointestinal diseases
and disorders such as inflammatory bowel disease, irritable bowel syndrome,
cholestatic liver diseases and complications related to cystic fibrosis.
Axcan's products are marketed by its own sales force in North America and
Europe. Its common shares are listed on the Toronto Stock Exchange under the
symbol "AXP" and on the NASDAQ National Market under the symbol "AXCA".
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995.
This release contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent any
statements made in this release contain information that is not historical,
these statements are essentially forward-looking and are often identified by
words such as "anticipate," "expect," "estimate," "intend," "project," "plan"
and "believe." Forward-looking statements are subject to risks and
uncertainties, including the difficulty of predicting FDA and other regulatory
approvals, acceptance and demand for new pharmaceutical products, the impact
of competitive products and pricing, new product development and launch,
reliance on key strategic alliances, availability of raw materials, the
regulatory environment, fluctuations in operating results, the protection of
our intellectual property and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission and the Canadian
Securities Regulators, including under the Canadian Multijurisdictional
Disclosure System.
The names CANASA, CARAFATE, DELURSAN, HELIZIDE, ITAX, LACTEOL, PANZYTRAT,
SALOFALK, SULCRATE, ULTRASE and URSO appearing in this press release are
trademarks of Axcan Pharma Inc. and its subsidiaries.
<<
KEY PRODUCT INFORMATION
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Sales(1)($US M) Sales Growth(2) Rx(3)Growth(2)
(U.S.)
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NORTH AMERICA
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CANASA 36.8 13.0% 8.9%
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SALOFALK 15.0 18.1% n/a
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ULTRASE 36.4 14.6% 2.0%
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URSO 250/FORTE/DS 51.0 6.5% 15.0%
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CARAFATE 34.9 -17.5% 3.1%
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EUROPE
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LACTEOL 19.3 7.8% n/a
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PANZYTRAT 16.1 34.4% n/a
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DELURSAN 13.1 12.6% n/a
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(1) Sales for the 12-month period ended December 31, 2005
(2) Compared with the 12-month period ended December 31, 2004
(3) Based on IMS Prescription Data for products sold in the United States
>>
PRODUCTS IN NORTH AMERICA
-------------------------
CANASA
U.S. prescriptions for the 12-month period ended December 31, 2005, were
up 8.9% compared to the same period in 2004.
Sales for the 12-month period ended December 31, 2005, increased 13.0%,
compared to the 12-month period ended December 31, 2004, mainly due to the
stabilization of the impact of wholesaler reductions in inventory levels that
occurred in fiscal 2005.
ULTRASE
U.S. prescriptions for the 12-month period ended December 31, 2005,
increased 2.0% compared to the same period in 2004.
U.S. sales for ULTRASE for the 12-month period ended December 31, 2005,
increased 14.6%, compared to the 12-month period ended December 31, 2004,
mainly due to the stabilization of the impact of wholesaler reductions in
inventory levels that occurred in fiscal 2005, as well as price increases that
occurred in 2005.
URSO 250/URSO FORTE
In the U.S., prescriptions for the 12-month period ended December 31,
2005, were up 15.0% compared with the same period a year earlier. During
fiscal 2005, Axcan launched URSO Forte, a 500-mg dosage form of Ursodiol,
which contributed to overall prescription growth.
For the 12-month period ended December 31, 2005, total sales in North
America were up 6.5% compared to the 12-month period ended December 31, 2004.
CARAFATE
U.S. prescriptions for the 12-month period ended December 31, 2005,
increased 3.1% compared to the same period in 2004.
For the 12-month period ended December 31, 2005, U.S. sales decreased
17.5% compared to the 12-month period ended December 31, 2004.
PRODUCTS IN EUROPE
------------------
LACTEOL
For the 12-month period ended December 31, 2005, sales of LACTEOL
increased 7.8% compared to the prior year. In local currency, the increase was
7.6%.
PANZYTRAT
For the 12-month period ended December 31, 2005, sales of PANZYTRAT
increased 34.4% compared to the prior year, as most of PANZYTRAT sales have
now been transferred to Axcan from Abbott Laboratories. In local currency, the
increase was 32.9%.
DELURSAN
For the 12-month period ended December 31, 2005, sales of DELURSAN
increased 12.6% compared to the prior year. In local currency, the increase
was 11.2%.
Management's discussion and analysis of financial condition and results
of operations
This discussion should be read in conjunction with the information
contained in Axcan's consolidated financial statements and the related notes
thereto. All amounts are in U.S. dollars.
Overview
Axcan is a leading speciality pharmaceutical company concentrating in the
field of gastroenterology, with operations in North America and Europe. Axcan
markets and sells pharmaceutical products used in the treatment of a variety
of gastrointestinal diseases and disorders. The Company seeks to expand its
gastrointestinal franchise by in-licensing products and acquiring products or
companies, as well as developing additional products and expanding indications
for existing products. Axcan's current products include ULTRASE, PANZYTRAT and
VIOKASE for the treatment of certain gastrointestinal symptoms, related to
cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO/URSO 250, URSO
FORTE/URSO DS and DELURSAN for the treatment of certain cholestatic liver
diseases; SALOFALK and CANASA for the treatment of certain inflammatory bowel
diseases; and CARAFATE/SULCRATE for the treatment of gastric duodenal ulcers.
Axcan has a number of pharmaceutical projects in all phases of development,
including ITAX for the treatment of functional dyspepsia.
For the three-month period ended December 31, 2005, revenue was
$70.6 million, operating income was $14.2 million and net income was
$9.2 million. Revenue from sales of Axcan's products in the United States was
$46.2 million (65.5% of total revenue) for the three-month period ended
December 31, 2005, compared to $38.2 million (62.0% of total revenue) for the
corresponding period of fiscal 2005. In Canada, revenue was $10.2 million
(14.4% of total revenue) for the three-month period ended December 31, 2005,
compared to $9.2 million (14.9% of total revenue) for the corresponding period
of fiscal 2005. In Europe, revenue was $14.2 million (20.1% of total revenue)
for the three-month period ended December 31, 2005, compared to $14.2 million
(23.1% of total revenue) for the corresponding period of fiscal 2005.
Axcan's revenue historically has been and continues to be principally
derived from sales of pharmaceutical products to large pharmaceutical
wholesalers and large chain pharmacies. Axcan utilizes a "pull-through"
marketing approach that is typical of pharmaceutical companies. Under this
approach, Axcan's sales representatives demonstrate the features and benefits
of its products to gastroenterologists who may write their patients
prescriptions for Axcan's products. The patients, in turn, take the
prescriptions to pharmacies to be filled. The pharmacies then place orders
with the wholesalers or, in the case of large chain pharmacies, their
distribution centers, to whom Axcan sells its products.
Axcan's expenses are comprised primarily of selling and administrative
expenses (including marketing expenses), cost of goods sold (including royalty
payments to those companies from whom Axcan licenses some of its products),
research and development expenses as well as depreciation and amortization.
Axcan's annual and quarterly operating revenue are primarily affected by
three factors : the level of acceptance of Axcan's products by
gastroenterologists and their patients; the ability of Axcan to convince
practitioners to use Axcan products for approved indications; and wholesaler
buying patterns.
Historically, wholesalers' business models in the U.S. were dependent on
drug price inflation. Their profitability and gross margins were directly tied
to speculative purchasing pharmaceutical products at pre-price increase prices
and selling their product inventory to the trade at the new higher price. This
inventory price arbitrage was predominantly how wholesalers were compensated
for the distribution services they provided and had a dramatic effect on
wholesaler buying patterns as they invested in inventories in anticipation of
generating higher gross margins from price increases from manufacturers. More
recently, for a number of reasons, pharmaceutical manufacturers have not been
increasing drug prices as frequently, and the increases as a percentage have
been lower. For these and other reasons, some wholesalers moved to a
fee-for-service type arrangement where fees are now typically expressed as a
percentage of the wholesaler's purchases from the manufacturer or as an amount
per piece or per unit. For wholesalers, fee-for-service means their
compensation will be periodic and volume activity based as opposed to price
increase based.
As a result of the move to a fee-for-service business model, many
wholesalers are no longer investing in inventory ahead of anticipated price
increases and are reducing their carrying levels of inventory from their
historical norms. Under the new model, manufacturers will now realize the
benefit of price increase more rapidly and pay wholesalers for the services
they provide on a fee-for-service basis. This change in wholesaler's business
model has affected Axcan's revenue since fiscal 2005.
Most importantly, the level of patient and physician acceptance of
Axcan's products, as well as the availability of similar therapies, which may
be less effective but also less expensive than some of Axcan's products,
impact Axcan's revenues by driving the level and timing of prescriptions for
its products.
Critical Accounting Policies
Axcan's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
("U.S. GAAP"), applied on a consistent basis. Axcan's critical accounting
policies include the use of estimates, revenue recognition, the recording of
research and development expenses and the determination of the useful lives or
fair value of goodwill and intangible assets. Some of our critical accounting
policies require the use of judgment in their application or require estimates
of inherently uncertain matters. Although our accounting policies are in
compliance with U.S. GAAP, a change in the facts and circumstances of an
underlying transaction could significantly change the application of our
accounting policies to that transaction, which could have an effect on our
financial statements. Discussed below are those policies that we believe are
critical and require the use of complex judgment in their application.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of financial statements and the disclosure of
recognized amounts of revenues and expenses during the year. Significant
estimates and assumptions made by management include the allowance for
accounts receivable and inventories, reserves for product returns, rebates and
chargebacks, the classification of intangible assets between finite and
indefinite life, useful lives of long-lived assets, the expected cash flows
used in evaluating long-lived assets, goodwill and investments for impairment,
contingency provisions and other accrued charges. These estimates were made
using the historical information and various other factors related to each
circumstance available to management. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any adjustments when necessary. Actual results could differ from
those estimates based upon future events, which could include, among other
risks, changes in regulations governing the manner in which we sell our
products, changes in health care environment and managed care consumption
patterns.
Revenue Recognition
Revenue is recognized when the product is shipped to the Company's
customer, provided the Company has not retained any significant risks of
ownership or future obligations with respect to the product shipped.
Provisions for sales discounts and estimates for chargebacks, managed care and
Medicaid rebates and product returns are established as a reduction of product
sales revenues at the time such revenues are recognized. These revenue
reductions are established by us as our best estimate at the time of sale
based on historical experience adjusted to reflect known changes in the
factors that impact such reserves. These revenue reductions are generally
reflected as an addition to accrued expenses.
We do not provide any forms of price protection to our wholesale
customers and permit product returns only if the product is returned within
12 months after expiration. Credit for returns is issued to the original
purchaser at current net pricing less 10%. Accrued liabilities include
reserves of $7.6 million and $7.5 million as of December 31, 2005, and
September 30, 2005, respectively for estimated product returns.
In the United States, we establish and maintain reserves for amounts
payable by us to managed care organizations and state Medicaid programs for
the reimbursement of portions of the retail price of prescriptions filled that
are covered by the respective programs. We also establish and maintain
reserves for amounts payable by us to wholesale distributors for the
difference between their regular sale price and the contract price for the
products sold to our contract customers. The amounts estimated to be paid
relating to products sold are recognized as revenue reductions and as
additions to accrued expenses at the time of sale based on our best estimate
of the product's utilization by these managed care and state Medicaid patients
and sales to our contract customers, using historical experience adjusted to
reflect known changes in the factors that impact such reserves. Accrued
liabilities include reserves of $6.3 million and $4.8 million as of
December 31, 2005, and September 30, 2005, respectively, for estimated rebates
and chargebacks.
If the levels of chargebacks, managed care and Medicaid rebates, product
returns and discounts fluctuate significantly and/or if our estimates do not
adequately reserve for these reductions of net product revenues, our reported
revenue could be negatively affected.
Goodwill and Intangible Assets
We have in the past acquired products and businesses that include
goodwill, trademarks, license agreements and other identifiable intangible
assets. Axcan's goodwill and intangible assets are stated at cost, less
accumulated amortization. Since October 1, 2001, the Company has not amortized
goodwill and intangible assets with an indefinite life. However, management
assesses the impairment of goodwill and intangible assets at least annually
and whenever events or changes in circumstances indicate that the carrying
amounts of these assets may not be recoverable, by comparing the carrying
value of the unamortized portion of goodwill and intangible assets to the
future benefits of the Company's activities or expected sales of
pharmaceutical products. Should there be a permanent impairment in value or if
the unamortized balance exceeds recoverable amounts, a write-down will be
recognized, for the current year. To date, Axcan has not recognized any
significant impairment in value.
Intangible assets with finite life are amortized over their estimated
useful lives according to the straight-line method at annual rates varying
from 4% to 15%. The straight-line method of amortization is used because it
reflects, in the opinion of management, the pattern in which the intangible
assets with finite life are used. In determining the useful life of intangible
assets, the Company considers many factors including the intention of
management to support the asset on a long-term basis by maintaining the level
of expenditure necessary, the use of the asset, the existence and expiration
date of a patent, the existence of a generic or competitor and any legal or
regulatory provisions that could limit the use of the asset.
As a result of acquisitions, we included $27.5 million of goodwill on our
consolidated balance sheets as of December 31, 2005, and September 30, 2005.
Also as a result of acquisitions of product rights and other identifiable
intangible assets, we included $383.0 million and $388.9 million as net
intangible assets on our consolidated balance sheets as of December 31, 2005,
and September 30, 2005, respectively. Estimated annual amortization expense
for intangible assets with a finite life, which have a weighted-average
remaining amortization period of approximately 17 years, for the next five
fiscal years, is approximately $16.9 million.
Research and Development Expenses
Research and development expenses are charged to operations in the year
they are incurred. Acquired in-process research and development having no
alternative future use is written off at the time of acquisition. The cost of
intangibles that are acquired from others for a particular research and
development project, with no alternative use, is written off at the time of
acquisition.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of revenue represented by items in Axcan's consolidated statements of
operations:
<<
For the three-month periods
ended December 31
------------------------------
2005 2004
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% %
Revenue 100.0 100.0
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Cost of goods sold 25.8 27.2
Selling and administrative expenses 33.4 34.0
Research and development expenses 12.6 10.4
Depreciation and amortization 8.0 8.7
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79.8 80.3
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Operating income 20.2 19.7
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Financial expenses 2.5 2.9
Interest income (1.1) (0.1)
Gain on foreign exchange (0.3) (0.4)
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1.1 2.4
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Income before income taxes 19.1 17.3
Income taxes 6.0 4.7
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Net income 13.1 12.6
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Three-month period ended December 31, 2005 compared to the three-month
period ended December 31, 2004
Revenue
For the three-month period ended December 31, 2005, revenue was
$70.6 million compared to $61.6 million for the corresponding period of the
preceding fiscal year, an increase of 14.6%. This increase in revenue
primarily resulted from higher sales in the United States. The end-customer
prescription demand resulted in positive growth for most of our products sold
in the United States, which was reflected in sales to our major wholesalers as
they work towards reaching their targeted inventory levels. Major wholesalers
in the United States reduced their inventory levels in fiscal 2005.
Revenue is stated net of deductions for product returns, chargebacks,
contract rebates, discounts and other allowances of $11.7 million (14.2% of
gross revenue) for the three-month period ended December 31, 2005, and
$8.2 million (11.7% of gross revenue) for the three-month period ended
December 31, 2004. This increase of total deductions as a percentage of gross
revenue is primarily due to an increase in returns and chargebacks.
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. For the three-month period ended December 31, 2005, cost of
goods sold increased $1.4 million (8.3%) to $18.2 million from $16.8 million
for the corresponding period of the preceding fiscal year. As a percentage of
revenue, cost of goods sold for the three-month period ended December 31, 2005
decreased as compared to the corresponding period of the preceding fiscal year
from 27.2% to 25.8%. This decrease in the cost of goods sold as a percentage
of revenue was due mainly to the increase in sales of products with a higher
margin.
Selling and administrative expenses
Selling and administrative expenses consist principally of salaries and
other costs associated with Axcan's sales force and marketing activities.
Selling and administrative expenses increased $2.6 million (12.4%) to
$23.6 million for the three-month period ended December 31, 2005, from
$21.0 million for the corresponding period of the preceding fiscal year. The
adoption of the new accounting rule concerning the compensation cost for share
based awards resulted in an increase in selling and administrative expenses of
$0.9 million. The increase was also due to marketing preparations for new
products, including ITAX, additional marketing efforts with respect to our
current products, increased distribution costs following the signing of a new
agreement with a major wholesaler, consulting fees for Information Technology
implementation and regulatory compliance.
Research and development expenses
Research and development expenses consist principally of fees paid to
outside parties that Axcan uses to conduct clinical studies and to submit
governmental approval applications on its behalf, as well as the salaries and
benefits paid to its personnel involved in research and development projects.
Research and development expenses increased $2.5 million (39.1%) to
$8.9 million for the three-month period ended December 31, 2005, from
$6.4 million for the corresponding period of the preceding fiscal year. This
increase was mainly due to the Phase III development of ITAX, acquired in
August 2003, for the treatment of functional dyspepsia. Phase III is the most
expensive stage of clinical development.
Depreciation and amortization
Depreciation and amortization consist principally of the amortization of
intangible assets with a finite life. Intangible assets include trademarks,
trademark licenses and manufacturing rights. Depreciation and amortization
increased $0.2 million (3.7%) to $5.6 million for the three-month period ended
December 31, 2005, from $5.4 million for the corresponding period of the
preceding fiscal year. The increase was mainly due to the amortization of
LACTEOL and ADEK's which were reclassified from intangible assets with an
indefinite life to intangible assets with a finite life on October 1, 2005.
Financial expenses
Financial expenses consist principally of interest and fees paid in
connection with money borrowed for acquisitions. Financial expenses remained
stable at $1.8 million for the three-month periods ended December 31, 2005 and
2004.
Income Taxes
Income taxes amounted to $4.2 million for the three-month period ended
December 31, 2005, compared to $2.9 million for the corresponding period of
the preceding fiscal year. The effective tax rates were 31.4% for the
three-month period ended December 31, 2005 and 27.2% for the three-month
period ended December 31, 2004.
Net income
Net income was $9.2 million or $0.20 of basic income per share and $0.19
of diluted income per share, for the three-month period ended December 31,
2005, compared to $7.8 million or $0.17 of basic income per share and $0.16 of
diluted income per share for the corresponding period of the preceding year.
Net income for the three-month period ended December 31, 2005 takes into
account the expensing of stock-based compensation which amounted to
$0.9 million after taxes. Had stock-based compensation been recorded in the
prior year, the impact to net income for the three-month period ended
December 31, 2004 would have been $1.1 million or $0.02 per share of basic and
diluted income per share thus reducing net income to $6.7 million or $0.15 of
basic income per share and $0.14 of diluted income per share. The change in
net income for the three-month period ended December 31, 2005 resulted mainly
from an increase in revenue of $9.0 million and an increase in interest income
of $0.7 million, which were offset by a $6.9 million increase in operating
expenses and an increase in income taxes of $1.3 million. The weighted average
number of common shares outstanding used to establish the basic per share
amounts increased from 45.6 million for the three-month period ended December
31, 2004 to 45.7 million for the three-month period ended December 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 decreased from 55.3 million for the three-month
period ended December 31, 2004 to 55.0 million for the three-month period
ended December 31, 2005.
Canadian GAAP
The differences (in thousands of dollars) between U.S. and Canadian GAAP
which affected net income for the three-month periods ended December 31, 2005
and 2004 are summarized in the following table:
For the three-month periods
ended December 31,
------------------------------
2005 2004
------------------ ----------
$ $
Net income in accordance with U.S. GAAP 9,245 7,754
Implicit interest on convertible debt (1,229) (1,123)
Stock-based compensation expense - (1,300)
Amortization of new product acquisition costs (14) (14)
Income tax impact of the above adjustments (163) 5
-------------------------------------------------------------------------
Net earnings in accordance with Canadian GAAP 7,839 5,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On March 5, 2003, the Company closed an offering of $125.0 million
aggregate principal amount of 4.25% convertible subordinated notes due
April 15, 2008. As a result of the terms of the notes, under Canadian GAAP, an
amount of $24.2 million was included in shareholders' equity as equity
component of the convertible debt, and an amount of $100.8 million was
included in long-term debt, as the liability component of the convertible
notes. For the three-month period ended December 31, 2005, implicit interest
in the amount of $1.2 million ($1.1 million 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 U.S.
GAAP, the effect of stock-based compensation has to be accounted for using the
fair value method since October 1, 2005.
Under Canadian GAAP, research and development expenses are stated net of
related tax credits which generally constitute between 5% and 10% of the
aggregate amount of such expenses. Under U.S. GAAP, these tax credits are
applied against income taxes.
Liquidity and capital resources
Axcan's cash, cash equivalents and short-term investments increased
$28.3 million (29.0%) to $125.9 million at December 31, 2005 from
$97.6 million at September 30, 2005. As of December 31, 2005, working capital
was $146.6 million, compared to $132.0 million at September 30, 2005. These
increases were mainly due to the cash flows from operating activities for the
three-month period ended December 31, 2005.
Total assets increased $8.3 million (1.3%) to $649.7 million as of
December 31, 2005 from $641.4 million as of September 30, 2005. Shareholders'
equity increased $8.2 million (2.0%) to $425.8 million as of December 31, 2005
from $417.6 million as of September 30, 2005.
Historically, Axcan has financed research and development, operations,
acquisitions, milestone payments and investments out of the proceeds of public
and private sales of its equity and convertible debt, cash flows from
operating activities, and loans from joint venture partners and financial
institutions. Since it went public in Canada in December 1995, Axcan has
raised approximately $243.0 million from sales of its equity and
$125.0 million from sales of convertible notes. Furthermore, Axcan has
borrowed and since repaid funds from financial institutions to finance the
acquisition of Axcan Scandipharm Inc. and from Schwarz Pharma Inc., a former
joint venture partner, to finance the acquisition of URSO.
Axcan's research and development expenses totalled $19.9 million for
fiscal 2004 and $31.9 million for fiscal 2005. Axcan believes that cash, cash
equivalents and short-term investments, together with funds provided by
operations, will be sufficient to meet its operating cash requirements,
including the development of products through research and development
activities, capital expenditures and repayment of its debt. Axcan believes
that regulatory approvals of future products and extension of products
indications, stemming from its research and development efforts, will
significantly contribute to an increase in funds provided by operations.
However, Axcan regularly reviews product and other acquisition opportunities
and may therefore require additional debt or equity financing. Axcan cannot be
certain that such additional financing, if required, will be available on
acceptable terms, or at all.
Line of credit
Effective September 22, 2004, the Company amended its existing credit
facility with a banking syndicate. The amended credit facility consists of a
$125.0 million 364-day extendible revolving facility with a two-year term-out
option maturing on September 21, 2008.
The credit facility is secured by a first priority security interest on
all present and future acquired assets of the Company and its material
subsidiaries, and provides for the maintenance of certain financial ratios.
Among the restrictions imposed by the credit facility is a covenant limiting
cash dividends, share repurchases (other than redeemable shares issued in
connection with a permitted acquisition) and similar distributions to
shareholders to 10% of the Company's net income for the preceding fiscal year.
As of December 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 line of credit also provides for a stand-by fee of
between 25 and 37.5 basis points. The credit facility may be drawn in U.S.
dollars, in Canadian dollar or Euros equivalents. As of December 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, totaled
$127.4 million as of December 31, 2005 compared to $127.8 million as of
September 30, 2005. As of December 31, 2005, the long-term debt included
$1.1 million of bank loans, $1.3 million of obligations under capital leases
contracted by Axcan's French subsidiary and the $125.0 million 4.25%
convertible subordinated notes due 2008, which were issued on March 5, 2003.
The notes are convertible into 8,924,113 common shares during any
quarterly conversion period if the closing price per share for at least
20 consecutive trading days during the 30 consecutive trading-day period
ending on the first day of the conversion period exceeds 110% of the
conversion price in effect on that thirtieth trading day. The notes are also
convertible during the five business-day period following any 10 consecutive
trading-day period in which the daily average of the trading prices for the
notes was less than 95% of the average conversion value for the notes during
that period. The noteholders may also convert their notes upon the occurrence
of specified corporate transactions or if the Company has called the notes for
redemption. On or after April 20, 2006, the Company may at its option, redeem
the notes, in whole or in part at redemption prices varying from 101.70% to
100.85% of the principal amount plus any accrued and unpaid interest to the
redemption date. The notes also include provisions for the redemption of all
the notes for cash at the option of the Company following certain changes in
tax treatment.
Cash Flows
Cash flows from operating activities increased $20.5 million from
$8.8 million of cash provided by operating activities for the three-month
period ended December 31, 2004 to $29.3 million for the three-month period
ended December 31, 2005. This increase is mainly due to the increase in income
and the fact that accounts receivable decreased by $12.9 million during the
three-month period ended December 31, 2005 compared to the corresponding
period of the previous fiscal year when they remained relatively stable. Cash
flows used by financing activities were $0.3 million for the three-month
period ended December 31, 2005. Cash flows provided by investment activities
for the three-month period ended December 31, 2005 were $6.4 million mainly
due to the disposal of short-term investments of $7.0 million less the cash
used for the acquisition of property, plant and equipment for $0.6 million.
Cash flows provided by investment activities for the three-month period ended
December 31, 2004 were $11.0 million mainly due to the disposal of short-term
investments of $12.8 million less the cash used for the acquisition of
property, plant and equipment for $1.8 million.
Off-Balance Sheet Arrangements
Axcan does not have any transactions, arrangements and other
relationships with unconsolidated entities that are likely to affect its
operating results, its liquidity or capital resources. Axcan has no special
purpose or limited purpose entities that provide off-balance sheet financing,
liquidity or market or credit risk support, engage in leasing, hedging,
research and development services, or other relationships that expose the
Company to liability that is not reflected on the face of the consolidated
financial statements.
Contractual Obligations
The following table summarizes Axcan's significant contractual
obligations (in thousands of dollars) as of December 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 December 31, 2005 or certain other purchase
obligations as discussed below:
For the twelve-month periods ending December 31,
----------------------------------------------------------
2010 and
2006 2007 2008 2009 thereafter
--------- --------- --------- --------- ------------
$ $ $ $ $
Long-term debt 1,401 801 125,193 53 -
Operating
leases 1,413 817 545 30 -
Other
commitments 225 475 716 250 -
--------- --------- --------- --------- ------------
3,039 2,093 126,454 333 0
--------- --------- --------- --------- ------------
--------- --------- --------- --------- ------------
Purchase orders for raw materials, finished goods and other goods and
services are not included in the above table. Management is not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this table,
contractual obligations for purchase of goods or services are defined as
agreements that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Axcan's purchase orders are based on current needs
and are fulfilled by our vendors with relatively short timetables. The Company
does not have significant agreements for the purchase of raw materials or
finished goods specifying minimum quantities or set prices that exceed its
short-term expected requirements. Axcan also enters into contracts for
outsourced services; however, the obligations under these contracts are not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty except for a sales management
services contract included in the above table. As milestone payments are
primarily contingent on receiving regulatory approval for products under
development, they do not have defined maturities.
The expected timing of payment of the obligations discussed above is
estimated based on current information. Timing of payments and actual amounts
paid may be different depending on the time of receipt of goods or services,
or for some obligations, changes to agreed-upon amounts.
Effect of recently issued U.S. accounting pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires all entities to recognize compensation cost for
share-based awards, including options, granted to employees. The Statement
eliminates the ability to account for share-based compensation transactions
using APB No. 25, "Accounting for Stock Issued to Employees", and generally
requires instead that such transactions be accounted for using a fair-value
based method. Public companies are required to measure stock-based
compensation classified as equity by valuing the instrument the employee
receives at its grant-date fair value. Previously, such awards were measured
at intrinsic value under both APB No. 25 and SFAS 123, "Accounting for
Stock-Based Compensation". The Company applied the Statement beginning in
fiscal 2006 using the modified prospective transition approach. The adoption
resulted in an increase in compensation cost of $1.1 million for the
three-month period ended December 31, 2005.
Earnings coverage
Under U.S. GAAP, for the twelve-month period ended December 31, 2005, our
interest requirements amounted to $6.2 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 7.04 to one.
Under Canadian GAAP, for the twelve-month period ended December 31, 2005,
our interest requirements amounted to $11.4 million on a pro-forma basis, and
our earnings coverage ratio was 3.73 to one. The principal difference between
the earnings coverage ratios under Canadian GAAP and U.S. GAAP is attributable
to the inclusion of implicit interest of $5.2 million as required by Canadian
GAAP.
Risk Factors
Axcan is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Axcan does not use derivative
financial instruments for speculative or trading purposes. Axcan does not use
off-balance sheet financing or similar special purpose entities. Inflation has
not had a significant impact on Axcan's results of operations. Risks other
than those described below can be found in the Part III - Business of Axcan,
of the Company's Annual Information Form.
Foreign Currency Risk
Axcan operates internationally; however, a substantial portion of the
revenue and expense activities and capital expenditures are transacted in U.S.
dollars. Axcan's exposure to exchange rate fluctuation is reduced because, in
general, Axcan's revenues denominated in currencies other than the U.S. dollar
are matched by a corresponding amount of costs denominated in the same
currency. Axcan expects this matching to continue.
Interest Rate Risk
The primary objective of Axcan's investment policy is the protection of
capital. Accordingly, investments are made in high-grade government and
corporate securities with varying maturities, but typically, less than
180 days. Therefore, Axcan does not have a material exposure to interest rate
risk, and a 100 basis-point adverse change in interest rates would not have a
material effect on Axcan's consolidated results of operations, financial
position or cash flows. Axcan is exposed to interest rate risk on borrowings
under the credit facility. The credit facility bears interest based on LIBOR,
U.S. dollar base rate, Canadian dollar prime rate, or Canadian dollar Bankers'
Acceptances. Based on projected advances under the credit facility, a
100 basis-point adverse change in interest rates would not have a material
effect on Axcan's consolidated results of operations, financial position, or
cash flows.
Supply and Manufacture
Axcan depends on third parties for the supply of active ingredients and
for the manufacture of the majority of its products. Although Axcan looks to
secure alternative suppliers, Axcan may not be able to obtain the active
ingredients or products from such third parties, the active ingredients or
products may not comply with specifications, or the prices at which Axcan
purchases them may increase and Axcan may not be able to locate alternative
sources of supply in a reasonable time period, or at all. If any of these
events occur, Axcan may not be able to continue to market certain of its
products, and its sales and profitability would be adversely affected.
Volatility of Share Prices
The market price of Axcan's shares is subject to volatility. Deviations
in actual financial or scientific results, as compared to expectations of
securities analysts who follow our activities can have a significant effect on
the trading price of Axcan's shares.
Forward-looking Statements
This document contains forward-looking statements, which reflect the
Company's current expectations regarding future events. To the extent that any
statements in this document contain information that is not historical, the
statements are essentially forward-looking and are often identified by words
such as "anticipate", "expect", "estimate", "intend", "project", "plan" and
"believe". These forward-looking statements include, but are not limited to,
the expected sales growth of the Company's products and the expected increase
in funds from operations resulting from the Company's research and development
expenditures. The forward-looking statements involve risks and uncertainties.
Actual events could differ materially from those projected herein and depend
on a number of factors, including but not limited to the successful and timely
completion of clinical studies, the difficulty of predicting FDA or other
regulatory approvals, the commercialization of a drug or therapy after
regulatory approval is received, the difficulty of predicting acceptance and
demand for pharmaceutical products, the impact of competitive products and
pricing, costs associated with new product development and launch, the
availability of raw materials, the protection of our intellectual property,
fluctuations in our operating results and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission and
the Canadian Securities Commissions. The reader is cautioned not to rely on
these forward looking statements. The Company disclaims any obligation to
update these forward-looking statements.
This MD&A has been prepared as of February 9, 2006. Additional
information on the Company is available through regular filing of press
releases, quarterly financial statements and the Annual Information Form on
the SEDAR website.
On behalf of Management,
(signed)
Jean VDezina
Vice President, Finance and Chief Financial Officer
AXCAN PHARMA INC.
Consolidated Balance Sheets
-------------------------------------------------------------------------
(in thousands of U.S. dollars, except share related data)
December September
31, 2005 30, 2005
---------- -----------
(unaudited)
Assets $ $
Current assets
Cash and cash equivalents 115,238 79,969
Short-term investments available for sale 10,622 17,619
Accounts receivable, net 24,485 37,587
Income taxes receivable 7,912 8,351
Inventories (Note 3) 35,799 36,016
Prepaid expenses and deposits 3,514 1,771
Deferred income taxes 7,934 9,044
-------------------------------------------------------------------------
Total current assets 205,504 190,357
Property, plant and equipment, net 30,618 31,673
Intangible assets, net (Note 4) 382,985 388,921
Goodwill, net 27,467 27,467
Deferred debt issue expenses, net 2,302 2,577
Deferred income taxes 781 412
-------------------------------------------------------------------------
Total assets 649,657 641,407
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 51,198 52,990
Income taxes payable 4,943 3,247
Instalments on long-term debt 1,401 1,497
Deferred income taxes 1,327 602
-------------------------------------------------------------------------
Total current liabilities 58,869 58,336
Long-term debt 126,047 126,332
Deferred income taxes 38,929 39,135
-------------------------------------------------------------------------
Total liabilities 223,845 223,803
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock
Preferred shares, without par value,
unlimited shares authorized, no shares issued; - -
Series A preferred shares, without par value,
shares authorized: 14,175,000; no shares issued. - -
Series B preferred shares, without par value,
shares authorized: 12,000,000; no shares issued. - -
Common shares, without par value, unlimited
shares authorized; 45,688,344 issued as at
December 31, 2005 and 45,682,175 as at
September 30, 2005. 261,780 261,714
Retained earnings 148,032 138,787
Additional paid-in capital 2,401 1,329
Accumulated other comprehensive income 13,599 15,774
-------------------------------------------------------------------------
Total shareholders' equity 425,812 417,604
-------------------------------------------------------------------------
Total liabilities and shareholders' equity 649,657 641,407
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Shareholders' Equity
-------------------------------------------------------------------------
(in thousands of U.S. dollars, except For the For the
share related data) three- three-
(unaudited) month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
Common shares (number)
Balance, beginning of period 45,682,175 45,562,336
Shares issued pursuant to the stock
option plan 6,169 18,714
-------------------------------------------------------------------------
Balance, end of period 45,688,344 45,581,050
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $
Common shares
Balance, beginning of period 261,714 260,643
Shares issued pursuant to the stock
option plan 66 156
-------------------------------------------------------------------------
Balance, end of period 261,780 260,799
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of period 138,787 112,362
Net income 9,245 7,754
-------------------------------------------------------------------------
Balance, end of period 148,032 120,116
-------------------------------------------------------------------------
Additional paid-in capital
Balance, beginning of period 1,329 -
Stock-based compensation expense 1,072 -
Income tax deductions on stock options exercise - 980
-------------------------------------------------------------------------
Balance, end of period 2,401 980
-------------------------------------------------------------------------
Accumulated other comprehensive income
Balance, beginning of period 15,774 19,071
Foreign currency translation adjustments (2,175) 10,848
-------------------------------------------------------------------------
Balance, end of period 13,599 29,919
-------------------------------------------------------------------------
Total shareholders' equity 425,812 411,814
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive income
Foreign currency translation adjustments (2,175) 10,848
Net income 9,245 7,754
-------------------------------------------------------------------------
Total comprehensive income 7,070 18,602
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Cash Flows
-------------------------------------------------------------------------
(in thousands of U.S. dollars) For the For the
(unaudited) three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
Operations $ $
Net income 9,245 7,754
Non-cash items
Amortization of deferred debt issue expenses 275 275
Other depreciation and amortization 5,634 5,364
Stock-based compensation expense 1,072 -
Foreign currency fluctuation (283) (16)
Deferred income taxes 1,279 601
Changes in working capital items
Accounts receivable 12,876 (138)
Income taxes receivable 406 (682)
Inventories 322 (1,125)
Prepaid expenses and deposits (1,724) (722)
Accounts payable and accrued liabilities (1,569) (5,249)
Income taxes payable 1,727 2,755
-------------------------------------------------------------------------
Cash flows from operating activities 29,260 8,817
-------------------------------------------------------------------------
Financing
Repayment of long-term debt (368) (469)
Deferred debt issue expenses - (589)
Issue of shares 66 156
-------------------------------------------------------------------------
Cash flows from financing activities (302) (902)
-------------------------------------------------------------------------
Investment
Disposal of short-term investments 6,997 12,822
Acquisition of property, plant and equipment (566) (1,834)
Acquisition of intangible assets - (8)
-------------------------------------------------------------------------
Cash flows from investment activities 6,431 10,980
-------------------------------------------------------------------------
Foreign exchange gain (loss) on cash held in
foreign currencies (120) 175
-------------------------------------------------------------------------
Net increase in cash and cash equivalents 35,269 19,070
Cash and cash equivalents, beginning of period 79,969 21,979
-------------------------------------------------------------------------
Cash and cash equivalents, end of period 115,238 41,049
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information
Interest received 897 99
Interest paid 2,680 2,698
Income taxes paid 814 1,269
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Consolidated Operations
-------------------------------------------------------------------------
(in thousands of U.S. dollars, except For the For the
share related data) three- three-
(unaudited) month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Revenue 70,639 61,583
-------------------------------------------------------------------------
Cost of goods sold excluding depreciation
and amortization 18,229 16,757
Selling and administrative expenses 23,642 20,957
Research and development expenses 8,894 6,389
Depreciation and amortization 5,634 5,364
-------------------------------------------------------------------------
56,399 49,467
-------------------------------------------------------------------------
Operating income 14,240 12,116
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Financial expenses 1,758 1,787
Interest income (786) (86)
Gain on foreign currency (210) (233)
-------------------------------------------------------------------------
762 1,468
-------------------------------------------------------------------------
Income before income taxes 13,478 10,648
Income taxes 4,233 2,894
-------------------------------------------------------------------------
Net income 9,245 7,754
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per common share
Basic 0.20 0.17
Diluted 0.19 0.16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of common shares
Basic 45,686,661 45,571,370
Diluted 55,042,690 55,303,339
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the Consolidated Financial Statements.
These interim financial statements should be read in conjunction with the
annual Consolidated Financial Statements.
AXCAN PHARMA INC.
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------
(amounts in tables are stated in thousands of U.S. dollars, except share
related data)
(unaudited)
1. Significant Accounting Policies
The accompanying unaudited financial statements are prepared in
accordance with U.S. GAAP for interim financial statements and do not include
all the information required for complete financial statements. They are
consistent with the policies outlined in the Company's audited financial
statements for the year ended September 30, 2005 except for the change
mentioned in note 2. The interim financial statements and related notes should
be read in conjunction with the Company's audited financial statements for the
year ended September 30, 2005. When necessary, the financial statements
include amounts based on informed estimates and best judgements of management.
The results of operations for the interim periods reported are not necessarily
indicative of results to be expected for the year.
2. Change in Accounting Policies
In December 2004, The Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". SFAS No. 123R requires all entities to recognize compensation cost
for share-based awards, including options, granted to employees. The Statement
eliminates the ability to account for share-based compensation transactions
using the Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued To Employees", and generally requires instead that such
transactions be accounted for using a fair-value based method. Public
companies are required to measure stock-based compensation classified as
equity by valuing the instrument the employee receives at its grant-date fair
value. Previously such awards were measured at intrinsic value under both APB
No. 25 and SFAS 123, "Accounting for Stock-Based Compensation". The Company
applied the Statement beginning in fiscal 2006 using the modified prospective
transition approach.
If this change in accounting policy had been applied to the previous
fiscal year, the Company's net income, basic income per share and diluted
income per share for the three-month period ended December 31, 2004 would have
been reduced on a pro-forma basis as follows:
For the three-month period
ended December 31, 2004
----------------------------
As reported Pro-forma
-------------- -----------
$ $
Net income 7,754 6,657
Basic income per share 0.17 0.15
Diluted income per share 0.16 0.14
The estimated fair value of granted stock options for the periods ended
December 31, 2005 and 2004 using the Black-Scholes model was as follows:
For the For the
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
Fair value per option $6.47 $6.98
Assumptions used
Expected volatility 44% 44%
Risk-free interest rate 4.01% 4.16%
Expected options life (years) 6 6
Expected dividend - -
3. Inventories
December September
31, 2005 30, 2005
----------- ------------
$ $
Raw materials and packaging material 17,317 18,710
Work in progress 1,716 1,547
Finished goods 16,766 15,759
-------------------------------------------------------------------------
35,799 36,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Intangible Assets
December 31, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortiza- Net
tion
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 344,796 49,943 294,853
Indefinite life 100,585 12,453 88,132
-------------------------------------------------------------------------
445,381 62,396 382,985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2005
-------------------------------------------------------------------------
Accumulated
Cost amortiza- Net
tion
-------------------------------------------------------------------------
$ $ $
Trademarks, trademark licenses and
manufacturing rights with a:
Finite life 334,749 45,841 288,908
Indefinite life 112,430 12,417 100,013
-------------------------------------------------------------------------
447,179 58,258 388,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of the products LACTEOL and ADEK's has been transferred from
intangible assets with an indefinite life to intangible assets with a finite
life following changes in the regulatory rules applicable to these products
and resulting in the modification of their useful life. The net cost of these
products as of October 1, 2005, which amounted to $13,520,565, is therefore
amortized over a 15-year period.
5. Segmented Information
The Company considers that it operates in a single reportable segment,
the pharmaceutical industry, since its other activities do not account for a
significant portion of segment assets.
The Company operates in the following geographic areas:
For the For the
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Revenue
Canada
Domestic sales 10,184 9,190
Foreign sales - -
United States
Domestic sales 44,909 37,028
Foreign sales 1,346 1,157
Europe
Domestic sales 12,145 11,743
Foreign sales 2,022 2,423
Other 33 42
-------------------------------------------------------------------------
70,639 61,583
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December September
31, 2005 30, 2005
----------- ------------
$ $
Property, plant, equipment, intangible
assets and goodwill
Canada 39,042 39,506
United States 126,843 127,915
Europe 247,408 252,509
Other 27,777 28,131
-------------------------------------------------------------------------
441,070 448,061
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to geographic segments based on the sales country
of origin.
6. Financial Information Included in the Consolidated Statement of
Operations
a) Financial expenses
For the For the
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Interest on long-term debt 1,375 1,434
Bank charges 29 7
Financing fees 79 71
Amortization of deferred debt issue expenses 275 275
-------------------------------------------------------------------------
1,758 1,787
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Selling and administrative expenses
Selling and administrative expenses include the followings:
For the For the
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Shipping and handling expenses 1,258 1,004
Advertising expenses 4,069 4,625
c) Other information
For the For the
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Rental expenses 290 287
Depreciation of property, plant and equipment 1,406 1,301
Amortization of intangible assets 4,228 4,063
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
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Net income available to common shareholders
Basic 9,245 7,754
Interest and amortization of deferred debt
issue expenses relating to the convertible
subordinated notes, net of income taxes 1,121 1,079
-------------------------------------------------------------------------
Net income available to common shareholders
on a diluted basis 10,366 8,833
-------------------------------------------------------------------------
For the For the
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
$ $
Weighted average number of common shares
Weighted average number of common shares
outstanding 45,686,661 45,571,370
Effect of dilutive stock options 431,916 807,856
Effect of dilutive convertible subordinated
notes 8,924,113 8,924,113
-------------------------------------------------------------------------
Adjusted weighted average number of common
shares outstanding 55,042,690 55,303,339
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares outstanding as at
January 31, 2006 45,710,879
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options to purchase 1,180,874 and 283,000 common shares were outstanding
as at December 31, 2005 and 2004 respectively but were not included in the
computation of diluted income per share as 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 three-month period
ended December 31, 2005, the Company made matching contributions to the Plan
totalling $100,456 ($122,183 in 2004).
7. 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
three- three-
month month
period period
ended ended
December December
31, 2005 31, 2004
----------- ------------
Operations adjustments $ $
Net income in accordance with U.S. GAAP 9,245 7,754
Implicit interest on convertible debt (1,229) (1,123)
Stock-based compensation expense - (1,300)
Amortization of new product acquisition costs (14) (14)
Income tax impact of the above adjustments (163) 5
-------------------------------------------------------------------------
Net earnings in accordance with Canadian GAAP 7,839 5,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share in accordance with Canadian GAAP
Basic 0.17 0.12
Diluted 0.17 0.11
December 31, 2005 September 30, 2005
----------------------------------------------
U.S. Canadian U.S. Canadian
GAAP GAAP GAAP GAAP
-------- ---------- --------- ------------
Balance sheet adjustments $ $ $ $
Current assets 205,504 205,504 190,357 190,357
Property, plant and
equipment 30,618 30,618 31,673 31,673
Intangible assets 382,985 395,280 388,921 401,229
Goodwill 27,467 28,862 27,467 28,862
Deferred debt issue expenses 2,302 2,302 2,577 2,577
Deferred income tax asset 781 612 412 412
Current liabilities 58,869 58,869 58,336 58,336
Long-term debt 126,047 114,194 126,332 113,250
Deferred income tax
liability 38,929 40,023 39,135 40,234
Shareholders' equity
Equity component of
convertible debt - 24,239 - 24,239
Capital stock 261,780 273,088 261,714 273,022
Additional paid-in
capital 2,401 14,367 1,329 13,293
Retained earnings 148,032 120,643 138,787 112,806
Accumulated foreign
currency translation
adjustments 13,599 17,755 15,774 19,930
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