UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-153896

 

AXCAN INTERMEDIATE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

     Yes       No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

     Yes þ       No

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes       No þ Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

     Yes       No (Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time).

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     Yes       No þ

     As of March 31, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public trading market for any of the common stock of the registrant and therefore, an aggregate market value of common stock of the registrant based on sales or bid and asked prices is not determinable. As of December 16, 2010, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Axcan MidCo Inc.

     Documents incorporated by reference: None.

 

 

TABLE OF CONTENTS

Forward-Looking Statements			4
Part I			5
Item 1. Business			5
Item 1a. Risk Factors			24
Item 1b. Unresolved Staff Comments			45
Item 2. Properties			45
Item 3. Legal Proceedings			45
Item 4. (Removed And Reserved)			46
Part II			47
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities			47
Item 6. Selected Financial Data			48
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations			53
Item 7a. Quantitative And Qualitative Disclosures About Market Risk			81
Item 8. Financial Statements And Supplementary Data			82
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure			130
Item 9a. Controls And Procedures			130
Item 9b. Other Information			130
Part III			131
Item 10. Directors, Executive Officers And Corporate Governance			131
Item 11. Executive Compensation			134
Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters			151
Item 13. Certain Relationships And Related Transactions, And Director Independence			153
Item 14. Principal Accounting Fees And Services			154
Part IV			155
Item 15. Exhibits And Financial Statement Schedules			155
Signatures			156

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K includes assumptions, expectations, projections, intentions and beliefs about future events. These statements are intended as “forward-looking statements.” We caution that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material.

     All statements in this document that are not statements of historical fact are forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, but are not limited to, such matters as

	•		delays in obtaining, or a failure to obtain and maintain, regulatory approval for our product candidates, including, but not limited to, our pancreatic enzyme products in the United States;
	•		our ability to successfully regain market share for our pancreatic enzyme products in the United States;
	•		our ability to market, commercialize and achieve market acceptance for any of the products that we are developing, commercializing or may develop or commercialize in the future, including the growth, establishment or acquisition of specialty sales, marketing and distribution capabilities to commercialize products;
	•		the expected timing, costs, progress or success of any of our preclinical and clinical development programs, regulatory approvals, or commercialization efforts;
	•		our ability to continue to successfully manufacture and commercialize our existing products;
	•		the potential advantages of our products or product candidates over other existing or potential products;
	•		our ability to enter into any new co-development or licensing agreements or to maintain any existing co-development or licensing agreements with respect to our product candidates or products;
	•		our ability to effectively maintain existing licensing relationships and establish new licensing relationships;
	•		the expense, time and uncertainty involved in the development of our product candidates, some or all of which may never reach the regulatory approval stage;
	•		our reliance on collaboration partners and licensees, to obtain and maintain regulatory approval for certain of our products and product candidates and to manufacture and commercialize such products;
	•		our ability to compete in the pharmaceutical industry against other branded or generic products;
	•		our ability to obtain reimbursement for the products we commercialize;
	•		our ability to protect our intellectual property and know-how and operate our business without infringing the intellectual property rights or regulatory exclusivity of others;
	•		a loss of rights to develop and commercialize our products under our license and sublicense agreements;
	•		a loss of any of our key scientists or management personnel;
	•		our estimates of market sizes and anticipated uses of our product candidates;
	•		our estimates of future performance; and
	•		our estimates regarding anticipated future revenue, expenses, operating losses, capital requirements and our needs for additional financing.

     When used in this document, the words “anticipate”, “believe”, “intend”, “estimate”, “project”, “forecast”, “plan”, “potential”, “will”, “may”, “should” and “expect” reflect forward-looking statements. Such statements reflect our current views and assumptions and all forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect our future financial results are discussed more fully under” Item 1A. — Risk Factors,” as well as elsewhere in this Annual Report on Form 10-K and in our other filings with the U.S. Securities and Exchange Commission, referred to herein as the SEC. We caution readers of this Annual Report on Form 10-K, also referred to herein as the Annual Report, not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.

CANASA, CARAFATE, CITRAFLEET, DELURSAN, FLEET PHOSPHO SODA, LACTEOL, PANZYTRAT, PHOTOFRIN, PHOTOBARR, PYLERA, SALOFALK, SULCRATE, ULTRASE, URSO/URSO 250, URSO FORTE, URSO DS and VIOKASE are trademarks or registered trademarks owned or used under license by Axcan Pharma Inc. and/or its affiliated companies.

PART I

ITEM 1. BUSINESS

     Axcan Intermediate Holdings Inc., a Delaware corporation, is a leading specialty pharmaceutical company concentrating in the field of gastroenterology, with operations in the United States (U.S.), Canada and the European Union (EU).

     Our website address is www.axcan.com. Information on our website is not incorporated herein by reference. Our reports filed with the Securities and Exchange Commission, or SEC, are available free of charge on the SEC’s website, http://www.sec.gov, or at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports may also be accessed through, the “Investor Relations” section of the Company’s website as soon as reasonably practicable after we file or furnishe such material with or to the SEC. In addition, copies of these reports will be made available free of charge, upon written request to Isabelle Adjahi, Senior Director, Investor Relations and Communications, Axcan Pharma, 597 Laurier Blvd., Mont-Saint-Hilaire, Quebec, Canada J3H 6C4. Axcan Intermediate Holdings Inc.’s corporate office is located at 22 Inverness Center Parkway, Suite 310, Birmingham, AL 35242.

     Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we”, “our”, “us”, the “Company”, “AIH” and “Axcan” means Axcan Intermediate Holdings Inc. and all of its subsidiaries.

Overview

     Axcan is a specialty pharmaceutical company focused on marketing and selling pharmaceutical products used in the treatment of a variety of gastrointestinal, or GI, diseases and disorders, which are those affecting the digestive tract. Our vision is to become the reference gastrointestinal company, and we hope to achieve this through our mission: to improve the quality of care and health of patients suffering from gastrointestinal diseases and disorders by providing effective therapies for patients and specialized caregivers.

     In addition to our marketing activities, we carry out research and development activities on products at late stages of development as further described below in the section “Products in Development”. These activities are carried out primarily with respect to products we currently market in connection with lifecycle management initiatives, as well as product candidates in late stage of development that we acquired or licensed from third parties. Our focus on products in late-stage development enables us to reduce risks and expenses typically associated with new drug development.

Subsequent Event

     On December 1, 2010, Axcan Holdings Inc. (“Axcan Holdings”), our indirect parent, and Axcan Pharma Holding B.V. (“Axcan Pharma”), our subsidiary, announced that they had entered into a definitive agreement with Eurand N.V. (“Eurand”), a global specialty pharmaceutical company with headquarters in the Netherlands, under which Axcan Holdings will acquire all of the outstanding shares of Eurand for $12.00 per share in cash, resulting in a purchase price of approximately $583 million. The transaction is subject to a condition that a minimum of 80% of Eurand shares be tendered, as well as receipt of antitrust approval. We have secured committed debt financing from BofA Merrill Lynch, Barclays Capital, RBC Capital Markets and HSBC Securities (USA) for the transaction.

INDUSTRY AND COMPANY

Industry Overview

     Gastrointestinal disorders are quite diverse affecting not only the GI tract but also different parts of the alimentary tract such as the pancreas, oropharynx, the liver and biliary systems and the alimentary canal. Disorders of the gastrointestinal tract are fairly common and occur in people of all ages. Causes of these disorders vary and could include genetic anomalies, the effect of certain toxins and drugs, infections, cancer and often unknown causes. GI disorders take up a significant share of the disease burden in developed economies and the gravity of the problem is further accentuated by the difficulty that they pose in effective management. The GI tract therapeutic area consists of some indications that can be treated through pharmacologic interventions, though significant unmet needs still exist, particularly for indications such as irritable bowel syndrome (IBS), Crohn’s disease (CD) and ulcerative colitis (UC).

     According to a report entitled “The Gastrointestinal Market Outlook To 2014: Market Dynamics, Competitive Landscape, Emerging Therapies” (published by Business Insights, December 2009 and retrieved from Research and Markets, a leading source for international market research and market data), the gastrointestinal market was valued at $49.9 billion in 2008 and U.S. took the largest share of this market (37.8%) with sales amounting to $18.8 billion.

     According to a report entitled “Opportunities & Challenges in Digestive Diseases Research” (U.S. Department of Health and Human Services, National Institutes of Health — March 2009), at least 60 to 70 million Americans are affected each year by digestive diseases, placing a burden on society that exceeds $100 billion in direct medical costs in the U.S. Annually, in the U.S., about 14 million hospitalizations —10% of the total— and 15% of all in-patient hospital procedures are attributed to treatment of digestive diseases. In addition, in the U.S., 105 million visits to doctors’ offices occur each year for digestive diseases, frequently in response to symptoms such as abdominal pain, diarrhea, vomiting or nausea. Prescription drugs for the treatment of certain digestive diseases such as gastroesophageal reflux disease (GERD) rank among the

most commonly used pharmaceutical drugs in the U.S. Even more worrying, digestive diseases are associated with significant mortality, morbidity and loss of quality of life. Digestive diseases, including cancer, are named as a primary cause of approximately 236,000 deaths in the U.S. each year. Moreover, digestive disorders, even conditions that are not immediately life-threatening, can severely affect patients’ quality of life and cause significant disability even for conditions that are not immediately life-threatening. Debilitating symptoms—such as chronic pain, discomfort, bloating, diarrhea, constipation, and incontinence, not to mention social stigma or embarrassment associated with many GI disorders can affect patients’ ability to work or engage in daily activities. Collectively, these diseases account for over $44 billion in indirect costs associated with disability and mortality each year in the U.S.

Competitive Strengths

     We believe we have a number of competitive strengths that will enable us to further enhance our position in the gastroenterology market.

     Diversified Portfolio of Branded Products. We currently market branded products in various product categories that treat a broad range of GI diseases and disorders. During fiscal year 2010, two product lines contributed 47% of our revenues, but no single product line accounted for more than 25% of our revenues. Our portfolio of products is also geographically diverse, with approximately 28% of our revenues being generated from sales outside the U.S. in fiscal year 2010.

     Leading Competitive Positions in Attractive Gastroenterology Markets. We have a strong track record of leveraging a product line’s unique market position to drive performance. CANASA and CARAFATE are our main products in the U.S.; CANASA is used to treat ulcerative proctitis and colitis and accounted for 66.0% of the U.S. market for rectally-administered mesalamine products in terms of sales in fiscal year 2010; CARAFATE is the only branded suspension-form sucralfate product in its market in the U.S. It accounted for 45.8% of the U.S. market sales for sucralfate products in fiscal year 2010. We believe that certain of our products are often the first line of treatment prescribed by physicians for these diseases and disorders. Additionally, many of the GI diseases and disorders that our products are used to treat are chronic, and as a result, we believe that physicians tend to be reluctant to change a patient’s treatment program once the patient has been treated with and becomes accustomed to a particular product. As a result, we believe that our products experience a high degree of patient loyalty, allowing us to maintain leading competitive positions in the markets in which we participate.

     Non-Patent Hurdles to Entry. Despite having no long-term patent protection, we believe that our core product lines benefit from a variety of regulatory, clinical, sourcing and manufacturing hurdles to entry, including, depending upon the product line and the product, the requirement to conduct clinical trials, availability of various forms of regulatory exclusivity and the know-how required to manufacture certain dosage forms. We believe that these hurdles make it more difficult for generic competitors to introduce and market generic versions of certain of our products, including products from our CANASA, CARAFATE, ULTRASE MT and VIOKASE product lines. See “Item 1A. Risk Factors—Risks Related to Our Business.”

     Focused Sales Force with Market-Leading Performance. By focusing on establishing strong relationships with gastroenterologists, hepatologists and cystic fibrosis centers, we are able to effectively penetrate the gastroenterology market. As of September 30, 2010, our sales force numbers 168 representatives, located in the U.S., Canada and in the EU (including a contracted sales force in Germany devoted exclusively to selling our products and one sales representative in the U.K).

     Consistently High Free Cash Flow Generation. Historically, our business is characterized by strong free cash flows due to our robust operating history and minimal capital intensity. In addition, our capital expenditure requirements have historically been minimal, providing for strong free-cash-flow conversion. Over the last five fiscal years, we have generated cumulative free cash flow of approximately $367.8 million. For information regarding the risks we and our business face, please see “Item 1A. Risk Factors.”

     Proven Track Record in Acquiring Products and Building Market Share. Our business development effort is focused on expanding our product portfolio by capitalizing on our core knowledge of gastrointestinal markets. Our experienced business development team uses a rigorous and disciplined approach to identify and acquire products that can be grown by our sales force using the strong relationships we have with gastroenterology practitioners. We have a strong record of acquiring and developing products and growing their market share, as evidenced by our leading position in a number of the markets in which we participate.

     Experienced and Dedicated Management Team. We have a highly experienced management team at both the corporate and operational levels. Our team is led by President and Chief Executive Officer Frank Verwiel, M.D., formerly of Merck & Co., Inc., who has over 20 years’ experience in the health-care industry. Dr. Verwiel joined Axcan Pharma as President and CEO in July 2005. David Mims, formerly with Scandipharm, Inc., is our Executive Vice President and Chief Operating Officer. He joined Axcan Pharma in that capacity in February 2000, when we acquired Scandipharm, Inc. Mr. Mims has more 20 years of experience in the health-care industry. Steve Gannon, our Senior Vice President and Chief Financial Officer, joined Axcan Pharma in that capacity in April 2006, having previously served as CFO of CryoCath Technologies Inc. and held various senior financial positions at AstraZeneca and Mallinckrodt over the past 20 years. Dr. Alexandre LeBeaut rejoined us as Senior Vice President and Chief Scientific Officer in September 2008 after holding the same position with Axcan Pharma from May 2006 to February 2007 and various other executive positions in the pharmaceutical industry, including Vice President, Medical Units, U.S. Medical Affairs of Sanofi-Aventis Pharmaceuticals. Dr. LeBeaut has more than 20 years of experience in the health-care industry. Nicholas Franco joined Axcan Pharma as Senior Vice President, International Commercial Operations, in July 2007, having held various management positions at Novartis Pharma AG, including President of the Global Ophthalmic Business Unit and Global Head of the Neuroscience Business Franchise. Mr. Franco has more than 20 years of experience in the health-care industry. Theresa Stevens joined Axcan Intermediate Holdings as Senior Vice President, Business Development, in June 2009, having previously held a number of executive positions at Novartis

Pharmaceuticals as Executive Committee member and Vice President, U.S. Business Development and Licensing, Life Cycle Management and Generics-Brands Strategies. Ms. Stevens has more than 25 years of experience in the health-care industry. Richard DeVleeschouwer has been our Senior Vice President, Human Resources, since March 2010, having served a number of senior human resources roles at Schering-Plough, Pharmacia and Monsanto. Mr. DeVleeschouwer has more than 23 years of experience as a Human Resources professional and more than 14 years of experience in the health-care industry. Richard Tarte, formerly a partner with the law firm of Coudert Brothers, joined Axcan Pharma as Vice President, Corporate Devel8opment, and General Counsel in 2001. Mr. Tarte has more than 10 years of experience in the health-care industry.

Business Strategy

     We intend to enhance our position as the leading specialty pharmaceutical company concentrating in the field of gastroenterology by pursuing the following strategic initiatives:

     Grow Sales of Existing Products. We call on a targeted group of prescribing physicians to build strong professional relationships. We also seek to leverage the unique value of our product lines to drive performance by means of physician and caregiver programs and dialogue with payors that help to differentiate Axcan from the competition and position our products as the drugs of choice for many patients. As a result, our products are often the first line of treatment prescribed by physicians. We seek to leverage this strong position as well as the high degree of patient loyalty to our products to maintain our lead in the markets in which we compete.

     Launch New Products. Over the years, the expertise of our R&D and sales and marketing teams has allowed us to build strong relationships with the scientific and medical GI community. Thanks to our in-depth knowledge of the gastrointestinal area, our team is able to present the benefits of Axcan’s products to patients, health-care providers and payors and effectively launch new products. We intend to leverage our knowledge and expertise to successfully launch innovative products by strongly positioning them in selected markets, thus expanding our presence and reach.

     Selectively Acquire or In-License Complementary Products. We plan to acquire or in-license new products that complement the strategic focus of our existing product portfolio. Thanks to our long-lasting presence, reputation, core knowledge of GI markets, R&D expertise, multinational sales and marketing teams, market access and top-tier sales force, we are a preferred partner for companies looking to sell or out-license their specialty products. Our experienced business development team uses a rigorous and disciplined approach to ensure that the product lines we acquire fit strategically within our portfolio. In recent years, we have successfully grown a number of product lines that we acquired or developed to become leaders in their markets.

     Pursue Growth Opportunities Through Developing Pipeline. We continue to invest in R&D to develop the next generation of products to address unmet medical needs in the gastroenterology market. Our internal development efforts focus primarily on clinical development, which includes life-cycle management and medical market access initiatives. Our objective is to contribute in establishing a valid value proposition for all our products across their life-cycle.

     Expand Internationally. Our current infrastructures in the U.S., the EU and Canada form the basis of our efforts to expand internationally by increasing our R&D and sales and marketing footprint worldwide. We intend to continue to increase the geographic presence of our products through our network of third-party distributors or strategic alliances with local partners.

Products

     We focus on the field of gastroenterology. Our current product portfolio includes a number of pharmaceuticals products for the treatment of a range of GI diseases and disorders such as inflammatory bowel disease, cholestatic liver diseases, pancreatic insufficiency, and gastric and duodenal ulcers.

     The majority of our product sales are generated in the U.S., the EU and Canada. However, many of our products have been commercialized in export markets through licensing and distribution agreements with local marketing partners.

     We also have various products in development. A discussion of these projects and the regulatory process follows under the headings “Products in Development” and “Government Regulation.”

     Most of our products that we market do not benefit from any patent protection. We believe, however, that certain of our products benefit from other hurdles to the entry of competitors or generics. Our products nevertheless remain subject to brand competition and generic product entry. Competition from generic products which are typically sold at a significant discount from branded products could significantly and negatively affect our revenues. As of September 30, 2010, our main product lines are CANASA, CARAFATE, URSO 250 / URSO FORTE and PYLERA in the U.S., SALOFALK in Canada, and DELURSAN, PANZYTRAT and LACTEOL in the EU.

     Our main product lines, their sales, patent/regulatory protection and certain other hurdles to entry are discussed below.

Mesalamine

CANASA

     CANASA, a 1,000mg mesalamine suppository sold in the U.S., is indicated for the treatment of distal ulcerative proctitis, an inflammatory bowel disease. CANASA is currently the only FDA-approved mesalamine suppository available in the U.S.

     We reported net sales of $80.9 million, $84.7 million and $72.1 million for CANASA in fiscal years 2010, 2009 and 2008, respectively. The decline in sales in fiscal year 2010 as compared to fiscal year 2009 resulted from temporary changes in wholesaler shipping patterns experienced in fiscal year 2010, as well as increased promotional activity by Shire US Inc., following the launch of LIALDA^®, a new oral mesalamine products in the U.S. market that was partially offset by price increases announced during fiscal year 2009.

     CANASA competes directly with topical corticosteroids available in the form of enemas and suppositories, as well as mesalamine enemas. In the U.S., CANASA primarily competes with ROWASA^® enemas sold by MEDA AB and with various generic mesalamine enemas. It also indirectly competes with oral mesalamine products such as ASACOL^® (Warner Chilcott Company, LLC), PENTASA^® and LIALDA^® (Shire US Inc.), or APRISO™ and COLAZAL^® (Salix Pharmaceuticals, Inc.).

     CANASA does not have any patent protection in the U.S. On November 5, 2007, clinical investigation exclusivity previously granted pursuant to the Hatch-Waxman Act, covering a change in the formulation of this drug from a 500 mg formulation to a 1,000 mg suppository formulation, expired. As a result, if a generic mesalamine suppository were to be launched, it could have a significant negative impact on sales of CANASA in the U.S.

     In June 2007, the FDA published draft guidance on the requirements it expects manufacturers seeking approval of a mesalamine suppository to meet in order to obtain approval of mesalamine suppositories. This draft guidance specifies that a request for regulatory approval of a mesalamine suppository product must be supported by placebo and reference-drug controlled clinical studies with clinical endpoints demonstrating safety and effectiveness in patients with ulcerative proctitis. We cannot provide assurances that the FDA requirements reflected in this draft guidance will be applied by the FDA or will be formally adopted in their current form.

     In a July 2010 posting on clinicaltrial.gov that was updated in November 2010, Sandoz Inc. disclosed that it had initiated in June 2010 a clinical trial to establish therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA rectal suppositories, for the treatment of mild to moderate ulcerative proctitis. The disclosure states that the trial is being conducted in India and has an estimated duration of 18 months. Cadila Healthcare Inc. also recently disclosed that it is conducting a similar clinical study in India to establish therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA.

     As a result, if another mesalamine suppository was to be launched, it could have a significant negative impact on sales of CANASA in the U.S. See “Item 1A. Risk Factors — Risks Related to Our Business.”

SALOFALK

     SALOFALK is a mesalamine-based product line (tablets, suspensions and suppositories) that we sell in Canada for the treatment of certain inflammatory bowel diseases, such as ulcerative colitis, ulcerative proctitis and Crohn’s disease.

     We reported net sales of $19.8 million, $19.0 million and $21.0 million for SALOFALK in fiscal years 2010, 2009 and 2008, respectively. The decline in sales in fiscal years 2010 and 2009 as compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the preceding fiscal year (fiscal 2009 as compared to fiscal 2008), as the value of the Canadian dollar depreciated against the U.S. dollar by 17.0%. SALOFALK sales were also negatively impacted by the launch of new competitive products in the market.

     In Canada, SALOFALK competes with several products containing mesalamine in controlled-release tablets or capsules, including ASACOL™ (Warner Chilcott Company, LLC), DIPENTUM™ (UCB Pharma, Inc.) and MEZAVANT^® (Shire plc). Generics versions of the tablet and suspension formulations are also available on the market.

     SALOFALK has no patent protection, or regulatory exclusivity.

Sucralfate

CARAFATE and SULCRATE

     Our CARAFATE and SULCRATE product lines are indicated for the treatment of gastric and duodenal ulcers.

     CARAFATE is sold in the U.S. as oral tablets and an oral suspension and SULCRATE as an oral suspension in Canada. Neither formulation is actively promoted. Both product lines compete primarily against generic sucralfate tablets.

     We reported combined net sales of $86.5 million, $68.5 million and $52.5 million for CARAFATE and SULCRATE in fiscal years 2010, 2009 and 2008, respectively. The increase in sales from fiscal year 2009 to fiscal year 2010 mainly resulted from an increase in prescription volumes and from price increases announced during fiscal year 2009.

     Neither CARAFATE nor SULCRATE have any patent protection or regulatory exclusivity in its respective market. Patent protection for CARAFATE lapsed in fiscal year 2001.

     We are not aware of any generic versions of CARAFATE and SULCRATE oral suspension that are commercially available in the U.S. or Canada. However, in a recent public filing K-V Pharmaceutical Company announced the sale of certain intellectual property and other assets related to its Abbreviated New Drug Application, or ANDA, submitted with the U.S. Food and Drug Administration for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension, the active pharmaceutical ingredient in our CARAFATE product. We do not have any information on the status of this ANDA. If a generic version of CARAFATE was to be launched, it could have a significant negative impact on sales of CARAFATE oral suspension in the U.S.

Ursodiol

URSO 250 and URSO FORTE (U.S.)

     In the U.S., we market URSO 250, a 250-mg ursodiol tablet and URSO FORTE, a 500-mg ursodiol tablet for the treatment of Primary Biliary Cirrhosis, or PBC, a chronic liver disease.

     We reported net sales of $18.7 million, $50.0 million and $67.0 million for URSO 250/ URSO FORTE in the U.S. in fiscal years 2010, 2009 and 2008, respectively. The decrease in sales in fiscal years 2010 and 2009 as compared to fiscal year 2008 resulted from the entry of generic versions of URSO 250 and URSO FORTE on the U.S. market, following approval by the Office of Generic Drugs on May 13, 2009. This decrease was partially offset by price increases announced on our URSO 250 and URSO FORTE branded products, and by sales generated from the launch of an authorized generic version of our ursodiol products. On July 2, 2009, we announced that we had entered into an agreement with Prasco Laboratories under which Prasco markets and sells an authorized generic of URSO 250 and URSO FORTE in the U.S. Despite measures taken to defend our URSO franchise in this market, we expect future sales to continue to decline.

URSO and URSO DS (Canada)

     In Canada, we market URSO, a 250-mg ursodiol tablet and URSO DS, a 500-mg ursodiol tablet for the treatment of cholestatic liver diseases, which include PBC and primary sclerosing cholangitis (PSC). URSO and URSO DS were covered by a patent relating to the use of ursodiol for the treatment of PBC in Canada, which was to expire in 2010. However, in 2006, the generic product manufacturer, Pharmascience Inc., successfully challenged the validity of this patent under Health Canada’s Notice of Compliance Regulation procedures. In May 2006, generic versions of URSO and URSO DS received approval for sale in Canada and were launched in fiscal year 2007. The launch of these generic products has had a negative impact on sales of URSO and URSO DS since fiscal year 2007.

     We reported net sales of $2.5 million, $3.0 million and $3.9 million for URSO/URSO DS in Canada for fiscal years 2010, 2009 and 2008, respectively.

     URSO and URSO DS do not benefit from any other patent protection or other form of regulatory exclusivity in Canada.

DELURSAN

     DELURSAN, is 250mg ursodiol tablet marketed in France and indicated for the treatment of cholestatic liver diseases, including PBC, PSC and liver disorders related to cystic fibrosis.

     We reported net sales of $23.4 million, $20.8 million and $21.4 million for DELURSAN, in fiscal years 2010, 2009 and 2008, respectively. The decline in sales in fiscal year 2009 as compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the preceding fiscal year, as the value of the euro depreciated against the U.S. dollar by 11.6%. In local currency, net sales of DELURSAN, were €17.3 million, €15.4 million and €14.2 million in fiscal years 2010, 2009 and 2008, respectively.

     DELURSAN, mainly competes with URSOLVAN^® (Sanofi-Aventis S.A.). However, we expect another competing product to be launched in France by the end of calendar year 2011. An additional request for marketing approval was submitted by another competitor for an ursodiol product, based on well-established use. Under this procedure, a company can submit for approval a product similar to one that is already marketed by submitting evidence of therapeutic efficacy based on published literature.

     DELURSAN, does not have any patent protection or any regulatory exclusivity in France. As a result, if another ursodiol product is launched, it could have a significant negative impact on sales of DELURSAN, in France. See “Item 1A. Risk Factors — Risks Related to Our Business.”

Helicobacter pylori eradication

PYLERA

     Since May 2007, we have been marketing as PYLERA a three-in-one capsule therapy for the eradication of Helicobacter pylori, a bacterium recognized as being the main cause of gastric and duodenal ulcers.

     We reported net sales of $10.5 million, $8.2 million and $6.6 million for PYLERA in fiscal years 2010, 2009 and 2008, respectively.

     Other pre-packaged products (all in blister packs) that compete with PYLERA include HELIDAC^® (Prometheus Laboratories Inc.) and PREVPAC^® (TAP Pharmaceutical Products Inc.).

     PYLERA is protected by patent claims covering triple and quadruple therapies for Helicobacter pylori eradication. These claims cover the treatment of duodenal ulcer disease (and in some countries reflux esophagitis and gastric ulcer) through the eradication of Helicobacter pylori using a bismuth compound together with two or more antibiotics. The expiry dates of these patents vary depending on the jurisdiction. In the U.S., they expired in March 2010. The double capsule formulation of this product and its use in multiple therapies is also covered by patent in a number of countries. The U.S. patent expires in December 2018. Prior to November 2008, the U.S. patents covering PYLERA’s triple and quadruple therapies for Helicobacter pylori eradication and capsule formulation were not eligible for listing in the FDA’s Orange Book and to benefit from the automatic 30-month stay provisions of the Hatch-Waxman Act. In November 2008, pursuant to the enactment of the Q1 Program Supplemental Funding Act (Q1 Act), the Food, Drug and Cosmetics Act, or FDCA, was amended to permit the Orange Book listing of patents covering products containing antibiotic active ingredients included in an application submitted to FDA for review prior to November 21, 1997 or, “old” antibiotics, which is the case of PYLERA. In December 2008, our patents were submitted for listing in the FDA’s Orange Book. Accordingly, we believe we are eligible to benefit from the automatic stay provisions of the Hatch-Waxman Act for an ANDA submitted subsequent to the date these patents were listed in the Orange Book and which contains a paragraph IV certification. For more details regarding the 30-month stay provisions of the Hatch-Waxman Act, see “Item 1. Business — Government Regulation — U.S. Regulations — Abbreviated New Drug Application”.

Pancreatic Enzyme Products

ULTRASE

     In the U.S., we were marketing as ULTRASE pancreatic enzyme microsphere (ULTRASE MS) and mini-tablet (ULTRASE MT) products, designed to help patients with exocrine pancreatic insufficiency (including pancreatic insufficiency associated with cystic fibrosis) to better digest food.

     We ceased distributing our ULTRASE product lines in the U.S. effective April 28, 2010. This action was taken because we did not receive FDA approval for ULTRASE MT by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products to remain on the market. We also interrupted shipments of ULTRASE MT from the U.S. to Canada and export markets to allow time for the FDA to review our request confirming that applicable export requirements were being met. As of September 30, 2010, this interruption of shipments was still in place.

     We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our response to this letter, we received a second complete response letter from the FDA in the fourth quarter of fiscal 2009. On May 5, 2010 the FDA issued an additional complete response with respect to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient of ULTRASE MT be addressed before approval can be granted. We submitted our response to this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA, date for our ULTRASE MT NDA.

     On November 28, 2010, the FDA issued a complete response letter regarding the NDA for ULTRASE MT. The letter requires that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for ULTRASE MT be addressed before approval can be granted. The letter also requires that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDA can be approved. We are in ongoing discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible. However, those remaining issues do not require additional clinical studies. See “Item 1A. Risk Factors—Risks Related to Our Pancreatic Enzyme Products.”

     We reported net sales of $37.9 million, $75.9 million and $58.6 million for ULTRASE in fiscal years 2010, 2009 and 2008, respectively. The decrease in sales in fiscal year 2010 as compared to fiscal year 2009 is a result of us ceasing to distribute our ULTRASE product line in the U.S. effective April 28, 2010.

     A number of branded pancreatic enzyme products have been approved and are currently marketed in the United States, including CREON^® (Abbott Laboratories), PANCREAZE^™ (Ortho-McNeil Pharmaceutical, Inc.) and ZENPEP^® (Eurand N.V.).

     ULTRASE is licensed from Eurand under an exclusive development license and supply agreement signed in 2000. It was for an original term of ten years with automatic renewals for subsequent periods of two years. The agreement was amended in 2007 and the term extended to the end of 2015. We have paid Eurand licensing fees totaling $3.5 million, and we have agreed to pay to Eurand royalties of 6% on annual net sales of ULTRASE.

     ULTRASE MT does not currently benefit from patent protection. However, based on the 29^th edition of the “Approved Drug Products with Therapeutic Equivalence Evaluations,” commonly known as the Orange Book, published by the FDA in August 2009, CREON^®, PANCREAZE^™ and ZENPEP^® have been granted the status of New Chemical Entity, or NCE, which entitles them to certain market exclusivity protections pursuant to the Hatch-Waxman Act. We believe that, upon approval of its NDA, ULTRASE MT will also be designated as an NCE

and will equally benefit from the same market exclusivity provided pursuant to the Hatch-Waxman Act. This would afford ULTRASE MT a measure of protection from new competition in the marketplace, as this exclusivity generally prohibits the FDA from reviewing ANDAs for products containing the same active moiety for a period of five years. Further, in its “Guidance for Industry—Exocrine Pancreatic Insufficiency Drug Products—Submitting NDAs” of April 2006, the FDA has stated that because of their complexity, pancreatic enzyme extract products are not likely to be appropriate for ANDA filings. For more details on NCE data exclusivity, see “Item 1 — Business — Government Regulation — U.S. Regulations — Data Exclusivity”.

VIOKASE

     In the U.S., we were marketing as VIOKASE uncoated immediate release pancreatic enzyme products for the treatment of exocrine pancreatic insufficiency.

     We ceased distributing VIOKASE in the U.S. effective April 28, 2010. This action was taken because we did not receive FDA approval for VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products to remain on the market.

     VIOKASE, although not actively promoted, is still sold in Canada.

     We reported net sales of $15.6 million, $22.7 million and $15.1 million for VIOKASE in fiscal years 2010, 2009 and 2008, respectively. The decrease in sales in fiscal year 2010 as compared to fiscal year 2009 is a result of us ceasing to distribute our VIOKASE product lines in the U.S. effective April 28, 2010.

     The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal 2010. At the time we completed this submission we requested a priority review and the FDA advised us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to complete their review.

     On November 28, 2010, the FDA issued a complete response letter regarding the NDA for VIOKASE. The letter requires that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for VIOKASE be addressed before approval can be granted. The letter also requires that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDA can be approved. We are in ongoing discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible. However, those remaining issues do not require additional clinical studies. See “Item 1A. — Risk Factors -Risks related to our Pancreatic Enzyme Products”.

     VIOKASE does not currently benefit from patent protection. However, we believe that like ULTRASE MT, it will be entitled to receive NCE market exclusivity pursuant to the Hatch-Waxman Act upon NDA approval.

PANZYTRAT

     PANZYTRAT consists of enteric-coated microtablets for use in the treatment of exocrine pancreatic insufficiency and pancreatic enzyme deficiency. PANZYTRAT is marketed in several countries, mainly Germany, the Netherlands and Switzerland, as well as a several Eastern European markets. We reported net sales of $14.8 million, $14.2 million and $16.6 million for PANZYTRAT in fiscal years 2010, 2009 and 2008, respectively. In local currency, net sales of PANZYTRAT, were €10.9 million, €10.6 million and €11.1 million in fiscal years 2010, 2009 and 2008, respectively.

     The main competitor for PANZYTRAT in Germany and the Netherlands is KREON^® (Abbott Laboratories). The decline in sales in fiscal years 2010 and 2009 as compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the preceding fiscal year (fiscal year 2009 as compared to fiscal year 2008), as the value of the euro depreciated against the U.S. dollar by 11.6% and from the reduction in sales volumes within export markets.

     PANZYTRAT does not benefit from any patent protection, nor any other form of regulatory exclusivity in the main countries in which it is marketed, namely Germany and the Netherlands.

     On July 7, 2010, we entered into a distribution agreement with PharmaSwiss S.A., for the distribution of PANZYTRAT, in various Central and East European countries.

Other Products

LACTEOL

     LACTEOL is a product containing specific proprietary strains of Lactobacillus LB in a lyophilized powder form. It is available as capsules and powder sachets, and is primarily indicated for the treatment of diarrhea. LACTEOL is mainly sold in France and in 36 export markets.

     We reported net sales of $15.9 million, $16.5 million and $19.0 million for LACTEOL in fiscal years 2010, 2009 and 2008, respectively

including $9.5 million, $9.3 million and $11.1 million outside of France. The decline in sales is a result of LACTEOL no longer being reimbursed in Germany, since February 2010. In addition, the decline in sales in fiscal year 2009 as compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the preceding fiscal year, as the value of the euro depreciated against the U.S. dollar by 11.6% and from the reduction in sales volumes within export markets.

     LACTEOL competes with a number of similar products in most markets. As LACTEOL has been marketed for several decades, we believe the brand name LACTEOL constitutes a definite marketing advantage wherever the product is sold.

     LACTEOL has no patent protection or regulatory exclusivity. However, the product is derived from proprietary strains of bacteria for which the source strains are protected by a number of security safeguards, such that access by third parties seeking to reproduce it for competitive or other purposes is limited and controlled.

     On April 6, 2009, we entered into a license agreement with a leading multi-national company (the “Licensee”), whereby we granted the Licensee the right to use the active ingredient contained in LACTEOL to develop and commercialize new food products that will contain this active ingredient. Under the terms of the agreement, the Licensee will have exclusive rights to commercialize these new products. We will continue to own all other rights related to the active ingredient, including the right to use the active ingredient and develop, manufacture and commercialize non-food products, including pharmaceutical products, containing it.

     On April 22, 2010, we entered into an agreement with Norgine Pharmaceuticals for the distribution and promotion of our LACTEOL product line in Australia. Under the terms of the agreement, Norgine Pharmaceuticals obtained exclusive rights to the distribution and promotion of the LACTEOL line of products on the Australian market. Norgine Pharmaceuticals will be responsible for securing regulatory approval and for launching LACTEOL on that market expected to occur during the first half of fiscal year 2011.

PHOTOFRIN/PHOTOBARR

     PHOTOFRIN/PHOTOBARR is a photo-sensitizer approved for use in photodynamic therapy, an innovative medical therapy based on the use of light-activated drugs.

     We market (directly or through distributors) PHOTOFRIN/PHOTOBARR in the U.S., the EU and Canada, as well as in other selected markets. PHOTOFRIN/PHOTOBARR has received regulatory approval in a number of countries, including approval for the treatment of high-grade dysplasia associated with Barrett’s esophagus, obstructing esophageal cancer and non-small-cell lung cancer, as well as certain types of gastric cancers and cervical dysplasia. Our marketing strategy varies based on the indication for which the product is approved and on the availability of the centering catheter required to perform some of the procedures.

     We reported net sales of $3.9 million, $4.2 million and $6.5 million for PHOTOFRIN/PHOTOBARR in fiscal years 2010, 2009 and 2008, respectively. The decline in sales resulted from the continued loss of supply of the balloon centering catheter as it was discontinued. That balloon centering catheter is required for the treatment of high-grade dysplasia associated with Barrett’s esophagus. In addition, the decline in sales in fiscal year 2009 as compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the preceding fiscal year, as the value of the euro depreciated against the U.S. dollar by 11.6%.

     To our knowledge, there are currently no other photo-sensitizers approved as drugs in the U.S., the EU or Canada for the treatment of high-grade dysplasia associated with Barrett’s esophagus, obstructing esophageal cancer and lung cancer, gastric cancer or cervical dysplasia.

     In Germany, PHOTOSAN^® (Seehof Laboratories), although not approved, had been marketed as a medical device for use in the treatment of broad oncological applications. However, in a recent ruling, the German Federal Court of Justice ruled in favor of the Axcan and its distributor confirming lower court findings that PHOTOSAN^® was a pharmaceutical product and, as a result, did not have the required regulatory approvals to remain on the market. As a result of this judgment, Seehof Laboratories stopped distribution of its product in Germany.

     PHOTOFRIN/PHOTOBARR is covered by a number of patents in various countries, claiming compositions (including product by process claims), methods of use in approved indications and, methods of manufacture, as well as patents for certain devices used in connection with treatment with these products. In the U.S., PHOTOFRIN/PHOTOBARR’s main market, the last of the patents covering this product or devices used in connection with the treatment expires in May 2016.

FLEET PHOSPHO-SODA and CITRAFLEET

     On October 23, 2009, we signed a distribution agreement with Laboratorios Casen-Fleet S.L.U., a Spanish subsidiary of the American company C.B. Fleet. Under the terms of the agreement, we have been granted exclusive distribution rights in France for FLEET PHOSPHO-SODA and CITRAFLEET, two products used for bowel cleansing.

     FLEET PHOSPHO-SODA is an oral sodium phosphate solution product which is used for bowel cleansing prior to colonoscopy and other medical procedures. CITRAFLEET is a powder formulation of sodium picosulfate/magnesium citrate for oral solution indicated for use prior to any diagnostic exploration requiring bowel cleansing, such as a colonoscopy or a radiological examination.

     We started promoting FLEET PHOSPHO-SODA on January 1, 2010 and CITRAFLEET on September 15, 2010. We reported net sales of $2.2 million for FLEET PHOSPHO-SODA and CITRAFLEET in fiscal year 2010.

Products in Development

     Our research and development team leverages its expertise in the field of gastroenterology to develop product line enhancements and modifications to existing products and to complete the clinical development of new product candidates, consistent with our development growth strategy. Our R&D capabilities include Pharmaceutical Development, Regulatory Affairs, Quality and Compliance, Clinical Development and Medical Affairs.

     Our staff of research scientists has expertise in all aspects of the drug development process on a global basis, from pre-formulation studies and formulation development, to scale-up and manufacturing. The clinical development and medical affairs team assumes product stewardship up to post-marketing study and contributes to market access strategies and tactics.

     For new product candidates, we mainly consider the development of late-stage (Phase II and beyond) novel molecules and innovative product candidates that, in our view, provide an acceptable risk/return profile. As part of our business strategy, we enter into licensing agreements with companies that are developing compounds and innovative products in the field of gastroenterology. These compounds and products are typically in-licensed with some combination of up-front payments, development milestone payments and/or royalty payments. In some cases, we have an option to acquire an ownership position in the company with which we have entered into such an agreement.

     For the existing portfolio, we seek to enhance product life cycles and extend exclusivity through the staged introduction of product enhancements. These may include (but are not limited to) new indications, improvements in the frequency of administration of drug products, improvements in the convenience of administration, reduction of side effects (improved tolerability) and improved efficacy.

     Our pipeline products are in various stages of development. Despite the reduced risk profile of our pipeline programs (relative to new chemical entities), they do carry potential development risks, and as such, we do not anticipate the commercialization of all of these products. In addition, we routinely review and prioritize our pipeline as new product candidates are added, which can result in the discontinuation or delay in other ongoing development programs which offer, in our estimation, a comparatively less attractive risk/return profile. This is normal practice in the pharmaceutical industry.

     Given that the successful development of any pipeline program is dependent on a number of variables, it is difficult to accurately predict timelines for regulatory approval and thus clinical development expenses. In fiscal year 2010, our R&D expenses were approximately $31.7 million or 8.9% of our total revenue ($36.0 million, or 8.8% of revenue in fiscal year 2009 and $28.1 million, or 7.4% of revenue in fiscal year 2008).

     From time to time, we review our portfolio of products under development to set priorities for the various development programs underway and to ensure that internal and budgeted resources are allocated accordingly. As a result of these reviews, the contents of certain development programs and related timelines may be modified or certain programs terminated.

     The following is a description of our active and disclosed pipeline projects. The intellectual property associated with these projects is discussed below in “Patents and Trademarks.”

Mesalamine

     Our MAX-002 Phase III clinical program, seeking approval of a new patented mesalamine suppository formulation characterized by its smaller size and lower melting temperature, is still ongoing.

     We also have ongoing life cycle management initiatives with respect to our CANASA franchise.

Sucralfate

     We also have ongoing life cycle management initiatives with respect to our CARAFATE franchise.

Ursodiol

URSO

     Non-alcoholic steatohepatitis (NASH) is an advanced form of non-alcoholic fatty liver disease associated with significant morbidity and mortality for which there is no proven effective pharmacological therapy. The prevalence of NASH is difficult to determine. It seems to occur in approximately 3% of the population but may be found in more than 25% of obese persons.

     We have successfully completed a multicentric, double-blind, randomized-controlled trial of high-dose ursodiol in patients suffering from NASH. The study, which was conducted in France, assessed the efficacy and safety of high-dose (25-35 mg/kg/day) ursodiol in NASH patients.

     Results confirmed that high-dose ursodiol is safe and well tolerated in patients with NASH. They also demonstrated a significant and marked biochemical response to high-dose ursodiol. Results of this study were published in the October 2010 edition of the “Journal of Hepatology”.

Helicobacter pylori eradication

PYLERA

     We have submitted our application for required regulatory approval to market, or Marketing Authorization, for PYLERA in major EU markets in fiscal year 2010. This submission was filed using the decentralized procedure process and we expect to get approval in the first market in fiscal year 2011, followed by a launch in the first market during the same year. For a discussion on the decentralized procedure, see “Item 1 — Business — Government Regulation — European Economic Area — Decentralized Procedure”.

Pancreatic Enzyme Products

ULTRASE and VIOKASE

     We ceased distributing our ULTRASE and VIOKASE product lines in the United States effective April 28, 2010. This action was taken because we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products.

     We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our response to this letter, we received a second complete response letter from the FDA in the fourth quarter of fiscal 2009. On May 5, 2010, the FDA issued an additional complete response with respect to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient of ULTRASE MT be addressed before approval can be granted. We submitted our response to this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA, date for our ULTRASE MT NDA.

     The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal 2010. At the time we completed this submission we requested a priority review and the FDA advised us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to complete their review.

     On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE MT and VIOKASE be addressed before approval can be granted. The letters also require that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs can be approved. We are in ongoing discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible. However, those remaining issues do not require additional clinical studies.

     In order to continue to support ULTRASE MT once approved, we have completed a pediatric Phase III clinical program to demonstrate the efficacy of ULTRASE MT in patients aged two to six years old. Once ULTRASE MT is approved, we expect to submit a supplemental NDA to enhance the product’s labeling.

     While we cannot provide any assurances, we expect to ultimately receive regulatory approval for ULTRASE MT and VIOKASE under FDA’s guidance to the industry. See “Item 1A. — Risk Factors -Risks related to our Pancreatic Enzyme Products”.

     PANZYTRAT

     We have initiated a multicenter Phase IV study aimed at assessing and comparing the efficacy of PANZYTRAT 25,000 in the control of steatorrhea in patients with cystic fibrosis who demonstrate pancreatic insufficiency. This study should allow us to better position our product on the markets where it is currently available.

Others

Cx401

     On September 30, 2007, we entered into an exclusive license and development agreement with Cellerix of Spain, for the North American (U.S., Canada and Mexico) rights to Cx401, an innovative biological product in development for the treatment of perianal fistulas. Under the terms of the agreement, Axcan was responsible for the costs of developing and commercializing Cx401 in North America.

     Based on the results of a Phase III study conducted by Cellerix in Europe, we have decided to not pursue the development of this formulation. We are awaiting the results of trials related to a new formulation of this compound to which we have certain rights to develop.

     See “Patents and Trademarks—Cx401” below for more information regarding certain royalty payments we may have to make related to the development of Cx401.

Sales and Marketing

     In the U.S., we sell our products to most major wholesale drug companies and distributors, which in turn distribute our products to chain and independent pharmacies, hospitals and mail-order pharmacies. As of September 30, 2010, we had 97 sales representatives, 11 regional sales managers managed by 2 zone directors and 5 national account managers in our managed markets group, all located in the U.S. This sales team calls on high-volume prescribing gastroenterology physicians, cystic fibrosis centers, as well as third-party payors, clinical pharmacists and formulary administrators. Since the launch of PYLERA, in May 2007, sales representatives have also been visiting general practitioners known to be high-volume prescribers of Helicobacter pylori eradication therapies. Finally, some of our sales representatives are specialized in photodynamic therapy and call on potential and current photodynamic therapy treatment centers.

     In Canada, we sell our products to hospitals and wholesale drug companies, which in turn distribute our products to pharmacies. Our major products are included in most provincial drug benefit formularies. Our products are promoted by our 11 sales representatives and a market access manager, under the supervision of a regional sales manager. They call on gastroenterologists and internal medicine specialists with a particular interest in GI diseases, as well as on colorectal surgeons.

     In France, we sell our products to distributors, which in turn distribute them to wholesale drug companies, which in turn distribute them to pharmacies. As of September 30, 2010, we had 43 sales representatives who, under the supervision of 5 regional sales directors, regularly visit high-volume prescribing physicians to promote our other prescription products. In addition, in Germany, we have an exclusive contracted sales force consisting of 16 sales representatives under the supervision of two regional sales directors and in the United Kingdom, we have 1 sales representative. We also have a partnership agreement with an over-the-counter distributor and marketer to co-promote one of our products in France.

     This international sales structure is complemented by our sponsorship of high-level international medical meetings on topics related to therapeutic areas we focus on, our products and research activities. These events are recognized by leading institutions. In North America, continuing medical education (CME) credits are awarded to attendees. As a consequence, we believe that we are recognized not only as a supplier of quality products, but also as an important link in the continuous medical education process.

Customers

     While the ultimate end users of our products are the individual patients to whom our products are prescribed by physicians, our direct customers include a number of large pharmaceutical wholesale distributors and large pharmacy chains. The pharmaceutical wholesale distributors that comprise a significant portion of our customer base sell our products primarily to retail pharmacies, which ultimately dispense our products to the end consumers.

     We use a “pull-through” marketing approach that is typical of pharmaceutical companies. Under this approach, our sales representatives actively promote our products by demonstrating the features and benefits of our products to physicians and, in particular, gastroenterologists who may prescribe our products for their patients. The patients, in turn, take the prescriptions to pharmacies to be filled. The pharmacies then place orders, directly or through buying groups, with the wholesalers, to whom we sell our products.

     The following table sets forth the percentage of total net product sales for each of the last three fiscal years for each of our wholesale customers that accounted for 10% or more of our total net product sales in any of the last three fiscal years.

		For the fiscal years
		ended September 30,
		2010				2009				2008
Customer A			29.9	%			30.4	%			39.0	%
Customer B			28.1	%			37.4	%			26.6	%
Customer C			12.2	%			11.7	%			10.3	%
Total			70.2	%			79.5	%			75.9	%

Competition

     Our business is highly competitive. Competition within the gastroenterology industry is primarily based upon product efficacy, tolerability and convenience, although price competition is an important factor as health-care providers continue to be concerned with costs.

     Our products face competition from both branded and generic products, sold by other pharmaceutical companies. Technological developments by competitors, earlier regulatory approval of competitive products, including generic versions of our products, or competitors’ superior marketing capabilities could adversely affect the commercial potential of our products and could have a material adverse effect on our revenue and results of operations. Many of our competitors have greater financial resources and marketing capabilities than we do. Our competitors in the U.S. and abroad are numerous and include major pharmaceutical companies, and some of the manufacturers of our products. We believe that our focus on gastroenterology, combined with our strategy of funding and controlling all or most aspects of our business, will provide the cost savings, efficiencies in product development and acceleration of regulatory filings necessary for us to compete effectively with such companies. Our competitors, however, may succeed in developing products that are as, or more, clinically effective or cost-effective than any that are being developed or licensed by us, or that would render our products obsolete or uncompetitive. In addition, certain of our competitors have greater experience than we do in clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA and other regulatory approvals.

     Competition for each of our key product lines is discussed in greater detail above in the “Products” section.

Manufacturing and Supply

     While we manufacture LACTEOL at our facility in France and SALOFALK at our facility in Canada, we outsource all aspects of the manufacturing of our other products. Our third-party manufacturers are subject to extensive government regulations. For example, the FDA requires that the drug product be manufactured, packaged and labeled in conformity with current good manufacturing practices, or cGMP. In complying with cGMP regulations, manufacturers must continue to invest time, money and effort in manufacturing and quality control and quality assurance to ensure that their products meet applicable specifications and regulatory requirements. The same applies to our manufacturers outside of the U.S. We intend to continue to outsource the manufacturing and distribution of most of our products for the foreseeable future, and we believe this strategy will enable us to direct our financial resources to product in-licensing and acquisition, product development and sales and marketing.

     With the exception of LACTEOL, we rely on third parties to supply the active pharmaceutical ingredients used in our finished products. Our experts in materials management, sourcing, technical services, quality assurance and regulatory affairs oversee the activities of contract manufacturing organizations and suppliers of active ingredients. We ensure continuity of supply through optimum inventory levels, dual sourcing, where feasible, supplier management and contracts. We usually build up inventory prior to changing manufacturing sites. Supply agreements are in place with most third parties and typically give price protection over the period of the contract; price increases, if any, are usually based on the consumer/producer price index. Contracts typically have three to five-year terms; our current contracts will expire at various dates over the next three to five years.

     We have entered into agreements with third parties to manufacture the finished dosage form of all our marketed products other than LACTEOL and SALOFALK. Depending on the particular arrangement, either we or the third-party manufacturer sources the active pharmaceutical ingredient. We also use third parties to perform analytical testing on our raw materials, active ingredients, finished products and product candidates.

     While we believe there are alternative sources of supply for the active pharmaceutical ingredients and raw materials required for the manufacturing of our products, should any of our current suppliers be unable to meet our business needs, there is possibility we could not be able to qualify these alternative suppliers in a timely manner, or obtain the required materials under favorable terms. For some of our marketed products, the finished dosage manufacturer also packages the product, while for others, we use a separate third-party packaging company.

     Our agreements with suppliers, manufacturers and testing laboratories include, among other, specific supply terms, product specifications, testing and release mechanisms, batch size requirements, price, payment terms, forecast requirements, shipping and quality assurance conditions. Under some of these agreements, we are obligated to purchase all or a specified percentage of our requirements for the product or active pharmaceutical ingredient supplied under the agreement. These agreements generally permit the manufacturer or supplier to pass on to us increases in cost of production or materials.

     With the exception of the manufacturers of ULTRASE, CANASA, and CARAFATE, our manufacturers and suppliers are not prevented from supplying similar product to third parties. Eurand, our supplier of ULTRASE, has agreed to restrictions on its ability to supply any third-party in the U.S., Canada and some Central and South-American countries with certain pancreatic enzyme products. Subject to certain requirements, Eurand is permitted to commercialize its own pancreatic enzyme product line, ZENPEP^® as well as an authorized generic version of ZENPEP^®, which was launched in the U.S. in 2009.

     Our suppliers of mesalamine and the manufacturer of CANASA have each agreed not to supply similar or same mesalamine active ingredient or mesalamine product to a third-party in the U.S. or Canada.

     Our supplier of CARAFATE has agreed not to supply a suspension formulation of sucralfate, the active pharmaceutical ingredient in CARAFATE, to a third-party in the U.S.

     Our agreements for the manufacturing of certain of our core products expire at various dates over the next three to five years. We believe, but cannot guarantee, that we will be able to renew these agreements under satisfactory terms and conditions as they expire or we shall be able to find suitable alternate suppliers and manufacturers. Should we be unable to renew these agreements under favorable terms and conditions or find suitable alternatives, our business may be adversely affected.

     Manufacturers and suppliers of our products and product candidates are subject to the FDA’s current cGMP requirements and other rules and regulations as prescribed by regulatory authorities outside the U.S., including in Canada and the EU. We depend on our third-party suppliers and manufacturers for continued compliance with cGMP requirements and other applicable regulations and standards.

Government Regulation

     The research and development, manufacture, and marketing of pharmaceutical products are subject to regulation by U.S., Canadian and foreign governmental authorities and agencies. Such national agencies and other federal, state, provincial and local entities regulate the testing, manufacturing, safety and promotion of our products. The regulations applicable to our products may be subject to change as regulators acquire additional experience in the specific area.

U.S. Regulations

New Drug Application

     We are required by the FDA to comply with new drug application (NDA) procedures for our branded products prior to commencement of marketing. New drug compounds and new formulations for existing drug compounds that cannot be filed as ANDAs are subject to NDA procedures. These procedures include (1) preclinical laboratory and animal toxicology tests; (2) submission of an investigational new drug (IND) application and its required acceptance by FDA before any human clinical trials can commence; (3) adequate and well-controlled replicate human clinical trials to establish the safety and efficacy of a drug for its intended indication; (4) submission of an NDA to the FDA; and (5) FDA approval of an NDA prior to any commercial sale or shipment of the product, including pre-approval and post-approval inspections of its manufacturing and testing facilities.

     In seeking FDA approval for a drug through an NDA, applicants are required to list each patent with claims that cover the applicant’s product or an approved use of the product. Upon approval of a drug, each of the patents listed in the application for the drug is, where eligible, published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.

Abbreviated New Drug Application

     When a drug is listed in the Orange Book and when a potential competitor seeks to develop a generic version of such a product, an ANDA may be filed in lieu of an NDA. An ANDA provides for marketing of a drug product that has the same active pharmaceutical ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Under the ANDA procedure, the FDA waives the requirement to submit complete reports of preclinical and clinical studies of safety and efficacy, and instead, requires the submission of bioequivalency data, that is, demonstration that the generic drug produces the same blood levels of drug in the body as its brand-name counterpart, although the FDA may agree or require other means of establishing bioequivalence.

     For each patent listed for the approved product in the Orange Book, the ANDA applicant must certify to the FDA that (1) the required patent information has not been filed; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or unenforceable or will not be infringed by the manufacture, use or sale of the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification.

     If the ANDA applicant has made a Paragraph IV certification, it must also send notice to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit against the ANDA applicant. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV notice automatically prevents the FDA from approving the ANDA until the earlier of 30 months from the receipt of notice by the patent holder, expiration of the patent, or a decision or settlement in the infringement case finding the patent to be invalid, unenforceable or not infringed.

     The Hatch-Waxman Act explicitly encourages generic challenges to listed patents by providing for a 180 day period of generic product exclusivity to the first generic applicant to file an ANDA with a Paragraph IV certification. Thus, many, if not most, successful new drug products are subject to generic applications and patent challenges prior to the expiration of all listed patents.

505(b)(2) Application Process

     Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA but a third alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of

an approved product, or published literature, in support of its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. A 505(b)(2) application allows the applicant to file an application where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon the FDA’s findings with respect to particular preclinical studies or clinical trials conducted for an approved product, although the FDA may also require companies to perform additional studies or measurements to support the change from the approved product.

     Relative to normal regulatory requirements for a 505(b)(1) NDA, regulation may permit a 505(b)(2) applicant to forego costly and time-consuming drug development studies by relying on the FDA’s finding of safety and efficacy for a previously approved drug product. Under some circumstances, the extent of this reliance approaches that permitted under the generic drug approval provisions. This approach is intended to encourage innovation in drug development without requiring duplicative studies to demonstrate what is already known about a drug, while protecting the patent and exclusivity rights for the approved drug. Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2).

Data Exclusivity

     Under the Hatch-Waxman Act, newly-approved drugs and indications may benefit from a statutory period of non-patent data exclusivity. The Hatch-Waxman Act provides five-year data exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the FDA has not previously approved any other drug containing the same active pharmaceutical ingredient. Although protection under the Hatch-Waxman Act will not prevent the submission or approval of another full NDA, such an NDA applicant would be required to conduct its own preclinical and adequate, well-controlled clinical trials to demonstrate safety and effectiveness.

     The Hatch-Waxman Act also provides three years of data exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) applications, for, among other things, new indications, dosage forms, routes of administration, or strengths of an existing drug, or for a new use, if new clinical investigations that were conducted or sponsored by the applicant are determined by the FDA to be essential to the approval of the application. This exclusivity, which is sometimes referred to as clinical investigation exclusivity, would not prevent the approval of another application if the applicant has conducted its own adequate, well-controlled clinical trials demonstrating safety and efficacy, nor would it prevent approval of a generic product that did not incorporate the exclusivity-protected changes of the approved drug product.

Canadian Regulations

     The requirements for selling pharmaceutical drugs in Canada are substantially similar to those of the U.S. described above, with the exception of the 505(b)(2) route, which is not available in Canada. Canadian regulations also include provisions relating to marketing and data exclusivity.

European Economic Area

     A medicinal product may only be placed on the market in the European Economic Area, or EEA, composed of the 27 European Union member states, plus Norway, Iceland and Lichtenstein, when a marketing authorization has been issued by the competent authority of a member state. There are essentially three community procedures created under prevailing European pharmaceutical legislation that, if successfully completed, allow an applicant to place a medicinal product on the market in the EEA.

     Centralized Procedure

     A centralized procedure exists when a marketing authorization is granted by the European Commission, acting in its capacity as the European Licensing Authority on the advice of the European Medicines Agency. That authorization is valid throughout the entire community and directly or indirectly (in the case of Norway, Iceland and Liechtenstein) allows the applicant to place the product on the market in all member states of the EEA. The European Medicines Agency is the administrative body responsible for coordinating the existing scientific resources available in the member states for evaluation, supervision and pharmacovigilance of medicinal products.

     Mutual Recognition and Decentralized Procedures

     The competent authorities of the member states are responsible for granting marketing authorizations for medicinal products that are placed on their markets. If the applicant for a marketing authorization intends to market the same medicinal product in more than one member state, the applicant may seek an authorization progressively in the community under the mutual recognition or decentralized procedure.

     Mutual Recognition

     Mutual recognition is used if the medicinal product has already been authorized in one member state. In this case, the holder of this marketing authorization requests the member state where the authorization has been granted to act as reference member state by preparing an updated assessment report that is then used to facilitate mutual recognition of the existing authorization in the other member states in which approval is sought (the so-called concerned member states). The reference member state must prepare an updated assessment report which, together with the approved Summary of Product Characteristics, or SmPC (which sets out the conditions of use of the product), and a

labeling and package leaflet are sent to the concerned member states for their consideration. The concerned member states are required to make an approval decision on the assessment report, the SmPC, and the labeling and package leaflet within 90 days of receipt of these documents.

     Decentralized Procedure

     This procedure is used in cases where the medicinal product has not received a marketing authorization in the EU at the time of application. The applicant sends its application simultaneously to all concerned member states and requests a member state of its choice to act as reference member state to prepare an assessment report that is then used to facilitate agreement with the concerned member states and the granting of a national marketing authorization in all of these member states. In this procedure, the reference member state must prepare, for consideration by the concerned member states, the draft assessment report, a draft SmPC and a draft of the labeling and package leaflet within 120 days after receipt of a valid application. As in the case of mutual recognition, the concerned member states are required to make an approval decision on these documents within 90 days of their receipt.

International Regulations

     Sales of our products outside the U.S., Canada and the EU are subject to local regulatory requirements governing the testing, registration and marketing of pharmaceuticals, which vary widely from country to country.

     In addition to the regulatory approval process and regulations relating to the manufacture of drugs, pharmaceutical companies are subject to regulations under provincial, state and federal laws, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future regulations of the pharmaceutical industry. We believe that we are in compliance in all material respects with such regulations as are currently in effect.

Trademarks and Patents

     We believe that trademark protection is an important part of establishing product and brand recognition. We own a number of registered trademarks and trademark applications, including trademarks for all of our key product lines, and have acquired the rights to trademarks for several of our smaller product lines by license. We actively manage our trademark portfolio and maintain trademark registrations in a number of jurisdictions where we sell our products and regularly file applications where we sell or intend to distribute our products. In the U.S., trademark registrations remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce.

     A patent is a statutory private right that grants to the patentee exclusive rights to exclude others from using the patented invention during the term of the patent. A patent is territorial and may be sought in many jurisdictions. In the U.S., as in most other countries, the term of patent protection is 20 years from the date the patent application was filed. An invention may be patentable if it meets the criteria of being “new,” “useful” and “non-obvious.” Depending upon whether a particular drug is patentable and the relative cost associated with obtaining patents for the invention, an inventor will either apply for a patent in order to protect the invention or maintain the confidentiality of the information to rely on the common-law protection afforded to trade secrets.

     A company may also enter into licensing agreements with third-party licensors in order to obtain the right to make, use and sell certain products, thereby gaining access to know-how, trade secrets and patented technology. The value of a license is generally enhanced by the existence of one or more patents. A license gives the licensee access to developed and, in many cases, tested technology and provides the licensee faster and often less expensive entry into the market. Licensing also establishes relationships, which may provide access to additional products or technology or may lead to joint ventures or alliances affording the licensor and the licensee an opportunity to evaluate each other’s products and technology. This is also true, to a lesser extent, for distribution relationships.

     Pursuant to license agreements with third parties, we have acquired rights to manufacture, market and used related know-how, tade secrets and, in certain cases, patented technology for our existing products, as well as many of our development products and technologies. Such agreements typically contain provisions requiring us to use commercially reasonable efforts or otherwise exercise diligence in pursuing market development for such products in order to maintain the rights granted under the agreements, and may be cancelled upon our failure to perform our payment or other obligations.

     We further rely and expect to continue to rely upon unpatented proprietary know-how and technological innovation in the development and manufacture of many of our marketed and development products. We also maintain and rely on trade secrets, know-how, product innovations, in-licensed technologies and in-licensing opportunities to develop and maintain our proprietary positions. Our success depends in part on our ability to obtain and maintain proprietary protection for our products and product candidates, to operate without infringing the proprietary rights of others, and to prevent others from infringing our proprietary rights as we develop products or expand into new territories.

     We also depend upon the skills, knowledge and experience of our scientific and technical staff, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require our employees, consultants, advisors and certain other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and

inventions pertinent to our business. Additionally, these confidentiality agreements require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third-party’s proprietary technology.

     We have entered into several types of collaborative agreements with licensors, licensees and other third parties and will continue to do so. The following provides an overview of relevant patent, trademark and regulatory protection and, where applicable, agreements which have been entered into, with respect to products marketed by us or under development.

ULTRASE

     We own the trademark ULTRASE and we market certain pancreatic enzyme-based microspheres and mini-tablets under the ULTRASE brand in North and Latin America, under an exclusive development, license and supply agreement with Eurand. This agreement, entered into in 2000, was amended in 2007, to extend its term to 2015. We have paid Eurand licensing fees totaling $3.5 million, and we have agreed to pay Eurand royalties of 6% on our annual net sales of ULTRASE.

     There are currently no issued U.S. patents covering ULTRASE. However, there are three (3) pending patent applications in the U.S. with claims related to pancrelipase products. The patent applications include claims intended to provide market exclusivity for certain technological and commercial aspects of pancrelipase products and their manufacture.

     In addition, based on the 29^th edition of the “Approved Drug Products with Therapeutic Equivalence Evaluations,” commonly known as the Orange Book, published by the FDA in August 2009, CREON^®, ZENPEP^® and PANCREAZE™ have been granted the status of New Chemical Entity, or NCE, which entitles them to certain market exclusivity protections pursuant to the Hatch-Waxman Act. We believe that, upon approval of its NDA, ULTRASE MT will also be designated as an NCE and will equally benefit from the same market exclusivity provided pursuant to the Hatch-Waxman Act. This would afford ULTRASE MT a measure of protection from new competition in the marketplace, as this exclusivity generally prohibits the FDA from reviewing ANDAs for products containing the same active moiety for a period of five years. Further, in its “Guidance for Industry—Exocrine Pancreatic Insufficiency Drug Products—Submitting NDAs” of April 2006, the FDA has stated that because of their complexity, pancreatic enzyme extract products are not likely to be appropriate for ANDA filings. For more details on NCE data exclusivity, see “Item 1 — Business - Government Regulation — U.S. Regulations — Data Exclusivity”.

MAX-002

     In June 2008, the USPTO approved our application and granted us a patent covering MAX-002 (U.S. Patent Application Publication No. 2009-0264386 A1). This patent includes claims covering the product’s formulation and methods of treatment, including for active ulcerative proctitis. We believe this patent should provide significant protection for this novel suppository by preventing third parties from making, selling, offering to sell, or using an infringing mesalamine suppository in the U.S. The patent will expire June 6, 2028 and is expected to be eligible for listing in the FDA’s Orange Book once MAX-002 receives FDA regulatory approval. We have also filed and are pursuing the prosecution of a continuation-in-part application to this issued patent that includes claims covering other dosage strengths of our novel suppository formulation.

Ursodiol

URSO

     In March 1999, we entered into two agreements with Synthélabo of France (now, Sanofi-Aventis) that secured our right to manufacture, use and market URSO for the treatment of PBC in Canada and the U.S.

     For the U.S., we licensed the rights to a patent covering the use of ursodiol in the treatment of PBC, which expired on November 19, 2007. On May 13, 2009, the Office of Generic Drugs approved a generic version of our ursodiol tablet products, which was launched by a third-party shortly thereafter. On July 2, 2009, we announced that we had entered into an agreement with Prasco Laboratories under which Prasco will market and sell an authorized generic of URSO 250 and URSO FORTE in the U.S. For Canada, we acquired full ownership of the patent relating to the use of ursodiol for the treatment of PBC, which expired in June 2010. However, in May 2006, the Canadian PBC patent was held to be invalid for the purposes of opposing the issuance of a Notice of Compliance for a generic version of URSO, under proceedings pursuant to the Canadian Patented Medicines (Notice of Compliance) Regulations.

PHOTOFRIN

     In May 2000, we purchased from QLT Inc., or QLT, the trademark PHOTOFRIN for the U.S., Canada and all other countries where it has been registered as a trademark or used in marketing. We also purchased, licensed or sublicensed from QLT, as the case may be, the worldwide rights in and to other assets and intellectual property related to PHOTOFRIN. As part of the transaction, we also acquired a European subsidiary of QLT, which holds the European regulatory approvals for PHOTOFRIN. The last of the patents, which form part of the licensed and acquired assets, expire in 2016 in the U.S. and in 2017 in certain other territories. As part of the acquisition, we agreed to assume QLT’s obligation to pay royalties of up to 5% on net sales of PHOTOFRIN to Health Research Inc., or Health Research, pursuant to arrangements under which we are a sub-licensee of the technology that QLT licensed from Health Research. Pursuant to the terms of the transaction between us and QLT, we have paid to QLT milestone cash payments of CAN$20.0 million (representing the maximum potential aggregate amount of milestone cash payments under the terms of the transaction).

PANZYTRAT

     In November 2002, we acquired from Abbott Laboratories and its affiliates, or Abbott, certain assets related to the distribution, marketing and sale of a line of pancreatic enzyme products used to enhance the digestion of fats. This pancreatic enzyme product line is commonly marketed under the trademark PANZYTRAT. Abbott directly assigned us certain patents related to the product, the last of which expired in 2006. The know-how and trade secrets associated with these products and their manufacture are the object of a perpetual unrestricted license from Abbott. The PANZYTRAT and related trademark portfolio, was assigned directly by Abbott to our French subsidiary, Axcan Pharma S.A. (now Axcan Pharma SAS). This portfolio contains trademarks associated with the product line for a number of countries throughout the world.

PYLERA

     In January 2000, we entered into a worldwide (excluding Australia and New Zealand) licensing agreement (which was amended in November 2000 and August 2001) with Exomed Australia Pty Ltd, Gastro Services Pty Ltd, Ostapat Pty Ltd, and Capability Services Pty Ltd. This agreement, as amended, provided us with exclusive rights in a number of countries, including Canada and the U.S., to a series of patents covering triple and quadruple therapies for Helicobacter pylori eradication. These patents cover the treatment of duodenal ulcer disease (and in some countries reflux esophagitis and gastric ulcer) through the eradication of Helicobacter pylori using a bismuth compound together with two or more antibiotics. We paid approximately $1.64 million cash for the license and will pay a 5.5% royalty based on sales. The expiry dates of these licensed patents vary depending on the jurisdiction. In the U.S., the patents expired in March 2010 and in other territories, the last patent will expire in July 2011.

     In May 1999, we acquired the rights to a double-capsule delivery technology to be used for PYLERA and related patents issued or applied for in various jurisdictions. This patent expires in December 2018 in the U.S. Prior to November 2008, the U.S. patents covering PYLERA’s triple and quadruple therapies for Helicobacter pylori eradication and capsule formulation were not eligible for listing in the FDA’s Orange Book and to benefit from the automatic 30-month stay provisions of the Hatch-Waxman Act. In November 2008, pursuant to the enactment of the Q1 Program Supplemental Funding Act (Q1 Act), the FDCA was amended to permit the Orange Book listing of patents covering products containing antibiotic active ingredients included in an application submitted to FDA for review prior to November 21, 1997 or, “old” antibiotics, which is the case of PYLERA. In December 2008, our patents were submitted for listing and, as a result, were listed in the FDA’s Orange Book. Accordingly, we believe we are eligible to benefit from the automatic stay provisions of the Hatch-Waxman Act for an ANDA submitted subsequent to the date these patents were listed in the Orange Book and which contains a paragraph IV certification. For more details regarding the 30-month stay provisions of the Hatch-Waxman Act, see “Item 1. Business — Government Regulation — U.S. Regulations — Abbreviated New Drug Application”.

LACTEOL

     In April 2002, we acquired all of the shares of Laboratoire du Lactéol du Docteur Boucard (now Axcan Pharma SAS), which owns all the intellectual property rights to the bacterial strain (Lactobacillus LB) composition marketed by Laboratoire du Lactéol under different trademarks, including LACTEOL.

     In April 2009, we entered into a license agreement with a leading multi-national company (the “Licensee”) whereby we granted the Licensee the right to use the active ingredient contained in one of our commercialized products, LACTEOL, to develop and commercialize new food products that will contain this active ingredient. Under the terms of the agreement, the Licensee will have exclusive rights to commercialize these new products. We will continue to own all other rights related to the active ingredient, including the right to use the active ingredient and develop, manufacture and commercialize non-food products containing the active ingredient, including pharmaceutical products. For the fiscal year ended September 30, 2009, we recorded as revenue milestones that we are entitled to receive under the agreements in the amount of $7.1 million.

     LACTEOL has no patent protection or regulatory exclusivity. However, the product is derived from proprietary strains of bacterium for which the ultimate parent organism is protected by a number of security safeguards, such that access by third parties seeking to reproduce it for competitive or other purposes is limited and controlled.

Cx401

     Under the terms of the agreement signed with Cellerix on September 30, 2007, relating to Cx401, an innovative biological product in development for the treatment of perianal fistulas, we made a $10.0 million upfront payment to Cellerix (which was charged to expense in the fourth quarter of fiscal year 2007), and will make regulatory milestone payments that could total up to $30.0 million. In addition, patent applications were submitted, which, if granted, could provide protection until at least 2025. However, we cannot provide assurances that such patents will be granted.

     Based on the results of a Phase III study conducted by Cellerix in Europe, we have decided to not pursue the development of this formulation. We are awaiting the results of trials related to a new formulation to which we have certain exerciseable development rights.

Employees

     As of September 30, 2010, we employed 525 people. Of these employees, 194 were located in the U.S., 186 were located in Canada and 145 were located in the EU. In Canada, we are a party to a collective bargaining agreement expires March 24, 2011. As of September 30, 2010, this agreement covers 53 employees, all of whom are non management employees. In France, our employees are subject to the Convention Collective Nationale de l’Industrie Pharmaceutique, a collective bargaining agreement which applies to the entire pharmaceutical industry. We believe that relations with both our unionized and non unionized employees are good.

     We believe that our future success will depend in part on our continued ability to attract, hire, and retain qualified personnel, including sales and marketing personnel in particular. Competition for such personnel is intense, and there can be no assurance that we will be able to identify, attract, and retain such personnel in the future.

ITEM 1A. RISK FACTORS

     This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report.

     If any of the following risks, or other risks are not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market value of our bonds could decline, and bond holders could lose all or part of their investment.

RISKS RELATED TO OUR BUSINESS

Since we ceased distributing PEPs products in the U.S., we currently depend on three categories of products for a large portion of our revenues; any material decline in the sales of any of them or our inability to relaunch PEPs in the U.S. would have an adverse impact on our business.

     Any factor that adversely affects the sale or price of our key products could significantly decrease our sales and profits. Ursodiol products (URSO, URSO 250, URSO DS, URSO FORTE and DELURSAN,), mesalamine products (CANASA and SALOFALK) and sucralfate products (CARAFATE and SULCRATE) accounted for 18.0%, 25.3% and 16.7%, respectively, of our net product sales for fiscal year 2009 and for 12.6%, 28.4% and 24.4%, respectively, of our net product sales for fiscal year 2010. With the exception of ursodiol products that now face generic competition both in the U.S. and Canada, we believe that sales of other groups of products will continue to constitute a significant portion of our total revenues until we launch additional products. Any significant setback with respect to any one of these products, including shipping, manufacturing, regulatory issues, product safety, marketing, government licenses and approvals, intellectual property rights problems, or generic or other forms of competition, could have a material adverse effect on our financial position, cash flows or overall trends in results of operations.

     Pancreatic enzyme products (ULTRASE, VIOKASE and PANZYTRAT) were representing the fourth category of products that was accounting for a large portion of our revenues. PEPs accounted for 27.5% of our net product sales for fiscal year 2009 and for 19.3% of our net product sales for fiscal year 2010. We ceased distributing our ULTRASE and VIOKASE product lines in the U.S. effective April 28, 2010. This action was taken because we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products. ULTRASE and VIOKASE have accounted for 24.0% of our net product sales in fiscal year 2009 and for 15.1% of our net product sales in fiscal year 2010. If ULTRASE MT and VIOKASE are not approved, it will continue to adversely affect our financial position, cash flows or overall trends in results of operations.

The entry of generics versions of our CARAFATE and CANASA products in the U.S. could have a material adverse impact on our financial position, cash flows or overall trends in results of operations.

     CANASA

     CANASA does not have any patent protection in the U.S. On November 5, 2007, clinical investigation exclusivity previously granted pursuant to the Hatch-Waxman Act, covering a change in the formulation of this drug from a 500 mg formulation to a 1,000 mg suppository formulation, expired. As a result, if a generic mesalamine suppository were to be launched, it could have a significant negative impact on sales of CANASA in the U.S.

     In June 2007, the FDA published draft guidance on the requirements it expects manufacturers seeking approval of a mesalamine suppository to meet in order to obtain approval of mesalamine suppositories. This draft guidance specifies that a request for regulatory approval of a mesalamine suppository product must be supported by placebo and reference-drug controlled clinical studies with clinical endpoints demonstrating safety and effectiveness in patients with ulcerative proctitis. We cannot provide assurances that the FDA requirements reflected in this draft guidance will be applied by the FDA or will be formally adopted in their current form.

     In a July 2010 posting on clinicaltrial.gov that was updated in November 2010, Sandoz Inc. disclosed that it had initiated in June 2010 a clinical trial to establish therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA rectal suppositories, for the treatment of mild to moderate ulcerative proctitis. The disclosure states that the trial is being conducted in India and has an estimated duration of 18 months. Cadila Healthcare Inc. also recently disclosed that it is conducting a similar clinical study in India to establish therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA.

     CARAFATE

     CARAFATE does not have any patent protection or regulatory exclusivity in the United States.

     In a public filing on May 7, 2010, K-V Pharmaceutical Company announced the sale of certain intellectual property and other assets related to its Abbreviated New Drug Application, submitted with the U.S. Food and Drug Administration for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension, the active pharmaceutical ingredient in our CARAFATE product. We do not have any information on the status of this ANDA.

     Generic competition against any of our products could potentially lower prices and unit sales and could have a material adverse impact on our financial position, cash flows or overall trends in results of operations.

The launch of a product that competes with our ursodiol product line in France could have a material adverse impact on our financial position, cash flows or overall trends in results of operations.

     We reported net sales of $23.4 million, $20.8 million and $21.4 million for DELURSAN in fiscals 2010, 2009, and 2008, respectively. (In local currency, net sales of DELURSAN were €17.3 million, €15.4 million and €14.2 million in fiscal years 2010, 2009 and 2008, respectively).

     DELURSAN mainly competes with URSOLVAN^® (Sanofi-Aventis S.A.). However, we expect another competing branded product to be launched in France by the end of calendar year 2011. An additional request for marketing approval was submitted by another competitor for an ursodiol product, based on well-established use. Under this procedure, a company can submit for approval a product similar to one that is already marketed by submitting evidence of therapeutic efficacy based on published literature. If this other ursodiol product is launched, it could have a significant negative impact on sales of DELURSAN in France.

     Competition to DELURSAN, which made up approximately 6.6% of our net product sales in fiscal year 2010, could have a material adverse effect on our results of operations and financial condition.

Some of our key products face competition from generic or unbranded products.

     Some of our key products, including products from our URSO and CANASA lines, currently face competition from generic or unbranded products (such as ACTIGALL™ , its generics and the launched generic in the case of URSO, and other mesalamine rectal dosage forms in the case of CANASA). Third-party payors and pharmacists can substitute generic or unbranded products for our products even if physicians prescribe our products by name. Particularly in the U.S., government agencies and third-party payors often put pressure on patients to purchase generic products instead of brand-name products as a way to reduce health-care costs.

     Generic competition against any of our products could lower prices and unit sales and could therefore have a material adverse effect on our results of operations and financial condition.

Future sales of our marketed products might be less than expected.

     The degree of continued market acceptance of our products among physicians, patients, health-care payors and the medical community will depend upon a number of factors including

	•		the timing of regulatory approvals and product launches by us or competitors, and any generic or over-the-counter competitors;
	•		perceptions by physicians and other members of the health-care community regarding the safety and efficacy of the products;
	•		price increases, and the price of our products relative to other drugs or competing treatments;
	•		patient and physician demand;
	•		adverse side effects or unfavorable publicity regarding our products or other drugs in our class;
	•		the results of product development efforts for new indications;
	•		the scope and timing of additional marketing approvals and favorable reimbursement programs for expanded uses;
	•		availability of sufficient commercial quantities of the products; and
	•		our success in getting other companies to distribute our products outside our target markets.

The concentration of our product sales to only a few wholesale distributors increases the risk that we will not be able to effectively distribute our products if we need to replace any of these distributors, which would cause our sales to decline.

     The majority of our sales are to a small number of pharmaceutical wholesale distributors, which in turn sell our products primarily to retail pharmacies, which ultimately dispense our products to the end consumers. In fiscal year 2010, sales to our main customer, Customer A, accounted for 29.9% of our net product sales, sales to Customer B accounted for 28.1% of our net product sales, and sales to Customer C accounted for 12.2% of our net product sales.

     If any of these distributors cease doing business with us for any or all of our products, or materially reduce the amount of product they purchase from us and we cannot conclude agreements with replacement wholesale distributors on commercially reasonable terms, we might not be able to effectively distribute our products through retail pharmacies. The possibility of this occurring is exacerbated by the consolidation occurring in the wholesale drug distribution industry, including through mergers and acquisitions among wholesale distributors and the growth of large retail drugstore chains. As a result, a small number of large wholesale distributors control a significant share of the market. However, this risk is mitigated by the fact that we now have DSAs with our three largest U.S. wholesalers.

Wholesaler buying patterns may change, and this could have a detrimental effect on our future revenue and financial condition.

     Since fiscal year 2005, some wholesalers have changed their business model from one depending on drug price inflation to a fee-for-service arrangement, whereby manufacturers pay wholesalers a fee for inventory management and other services. These fees typically are a percentage of the wholesaler’s purchases from the manufacturer or a fixed charge per item or per unit. The fee-for-service approach results in

wholesalers’ compensation being more stable and volume-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 have reduced their inventories from their historical levels. Under the new model, the consequence of manufacturers using wholesalers is that they now realize the benefit of price increases more rapidly in return for paying wholesalers for the services they provide, on a fee-for-service basis. Fees resulting from distribution service agreements, or DSAs, are deducted from gross sales. We have DSAs with our three largest U.S. wholesalers, which provide that these wholesalers will maintain the levels of inventory of our products that they carry within specific agreed upon target levels. A reduction in inventory levels by a pharmaceutical wholesale distributor would result in a reduction in our sales to that wholesale distributor for the period during which the reduction occurs, and would have a negative effect on our results of operations for the period.

     We deduct DSA fees, which totaled approximately $3.6 million and $5.6 million for fiscal year 2009 and fiscal year 2010, respectively, from our total revenues. If we enter into DSAs with additional wholesalers, we will likely have to pay them DSA fees, which will further reduce our revenue in future periods.

     Generally, changes in wholesaler buying patterns may occur in the future, and these changes could result in a reduction in our revenues and could have a detrimental effect on our overall financial condition or results of operations.

We use third parties to manufacture and test most of our products and product candidates. This may increase the risk of not having sufficient quantity of our products or product candidates, quantity at an acceptable cost or product with acceptable quality or in compliance with standards and specifications. This could adversely affect sales of our products or result in the clinical development or commercialization of our products or product candidates being delayed, prevented or impaired.

     With the exception of SALOFALK and LACTEOL, we have limited capabilities in manufacturing pharmaceutical products. We do not expect to engage directly in the manufacturing of products, but instead will continue to contract with third-party organizations. There are a limited number of manufacturers capable of manufacturing our marketed products and our product candidates. We could fail to contract or renew contracts with the relevant manufacturers or could contract with manufacturers under terms and conditions that may not be entirely acceptable to us.

     We currently rely, and expect to continue to rely, on third parties for (i) the supply and testing of the active pharmaceutical ingredients used in our products and product candidates, and (ii) the manufacturing, packaging and testing of the finished products. The current manufacturers of our products and product candidates and likely future third-party manufacturers with whom we would enter into an agreement, are or could be sole suppliers of our products and product candidates for a given period of time. These manufacturers are commonly referred to as single-source suppliers. Our agreements for the manufacturing of our core products expire at various dates over the next three to five years. Should we be unable to renew these agreements under favorable terms or find suitable alternates, our business may be adversely affected. Some of our contracts prohibit us from using alternate manufacturers or suppliers for the products supplied under these contracts, which prevents us from reducing dependence on single sources of supply. In addition, we currently purchase materials and clinical supplies for some of our products and product candidates from third-party manufacturers on a purchase order basis. Should any of these manufacturers be unable to supply us for any reason, we may be delayed in identifying and qualifying replacements. In any event, identifying and qualifying a new supplier or third-party manufacturer could involve significant cost, is associated with the transfer of the active pharmaceutical ingredient or finished-product manufacturing process. In addition, any change in manufacturing generally requires formal approval by the regulatory agency, e.g. the FDA, prior to proceeding with manufacturing at the new site. This approval process typically takes a minimum of 12 to 18 months and during that time we may face a shortage of supply of our products.

     Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured or tested products or product candidates ourselves; risks revolve around, without being limited to, the followings:

	•		Manufacturing of products may be difficult to scale up when required, which could result in delays, inefficiencies and poor or low yields of quality products.
	•		Some of our contracts contain purchase commitments that require us to make minimum purchases that might exceed needs or limit the ability to negotiate with other manufacturers, which might increase costs.
	•		Cost involved in manufacturing certain products may lead to such products being prohibitively expensive.
	•		Delays in site transfers or scale-up to commercial quantities and any difficulty in manufacturing could delay clinical studies, regulatory submissions, approval and commercialization or continued commercialization of our products.
	•		In the event of a manufacturing change, the FDA and other comparable country regulators require testing and compliance inspections; new manufacturers may have to be educated to our products’ production process, which requires time.
	•		There is a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture and/or test a product for commercial sale or for our clinical trials were to cease to continue to do so for any reason, we could experience delays in obtaining sufficient quantities of our products for us to meet commercial demand or in advancing production of our commercial products or our clinical trials while we identify and qualify replacement suppliers.

•

If, for any reason, we were not able to obtain adequate supply of our product and product candidates or the drug substances used to manufacture them, it would be difficult for us to develop, transfer or manufacture our products ourselves and compete effectively.

     Our current and anticipated future dependence upon others for the manufacturing and testing of our products and product candidates may adversely affect our profit margins and our ability to develop products and commercialize additional products that receive regulatory approval in a timely and competitive manner.

We rely on our third-party manufacturers for compliance with applicable regulatory requirements. This may increase the risk of sanctions being imposed on us or on a manufacturer of our products or product candidates, which could result in our inability to obtain sufficient quantities of these products or product candidates.

     Manufacturers are subject to the FDA’s cGMP regulations and similar foreign standards, and we do not have control over compliance with these regulations by our third-party manufacturers. Our manufacturers may not be able to comply with cGMP regulations or other regulatory requirements or similar regulatory requirements outside the U.S.

     Our manufacturers are subject to unannounced inspections by the FDA, state regulators and similar regulators outside the U.S. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including

	•		fines;
	•		injunctions;
	•		civil penalties;
	•		failure of regulatory authorities to grant marketing approval of our product candidates;
	•		delays, suspension or withdrawal of approvals;
	•		suspension of manufacturing operations;
	•		license revocation;
	•		seizures or recalls of products or product candidates;
	•		operating restrictions; and
	•		criminal prosecutions.

Any of these sanctions could significantly and adversely affect supplies of our products and product candidates and might adversely affect our profit margins and our ability to develop product candidates and commercialize any additional products that receive regulatory approval on a timely and competitive basis.

We rely on third parties to conduct, supervise and monitor our clinical trials, and those third parties may perform in an unsatisfactory manner, such as by failing to meet established deadlines for the completion of such trials.

     We rely on third parties such as contract research organizations, medical institutions and clinical investigators to enroll qualified patients and conduct, supervise and monitor our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Our reliance on these third parties, however, does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with good clinical practice regulations, and the investigational plan and protocols contained in the relevant regulatory application, such as the IND. In addition, such third parties may not complete activities on schedule, or may not conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for, and to commercialize, our product candidates may be delayed or prevented.

Our business could suffer as a result of adverse drug reactions to the products we market.

     Unexpected adverse drug reactions by patients to any of our products could negatively impact utilization or market availability of our product.

     Absence of long-term safety data may also limit the approved uses of our products, if any. If we fail to comply with the regulatory requirements of the FDA and other applicable regulatory authorities, or if previously unknown problems with any approved commercial products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks, including

	•		restrictions on the products, manufacturers or manufacturing processes;
	•		warning letters and untitled letters;
	•		civil penalties and criminal prosecutions and penalties;

	•		fines;
	•		injunctions;
	•		product seizures or detentions;
	•		import or export bans or restrictions;
	•		voluntary or mandatory product recalls and related publicity requirements;
	•		suspension or withdrawal of regulatory approvals;
	•		total or partial suspension of production; and
	•		refusal to approve pending applications for marketing approval of new products or of supplements to approved applications.

The publication of negative results of studies or clinical trials may adversely impact our sales revenue.

     From time to time, studies or clinical trials on various aspects of pharmaceutical products are conducted by academics or others, including government agencies. The results of these studies or trials, when published, may have a dramatic effect on the market for the pharmaceutical product that is the subject of the study. The publication of negative results of studies or clinical trials related to our products or the therapeutic areas in which our products compete could adversely affect our sales, the prescription trends for our products and the reputation of our products. In the event of the publication of negative results of studies or clinical trials related to our products or the therapeutic areas in which our products compete, our business, financial condition, results of operation and cash flows could be materially adversely affected.

We may not be able to acquire or successfully integrate new products or businesses.

     Our products are maturing, and therefore a significant component of our strategy is growth through acquisitions of products or businesses. However, we cannot be certain that we will be able to identify appropriate acquisition candidates. Even if an acquisition candidate is identified, there can be no assurance we will be able to successfully negotiate any such acquisition on favorable terms or at all, finance such an acquisition or integrate such an acquired product or business into our existing business. We face significant competition from other pharmaceutical companies for acquisition candidates, which makes it more difficult to find attractive transaction opportunities for products or companies on acceptable terms. Furthermore, the negotiation of potential acquisitions and the integration of such acquired products or businesses could divert management’s time and resources and require significant financial resources to consummate. Failure to acquire new products may diminish our rate of growth and adversely affect our competitive position.

Acquisitions that we may undertake will involve a number of inherent risks, any of which could cause us not to realize the anticipated benefits.

     One of our key strategies will be acquisitions of additional products and/or businesses. Acquisition transactions involve various inherent risks, such as assessing the value, strengths, weaknesses, contingent and other liabilities, and potential profitability of the acquisition; the potential loss of key personnel of an acquired business; the ability to achieve operating and financial synergies anticipated to result from an acquisition and unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition. Any one or more of these factors could cause us not to realize the anticipated benefits from the acquisition of businesses or products.

There is no assurance that we will continue to be successful in our licensing and marketing operations.

     Certain of our products are sold and marketed by third parties. Such third-party arrangements may not be successfully negotiated in the future. Any such arrangements may not be available on commercially reasonable terms. Even if acceptable and timely marketing arrangements are available, the products we develop may not be accepted in the marketplace, and even if such products are initially accepted, sales may thereafter decline. Additionally, our clients or marketing partners may make important marketing and other commercialization decisions with respect to products we develop that are not within our control. As a result, many of the variables that may affect our revenues, cash flows and net income are not exclusively within our control.

The success of our strategic investments, partnerships or development alliances depends upon the performance of the companies in which we invest, or with which we partner or co-develop products.

     Economic, governmental, industry and internal company factors outside our control affect each of the companies in which we may invest or with which we may partner or co-develop products. Some of the material risks relating to such companies include:

	•		the ability of these companies to successfully develop, manufacture and obtain necessary governmental approvals for the products that serve as the basis for our investments in, or relationship with, such companies;
	•		the ability of competitors of these companies to develop similar or more effective products, making the drugs developed by these companies difficult or impossible to market;
	•		the ability of these companies to adequately secure patents for their products and protect their proprietary information;
	•		the ability of these companies to enter the marketplace without infringing upon competitors’ patents;

	•		the ability of these companies to finance their operations;
	•		the ability of these companies to remain technologically competitive; and
	•		the dependence of these companies upon key scientific and managerial personnel.

     We may have limited or no control over the resources that any such company may devote to developing the products for which we collaborate with them. Any such company may not perform as expected. These companies may breach or terminate their agreements with us or otherwise fail to conduct product discovery and development activities successfully, or in a timely manner. If any of these events occurs, it could have a material adverse effect on our business and our financial results.

Our operations could be disrupted if our information systems fail or if we are unsuccessful in implementing necessary upgrades.

     Our business depends on the efficient and uninterrupted operation of our computer and communications systems and networks, hardware and software systems, and other information technology. If our systems were to fail or we were unable to successfully expand the capacity of these systems, or we were unable to integrate new technologies into our existing systems, our operations and financial results could suffer.

Our quarterly results may fluctuate.

     Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future. Factors that could cause quarterly operating results to decline, many of which are not within our control, include, for example, the size and timing of product orders, which can be affected by customer budgeting and buying patterns, or the size and timing of expenses associated with our development and marketing programs. As a result, if customer buying patterns cause revenue shifts from one fiscal quarter to another, or if the development and marketing of our products causes our expenses to change from one fiscal quarter to another, our net quarterly income may fluctuate.

Our business depends on key scientific, sales and managerial personnel for continued success.

     Much of our success to date has resulted from the skills of certain of our officers, scientific personnel and sales force. If these individuals were no longer employed by us, we might not be able to attract or retain employees with similar skills or carry out our business plan.

RISKS RELATED TO OUR PANCREATIC ENZYME PRODUCTS (PEPs)

Our ULTRASE MT and VIOKASE PEPs may never be approved in the U.S.

     We ceased distributing our ULTRASE and VIOKASE product lines in the United States effective April 28, 2010. ULTRASE and VIOKASE have accounted for 24.0% of our net product sales in fiscal year 2009 and for 15.1% of our net product sales in fiscal year 2010. This action was taken because we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products. In April 2004, the FDA mandated that all manufacturers of PEPs file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for PEPs until April 28, 2010, for those companies that (a) were marketing unapproved PEPs as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) continued diligent pursuit of regulatory approval.

     We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our response to this letter, we received a second complete response letter from the FDA in the fourth quarter of fiscal 2009. On May 5, 2010 the FDA issued an additional complete response with respect to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient of ULTRASE MT be addressed before approval can be granted. We submitted our response to this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA, date for our ULTRASE MT NDA.

     The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal 2010. At the time we completed this submission we requested a priority review and the FDA advised us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to complete their review.

     On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE MT and VIOKASE be addressed before approval can be granted. The letters also require that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs can be approved. We are in ongoing discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible. However, those remaining issues do not require additional clinical studies.

     If ULTRASE MT and VIOKASE are not approved, it will continue to adversely affect our financial position, cash flows or overall trends in results of operations.

If ULTRASE MT and VIOKASE are approved and relaunched, competition in the PEP market could be more intense than expected.

     If approved and relaunched, the level of competition that ULTRASE MT and VIOKASE will face in the U.S. will be more intense than before April 28, 2010, when we ceased distributing these products. A number of branded pancreatic enzyme products have been approved and are currently marketed in the United States, including CREON^® (Abbott Laboratories), PANCREAZE^™ (Ortho-McNeil Pharmaceutical, Inc.) and ZENPEP^® (Eurand N.V.). In order to relaunch ULTRASE MT and VIOKASE, we will need to re-establish the market position for these products and succeed in having customers using other marketed products start or restart using our products. These efforts will likely result in increased marketing and other expenses. If we are not successful, this would have a material adverse effect on our business and our financial results.

If ULTRASE MT and VIOKASE are approved and relaunched, our future revenues and profitability will be adversely affected if governmental, private third-party payors and other third-party payors, including Medicare and Medicaid, do not sufficiently defray the cost of ULTRASE MT and VIOKASE to the consumer.

     Our future revenues and profitability will be adversely affected if governmental, private third-party payors and other third-party payors, including Medicare and Medicaid, do not sufficiently defray the cost of ULTRASE MT and VIOKASE to the consumer. If these entities do not provide coverage and reimbursement for ULTRASE MT and VIOKASE or determine to provide an insufficient level of coverage and reimbursement, ULTRASE MT and VIOKASE may be too costly for general use, and physicians may not prescribe it. Many third-party payors cover only selected drugs, making drugs that are not preferred by such payor more expensive for patients, and often require prior authorization or failure on another type of treatment before covering a particular drug.

     In addition to potential restrictions on coverage, the amount of reimbursement for our products may adversely affect results of operations. In the U.S., there have been, and we expect there will continue to be, actions and proposals to control and reduce health-care costs. Government and other third-party payors are challenging the prices charged for health-care products and increasingly limiting and attempting to limit both coverage and level of reimbursement for prescription drugs.

     If adequate coverage and reimbursement by third-party payors does not continue to be available, our ability to successfully relaunch ULTRASE MT and VIOKASE may be adversely impacted. Any limitation on the use of ULTRASE MT and VIOKASE or any decrease in the price of ULTRASE MT and VIOKASE will have a material adverse effect on our business.

RISKS RELATED TO REGULATORY MATTERS

If our products fail in clinical studies or if we fail, or encounter difficulties, in obtaining regulatory approval for our new products or new indications of existing products or relaunching our PEPs, we will have expended significant resources for no return.

     If our products are not successful in clinical trials or if we do not obtain such regulatory approvals, we will have expended significant resources for no return. Our ongoing clinical studies might be delayed or halted or additional studies might be required, for various reasons, including the following:

	•		Our products are shown not to be effective.
	•		We do not comply with requirements concerning the investigational NDAs, biologic license applications (BLAs) or new drug submissions (NDSs), for the protection of the rights and welfare of human subjects.
	•		Patients experience unacceptable side effects or die during clinical trials.
	•		Patients do not enroll in the studies at the rate we expect.
	•		A drug is modified during testing.
	•		Product supplies are delayed or are not sufficient to treat the patients participating in the studies.
	•		Failure by our manufacturers or suppliers to comply with any of the FDA’s or other relevant foreign counterparts continuing regulations.

     If we cannot obtain regulatory approvals for the products we are developing or may seek to develop in the future, our rate of sales growth and competitive position will suffer. This risk is most acute for products that are currently in the development of the final formulation, or ULTRASE MT and VIOKASE, our pancreatic enzyme products, for which we need to comply with FDA’s requirement in order to return to the market.

     Approval might entail ongoing requirements for post-marketing studies. Even if regulatory approval is obtained, labeling and promotional activities are subject to continual scrutiny by the regulatory agencies, in particular the FDA, and, in some circumstances, the Federal Trade Commission. FDA enforcement policy prohibits the marketing of approved products for unapproved, or off-label, uses. These regulations and the FDA’s interpretation of them might impair our ability to effectively market our products.

     We, our third-party manufacturers and certain of our suppliers are also required to comply with the applicable FDA cGMP regulations,

which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Furthermore, manufacturing facilities must be approved by regulatory authorities before they can be used to manufacture our products and certain raw materials used therein, and they are subject to additional inspections. If we or any of our manufacturers or suppliers fails to comply with any of the FDA’s or other relevant foreign counterparts continuing regulations, we could be subject to sanctions, including:

	•		delays, warning letters and fines;
	•		product recalls or seizures and injunctions on sales;
	•		refusal to review pending applications;
	•		total or partial suspension of production;
	•		withdrawals of previously approved marketing applications; and
	•		civil penalties and criminal prosecutions.

     In addition, identification of side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of the product from the market, reformulation of the drug, additional testing or changes in labeling of the product.

We may find it difficult to achieve market acceptance of our PEPS or products in our product pipeline.

     The commercial success of any of our product candidates for which we obtain marketing approval from the FDA, Health Canada’s Therapeutic Products Directorate, or TPD, the European medicines Agency, or EMA, or other regulatory authorities will depend upon the acceptance of these products by the medical community, including physicians, patients and health-care payors. The degree of market acceptance of any of our approved products will depend on a number of factors, including

	•		demonstration of clinical safety and efficacy compared to other products;
	•		the relative convenience and ease of administration;
	•		the prevalence and severity of any adverse side effects;
	•		limitations or warnings contained in a product’s FDA, TPD or EMA approved labeling;
	•		availability of alternative treatments for the indications we target;
	•		pricing and cost effectiveness compared to competing products, particularly generic products;
	•		the effectiveness of our or any future collaborators’ sales and marketing strategies;
	•		the effectiveness of our manufacturing and distribution plans;
	•		our ability to obtain sufficient third-party coverage or reimbursement; and
	•		the willingness of patients to pay out-of-pocket in the absence of third-party coverage.

     If any of our product candidates are approved but do not achieve an adequate level of acceptance by physicians, health-care payors and patients, we may not generate sufficient revenue from these products for such products to become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

Our business is subject to limitations imposed by government regulations.

     Governmental agencies in the countries in which we conduct business regulate pharmaceutical products intended for human use. These regulations normally require extensive clinical trials and other testing in addition to governmental review and final approval before products can be marketed. Governmental authorities in such countries also regulate the research and development, manufacture, distribution, promotion, testing and safety of products, and therefore, the cost of complying with governmental regulations can be substantial.

     Requirements for approval can vary widely from country to country. A product must normally be approved by regulatory authorities in each country in which we intend to market it, prior to the commencement of marketing in that country. There can be long delays in obtaining required clearances from regulatory authorities in many countries after applications are filed. Therefore, there can be no assurance that we will obtain regulatory approvals in such countries or that we will not incur significant costs in obtaining or maintaining such regulatory approvals. Moreover, the regulations applicable to our existing and future products may change.

     Government regulations require the detailed inspection and control of research and laboratory procedures, clinical studies, manufacturing procedures and marketing and distribution methods, all of which significantly increase the level of difficulty and the costs involved in obtaining and maintaining the regulatory approval for marketing new and existing products. Moreover, regulatory measures adopted by governments provide for the possible withdrawal of products from the market and, in certain cases, suspension or revocation of the required approvals for their production and sale.

     Failure to obtain necessary regulatory approvals; the restriction, suspension or revocation of existing approvals; or any other failure to comply with regulatory requirements would restrict or impair our ability to market our products and carry on our business.

Regulatory approval for our currently marketed products is limited by the regulatory authorities to those specific indications and conditions for which clinical safety and efficacy have been demonstrated.

     Any regulatory approval is limited to those specific diseases and indications for which our products are deemed to be safe and effective by the FDA, the TPD, the EMA, or other regulatory authorities. In addition to approval required for new formulations, any new indication for an approved product also requires regulatory approval. If we are not able to obtain regulatory approval for any desired future indications for our products, our ability to effectively market and sell or products may be reduced and our business may be adversely affected.

     Our ability to promote the product is limited to those indications that are specifically approved by regulatory authorities. Regulatory authorities further restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow rules and guidelines relating to promotion and advertising may cause regulatory authorities to delay approval or refuse to approve a product, the suspension or withdrawal of an approved product from the market, recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution, any of which could harm our business.

Our approved products and pipeline products remain subject to ongoing regulatory requirements. If we fail to comply with these requirements, we could lose these approvals, and the sales of any such approved commercial products could be suspended.

     After receipt of initial regulatory approval, each product remains subject to extensive regulatory requirements, including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping. Furthermore, even if we receive regulatory approval to market a particular product, such a product will remain subject to the same extensive regulatory requirements. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the uses for which the product may be marketed or the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor product safety or efficacy, which could reduce our revenues, increase our expenses and render the approved product not commercially viable. In addition, as clinical experience with a drug expands after approval because it is typically used by a greater number and more diverse group of patients after approval than during clinical trials, side effects and other problems may be observed after approval that were not seen or anticipated during pre-approval clinical trials or other studies.

Our approved products and pipeline products remain subject to ongoing regulatory requirements.

     Following receipt of regulatory approval, any products that we market continue to be subject to extensive regulation. These regulations affect many aspects of our operations, including the manufacture, labeling, packaging, adverse-event reporting, storage, distribution, advertising, promotion and record keeping related to the products. The FDA also frequently requires post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. In addition, the subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, significant disbursements, operating restrictions and criminal prosecution.

     In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal health-care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health-care item or service reimbursable under Medicare, Medicaid or other federally financed health-care programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal health-care programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

     Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Several pharmaceutical and other health-care companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free products to customers with the expectation that the customers would bill federal programs for those products. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

     Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be

subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.

     In addition, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning record keeping and control procedures. Any failure to comply with the regulations may result in significant criminal and civil penalties as well as damage to our credibility in the marketplace.

RISKS RELATED TO OUR INDUSTRY

The pharmaceutical industry is highly competitive and is subject to rapid and significant change, which could render our products obsolete or uncompetitive.

     Competition in our business is intense and characterized by extensive research efforts and rapid technological progress. Technological developments by competitors, regulatory approval for marketing competitive products, including potential generic or over-the-counter products, or competitors’ superior marketing resources could adversely affect the commercial potential of our products and could have a material adverse effect on our revenue and results of operations. We believe that there are numerous pharmaceutical and biotechnology companies, including large well-known pharmaceutical companies, as well as academic research groups throughout the world, engaged in research and development efforts with respect to pharmaceutical products targeted at gastrointestinal diseases and conditions addressed by our current and potential products. In particular, we are aware of products in research or development by competitors that address the diseases targeted by our products. Developments by others might render our current and potential products obsolete or noncompetitive. Competitors might be able to complete the development and regulatory approval process sooner and, therefore, market their products earlier than we can. They may succeed in developing products that are more effective or less expensive to use than any that we may develop or license. These developments could render our products obsolete or uncompetitive, which would have a material adverse effect on our business and financial results.

     Many of our competitors have greater financial resources and selling and marketing capabilities, have greater experience in clinical testing and human clinical trials of pharmaceutical products, and have greater experience in obtaining approvals from the FDA, the TPD or other applicable regulatory approvals.

Pricing pressures from, and other measures taken by, third-party payors, including managed care organizations, government sponsored health-care systems and regulations relating to Medicare and Medicaid, Health Care and Education Reconciliation Act of 2010, pharmaceutical reimbursements and pricing in general could decrease our revenues.

     Our ability to successfully commercialize our products and product candidates—even if FDA, TPD or EMA approval is obtained— depends, in part, on whether appropriate reimbursement levels for the cost of the products and related treatments are obtained from government authorities and private health insurers and other organizations, such as health maintenance organizations, or HMOs, managed-care organizations, or MCOs, and provincial formularies.

     Third-party payors are increasingly challenging the pricing of pharmaceutical products. In addition, the trend toward managed health-care in the U.S., the growth of organizations such as HMOs and MCOs, and the recently enacted Health Care and Education Reconciliation Act of 2010, could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. One way in which MCOs and government sponsored health-care systems seek to control their costs is by developing formularies to encourage plan beneficiaries to use preferred products for which the plans have negotiated favorable terms. Exclusion of a product from a formulary, or placement of a product on a disfavored formulary tier, can lead to sharply reduced usage in the patient population covered by the applicable MCO or government-sponsored health-care system. If our products are not included in an adequate number of formularies or if adequate reimbursement levels are not provided, or if reimbursement policies increasingly favor generic products, our market share and business could be negatively affected.

     Recent reforms to Medicare added an out-patient prescription drug reimbursement for all Medicare beneficiaries beginning in 2006. The U.S. federal government and private plans contracting with the government to deliver the benefit, through their purchasing power under these programs, are demanding discounts from pharmaceutical companies that may implicitly create price controls on prescription drugs. These reforms may decrease our future revenues from product lines covered by the Medicare drug benefit, thereby adversely affecting our results or operations and cash flows.

     Uncertainty also exists regarding the reimbursement status of certain newly-approved pharmaceutical products and reimbursement may not be available for some of our products. Any reimbursements granted may not be maintained or limits on reimbursements available from third-party payors may reduce the demand for, or negatively affect the price of, these products. If our products do not qualify for reimbursement, if reimbursement levels diminish, or if reimbursement is denied, our sales and profitability would be adversely affected.

The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, known together as the Affordable Care Act, enacted in the U.S in March 2010 contain several provisions that could impact our business.

     Although many provisions of the new legislation do not take effect immediately, several provisions became effective during fiscal year 2010. These include (1) an increase in the minimum Medicaid rebate to States participating in the Medicaid program on our branded prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and. (3) the expansion of the 340B Public Health Service Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain children’s hospitals, free standing cancer hospitals, critical access hospitals, and rural referral centers.

     In addition, beginning in 2011, the new law requires drug manufacturers to provide a 50% discount to Medicare beneficiaries for any covered prescription drugs purchased during a Medicare Part D coverage gap (i.e. the “donut hole”). Also, beginning in 2011, new fees will be assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare Parts B and D, Medicaid, Department of Veterans Affairs and Department of Defense programs and TRICARE retail pharmacy program) made during the previous year. The aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. The IRS has issued guidance for calculating preliminary fees, but there is still uncertainty as to final implementation, since the IRS has requested public comment and may make changes in response. The new law also imposes a 2.3% excise tax on sales of certain taxable medical devices that are made after December 31, 2012, including our FLUTTER mucus clearance device. Further, effective March 31, 2013, the law requires pharmaceutical, medical device, biological, and medical supply manufacturers to begin reporting to the federal government the payments they make to physicians and teaching hospitals, and physician ownership interests in those entities. The law also provides for the creation of an abbreviated regulatory pathway for FDA approval of biosimilars and interchangeable biosimilar products. While creation of the biosimilars program is authorized as of passage of the legislation in 2010, the process of creating the regulatory pathway for approval of biosimilars will likely be lengthy, and the FDA is in the process of soliciting public input.

     The impact in terms of additional reserves recorded in contract rebates has been $1.8 million for the fiscal year 2010. However, we continue to assess the full extent of this legislation’s longer-term impact on our business. While certain aspects of the new legislation implemented in 2010 are expected to reduce our revenues in future years, other provisions of this legislation may offset, at some level, any reduction in revenues when these provisions become effective. In future years, based on our understanding, these other provisions are expected to result in higher revenues due to an increase in the total number of patients covered by health insurance and an expectation that existing insurance coverage will provide more comprehensive consumer protections. This would include a federal subsidy for a portion of a beneficiary’s out-of-pocket cost under Medicare Part D. However, these higher revenues will be negatively impacted by the branded prescription drug manufacturers’ fee.

Uncertainties regarding the Affordable Care Act and third-party reimbursement may impair our ability to continue to sell our products or form collaborations.

     The continuing efforts of governmental and third-party payers to contain or reduce the costs of health-care through various means may harm our business. For example, in some foreign markets, the pricing or profitability of health-care products is subject to government control. In the United States, there have been, and we expect there will continue to be, a number of federal and state proposals to implement similar government control. The implementation or even the announcement of any of these legislative or regulatory proposals or reforms could harm our business by reducing the prices we are able to charge for our products, or impeding our ability to continue to achieve profitability or form collaborations. In addition, the availability of reimbursement from third-party payers determines, in large part, the demand for health-care products in the United States and elsewhere. Examples of such third-party payers are government and private insurance plans. Significant uncertainty exists as to the reimbursement status of newly approved health-care products and third-party payers are increasingly challenging the prices charged for medical products and services. Reimbursement from third-party payers may not be available or may not be sufficient to allow us to continue to sell our products on a competitive or profitable basis.

Our relationships with customers and payors are subject to applicable fraud and abuse and other health-care laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.

     Health-care providers, physicians and others play a primary role in the recommendation and prescription of our products. Our arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other health-care laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products. Applicable U.S. federal and state health-care laws and regulations, include, but are not limited to, the following:

	•		The federal health-care anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal health-care programs such as Medicare and Medicaid.
	•		The federal False Claims Act imposes criminal and civil penalties, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.
	•		The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or

			making any materially false statement in connection with the delivery of or payment for health-care benefits, items or services.
	•		Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving health-care items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.
	•		There are similar laws in countries outside the U.S.

     Efforts to ensure that our business arrangements with third parties comply with applicable health-care laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other health-care laws and regulations. If our past or present operations, including activities conducted by our sales team or agents, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from third-party payor programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded health-care programs.

     Many aspects of these laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations, which increases the risk of potential violations. In addition, these laws and their interpretations are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.

The FDAAA may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market and distribute our existing products.

     The Food and Drug Administration Amendments Act of 2007, or FDAAA, grants a variety of powers to the FDA, many of which are aimed at improving drug safety and assuring the safety of drug products after approval. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. We expect the FDAAA to have a substantial effect on the pharmaceutical industry. As the FDA issues regulations, guidance and interpretations relating to the new legislation, the impact on the industry, as well as our business, will become clearer. The requirements and other changes that the FDAAA imposes may make it more difficult, and likely more costly, to obtain approval of new pharmaceutical products and to produce, market and distribute existing products.

Changes in laws and regulations could affect our results of operations, financial position or cash flows.

     Our future operating results, financial position or cash flows could be adversely affected by changes in laws and regulations such as (i) changes in the FDA, TPD or EMA (or their foreign equivalents) approval processes that may cause delays in, or prevent the approval of, new products; (ii) new laws, regulations and judicial decisions affecting product development, marketing, promotion or the health-care field generally; (iii) new laws or judicial decisions affecting intellectual property rights and (iv) changes in the application of tax principles, including tax rates, new tax laws, or revised interpretations of existing tax laws and precedents, which result in a shift of taxable earnings between tax jurisdictions.

We may be subject to investigations or other inquiries concerning our compliance with reporting obligations under federal health-care program pharmaceutical pricing requirements.

     Under federal health-care programs, some state governments and private payors investigate and have filed civil actions against numerous pharmaceutical companies alleging that the reporting of prices for pharmaceutical products has resulted in false and overstated average wholesale price, or AWP, which in turn may be alleged to have improperly inflated the reimbursements paid by Medicare, private insurers, state Medicaid programs, medical plans and others to health-care providers who prescribed and administered those products or pharmacies that dispensed those products. These same payors may allege that companies do not properly report their “best prices” to the state under the Medicaid program. Suppliers of outpatient pharmaceuticals to the Medicaid program are also subject to price rebate agreements. Failure to comply with these price rebate agreements may lead to federal or state investigations, criminal or civil liability, exclusion from federal health-care programs, contractual damages, and otherwise harm our reputation, business and prospects.

Future litigation and the outcome of current litigation may harm our business.

     In general, and subject to the terms of each specific agreement, we have agreed to indemnify our licensors, distributors and certain of our contract manufacturers for product liability claims and there is a risk that we will be subject to product liability claims and claims for indemnification under these agreements. A substantial portion of our revenues are derived and will continue to be derived from activities in the U.S., where pharmaceutical companies are exposed to a higher risk of litigation than in other jurisdictions.

     Currently, we maintain claims-based product liability insurance coverage in respect of all our products marketed in the U.S. We cannot be certain that existing or future insurance coverage available to us will be adequate to satisfy any or all future product liability claims and defense costs in the U.S.

Exposure relating to product liability claims may harm our business.

     We face an inherent business risk of exposure to product liability and other claims in the event that the use of our products results, or is alleged to have resulted, in adverse effects. While we have taken, and will continue to take, what we believe are appropriate precautions, there can be no assurance that we will avoid significant product liability claims. Although we currently carry product liability insurance that we believe is appropriate for the risks that we face, there can be no assurance that we have sufficient coverage, or can in the future obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the growth of our business or the number of products we can successfully market. Our obligation to pay indemnities, the withdrawal of a product following complaints, or a product-liability claim could have a material adverse effect on our business, results of operations, cash flows and financial condition. For details regarding certain litigation matters in which we are currently involved, see “Item 3. Legal Proceedings”.

RISKS RELATED TO INTELLECTUAL PROPERTY

We rely on the intellectual property of others, and we may not be able to protect our own intellectual property.

     Our continued success will depend, in part, on our ability to obtain, protect and maintain intellectual property rights and licensing arrangements for our products. Some of the proprietary rights in some of our products are held by third parties, which require us to obtain licenses for the use of such products. Despite these licenses, there can be no guarantees that the rights or patents used by us will not be challenged by third parties. Furthermore, an adverse outcome could lead to an infringement or other legal action being brought against us directly. We have filed and/or licensed patent applications related to certain of our products, but such applications may fail to be granted, or, even if granted, may be challenged or invalidated or may fail to provide us with any competitive advantages.

     To protect our own intellectual property, we have historically relied on patents and trade secrets, know-how and other proprietary information, as well as requiring our employees and other vendors and suppliers to sign confidentiality agreements prohibiting them from taking our proprietary information and technology or from using or disclosing proprietary information to third parties except in specified circumstances. However, confidentiality agreements may be breached despite all precautions taken, and we may not have adequate remedies for any breach. Third parties may gain access to our proprietary information or may independently develop substantially equivalent proprietary information. Our inability to protect and maintain intellectual property rights in our products may impair our competitive position and adversely affect our growth.

Litigation or third-party claims of intellectual property infringement could require substantial time and money to resolve. Unfavorable outcomes to these proceedings could limit our intellectual property rights and our activities.

     Third-party patents (now or in the future) may cover the materials or methods of treatment related to our products, and third parties may make allegations of infringement, regardless of merit. We cannot provide any assurances that our products or activities, or those of our licensors, will not infringe patents or other intellectual property owned by third parties. We have been (and from time to time we may be) notified that third parties consider their patents or other intellectual property relevant to our products.

     In addition, we may from time to time have access to confidential or proprietary information of third parties that could bring a claim against us asserting that we have misappropriated their technology (which, although not patented, may be protected by trade secrets) and that we have improperly incorporated that technology into our products. Some of our employees may have been employed by other pharmaceutical or biotechnology companies that may allege violations of their trade secrets by these individuals, irrespective of the steps that we may take to prevent such allegations.

     If a lawsuit is commenced with respect to any alleged intellectual property infringement by us, the uncertainties inherent in such litigation make the outcome difficult to predict, and the costs that we may incur as a result may have an adverse effect on our profitability. Such litigation would involve significant expense and would be a substantial diversion of the efforts of our scientific and our management teams. During the course of any intellectual property litigation, there may be public announcements regarding claims and defenses, and regarding the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these announcements as negative, the market price of the secured notes or any other securities that we may issue from time to time may decline.

     Any such lawsuit that culminates in an adverse determination may result in the award of monetary damages to the intellectual property holder and payment by us of any such damages, and/or an injunction prohibiting all of our business activities that infringe the intellectual property, or may require us to obtain licenses from third parties on terms that may not be commercially acceptable to us, which would in each case adversely affect our profitability and our business. If so, we may attempt to redesign our processes, products or technologies so that they do not infringe, but that might not be possible. If we cannot obtain a necessary or desirable license, can obtain such a license only on terms that we consider to be unattractive or unacceptable, or cannot redesign our products or processes to avoid potential patent or other intellectual property infringement, then we or our collaborators may be restricted or prevented from developing and commercializing our products and our business will be harmed.

Our intellectual property rights might not afford us with meaningful protection.

     The intellectual property rights protecting our products might not afford us with meaningful protection from generic and other competition. In addition, because our strategy is to in-license or acquire pharmaceutical products that typically have been discovered and initially researched by others, future products might have limited or no remaining patent protection due to the time elapsed since their discovery. Competitors could also design around any of our intellectual property or otherwise design competitive products that do not infringe our intellectual property.

     Any litigation that we become involved in to enforce intellectual property rights could result in substantial cost to us. In addition, claims by others that we infringe their intellectual property rights could be costly. Our patent or other proprietary rights related to our products might conflict with the current or future intellectual property rights of others. Litigation or patent interference proceedings, either of which could result in substantial cost to us, might be necessary to defend any patents to which we have rights and our other proprietary rights or to determine the scope and validity of other parties’ proprietary rights. The defense of patent and intellectual property claims is both costly and time consuming, even if the outcome is favorable. Any adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease selling one or more of our products. We might not be able to obtain a license to any third-party technology that we require to conduct our business, or, if obtainable, that technology might not be available at a reasonable cost.

     We also rely on trade secrets, proprietary know-how and technological advances, which we seek to protect, in part, through confidentiality agreements with collaborative partners, employees and consultants. These agreements might be breached and we might not have adequate remedies for any such breach. In addition, our trade secrets and proprietary know-how might otherwise become known or be independently developed by others.

RISKS RELATED TO GENERAL ECONOMIC AND FINANCIAL CONDITIONS

We are exposed to political, economic and other risks that arise from operating a multinational business.

     We have operations in several different countries. For the fiscal years ended September 30, 2008, 2009 and 2010, approximately 27.0%, 24.5% and 27.9% of our revenues, respectively, were derived from sources outside the U.S. We are therefore exposed to risks inherent in international operations. These risks include, but are not limited to

	•		changes in general economic, social and political conditions;
	•		adverse tax consequences;
	•		the difficulty of enforcing agreements and collecting receivables through certain legal systems;
	•		inadequate protection of intellectual property;
	•		required compliance with a variety of laws and regulations of jurisdictions outside of the U.S., including labor and tax laws;
	•		customers outside of the U.S. may have longer payment cycles;
	•		changes in laws and regulations of jurisdictions outside of the U.S.; and
	•		terrorist acts and natural disasters.

Our business success depends in part on our ability to anticipate and effectively manage these and other regulatory, economic, social and political risks inherent in multinational business. We cannot provide assurances that we will be able to effectively manage these risks or that they will not have a material adverse effect on our multinational business or on our business as a whole.

Currency exchange rate fluctuations may have a negative effect on our financial condition.

     We operate internationally, but a majority of our revenue and expense activities, including our debt service obligations, and capital expenditures are denominated in U.S. dollars. The other currencies in which we engage in significant transactions are Canadian dollars and euros. As a consequence, we are exposed to currency fluctuations from purchases of goods, services and equipment and investments in other countries, and funding denominated in the currencies of other countries. In particular, we are exposed to the fluctuations in the exchange rate between the U.S. dollar, the euro and the Canadian dollar. During fiscal year 2010, approximately 17.8% of our revenues was denominated in euros, 9.0% of our revenue was denominated in Canadian dollar, while the remainder was denominated in U.S. dollars.

     Fluctuations in currency exchange rates may affect the results of our operations and the value of our assets and revenues, and increase our liabilities and costs, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. For example, in 2010, we experienced a positive foreign exchange effect on revenues of approximately 0.8%. Changes in currency exchange rates may affect the relative prices at which we and our competitors sell products in the same market. Changes in the value of the relevant currencies also may affect the cost of goods, services and equipment required in our operations.

     In addition, due to the constantly changing currency exposures and the potential substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations on our future results and, because we do not currently hedge fully against all currency risks and fluctuations between the U.S. dollar and the euro, such fluctuations may result in currency exchange rate losses. Fluctuations in exchange rates could result in our realizing a lower profit margin on sales of our product candidates than we anticipate at the time of entering into commercial agreements. Adverse movements in exchange rates could have a material adverse effect on our financial condition and results of operations.

     A 1% change in the value of foreign currencies as compared the U.S. dollar to in which we had sales, income or expense in 2010 would have increased or decreased the translation of foreign sales by $0.9 million and income by $0.1 million.

We might be impacted by unfavorable decisions in proceedings related to future tax assessments.

     We operate in a number of jurisdictions and are from time to time subject to audits and reviews by various taxation authorities with respect to income, consumption, payroll and other taxes and remittances, for current as well as past periods. Accordingly, we may become subject to future tax assessments by various authorities. Any amount we might be required to pay in connection with a future tax assessment may have a material adverse effect on our financial position, cash flows or overall results of operations. There is a possibility of a material adverse effect on the results of operations of the period in which the matter is ultimately resolved, if it is resolved unfavorably, or in the period in which an unfavorable outcome becomes probable and reasonably estimable.

RISKS RELATED TO OUR INDEBTEDNESS

We may need additional capital.

     We believe that our current cash and cash equivalents, together with cash generated from the sale of our products will be sufficient to fund our operations for fiscal year 2011. Our future capital requirements will depend on many factors, including but not limited to:

	•		any impact on us of current conditions and uncertainties in the economy;
	•		patient and physician demand for our products;
	•		the status of competitive products, including current and potential generics;
	•		the results, costs and timing of our research and development activities, regulatory approvals and product launches;
	•		our ability to reduce our costs in the event product demand is less than expected, or regulatory approvals are delayed or more expensive than expected;
	•		the number of products and/or companies we acquire or in-license;
	•		the actual amounts of returns we receive compared to our current estimates; and
	•		our ability to maintain our current credit facility.

     If we need additional capital, we might seek additional debt to fund our operations or acquisitions. If we incur more debt, we might be restricted in our ability to raise additional capital and be subject to financial and restrictive covenants. We might also enter into additional collaborative arrangements that could provide us with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. We might not be able to enter into such arrangements or raise any additional funds on terms favorable to us or at all, especially in the current economic environment.

Our substantial level of indebtedness could materially adversely affect our ability to generate sufficient cash to fulfill our obligations under our existing indebtedness, our ability to react to changes in our business and our ability to incur additional indebtedness to fund future needs.

     We have a substantial amount of indebtedness. As of September 30, 2010, our total indebtedness was $594.5 million and we had an additional $115.0 million of borrowing capacity available under our senior secured revolving credit facility. The following chart shows our level of indebtedness as of September 30, 2010.

($ in millions of dollars)
Debt:
Senior secured term loan facility(1)		$	135.2
Senior secured revolving credit facility			0
Secured Notes(2)			226.2
Senior Notes(3)			233.1
Total		$	594.5

     In addition, we have significant other commitments, including milestone and royalty payments. See Note 19 in “Notes to Consolidated Financial Statements”. As of September 30, 2010, we had outstanding approximately $135.2 million in aggregate principal amount of indebtedness under our senior secured credit facilities that would bear interest at a floating rate. Although we may enter into interest rate swap agreements, and did enter into an interest rate swap on February 28, 2008, related to $115.0 million under our senior secured revolving credit facility, we are exposed to interest rate increases on the floating portion of our senior secured credit facility that is

not covered by an interest rate swap. Effective March 3, 2008, we entered into two pay-fixed, receive-floating interest rate swap agreements, effectively converting $115 million of variable-rate debt under our secured senior credit facilities to fixed-rate debt. Through the first two quarters of 2008, our two interest rate swaps were designated as effective hedges of cash flows. For the quarter ended September 30, 2008, due to the increased volatility in short-term interest rates and a realignment of our LIBOR rate election on our debt capital repayment schedule, hedge accounting was discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge accounting. On December 1, 2008, we redesignated our $50 million notional interest rate swap that matures in February 2010 anew as a cash flow hedge using an improved method of assessing the effectiveness of the hedging relationship. Our $65 million notional interest rate swap matured in February 2009. Effective March 2009, we entered into a pay-fixed, receive-floating interest rate swap of a notional amount of $52 million amortizing to $13 million through February 2010. During the fiscal year ended September 30, 2010, our two interest rate swaps with a combined $63 million notional that were designated as cash flow hedges of interest rate risk matured during the quarter ended March 31, 2010 and we have not entered into any new derivative agreement. The weighted average fixed interest rate on these swaps was 1.91%. Absent any such interest rate swap agreements, a change of 1/8% in floating rates would affect our annual interest expense on the senior secured borrowings by approximately $0.2 million. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk”.

     Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other financial obligations and contractual commitments, could have important consequences for our note holders. For example, it could:

	•		make it more difficult for us to satisfy our obligations with respect to our indebtedness, including the notes, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the indentures governing the notes and the agreements governing such other indebtedness;
	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other purposes;
	•		increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness;
	•		limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
	•		limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes; and
	•		prevent us from raising the funds necessary to buy back all notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indentures governing the notes.

We, including our subsidiaries, have the ability to incur substantially more indebtedness, including senior secured indebtedness.

     Subject to the restrictions in our senior secured credit facilities and the indentures governing the notes, we, including our subsidiaries, may incur significant additional indebtedness. As of September 30, 2010:

	•		we had $361.4 million of senior secured debt, including borrowings under our senior secured credit facilities, and the secured notes;
	•		we had $233.1 million of senior unsecured indebtedness under the senior notes;
	•		we had approximately $115.0 million available for borrowing under our senior secured revolving credit facilities, which, if borrowed, would be senior secured indebtedness; and
	•		subject to our compliance with certain covenants under the terms of our senior secured credit facility, we have the option to increase the senior secured term loan facility by up to $75 million without satisfying any additional financial tests under the indentures governing the notes, which, if borrowed, would be senior secured indebtedness.

     Although the terms of our senior secured credit facilities and the indentures governing the notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. If we and our restricted subsidiaries incur significant additional indebtedness, the related risks that we face could increase.

Restrictions imposed by the indentures governing the notes, our senior secured credit facilities and our other outstanding indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

     The terms of our senior secured credit facilities and the indentures governing the notes restrict us and our subsidiaries from engaging in specified types of transactions. These covenants restrict our ability and the ability of our restricted subsidiaries, among other things, to:

	•		incur or guarantee additional indebtedness;
	•		pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness;

	•		make investments, loans, advances and acquisitions;
	•		create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries;
	•		engage in transactions with our affiliates;
	•		sell assets, including capital stock of our subsidiaries;
	•		consolidate or merge; and
	•		create liens.

     In addition, the agreements governing our senior secured credit facilities require us to comply with certain financial ratio maintenance covenants. Our ability to comply with these ratios can be affected by events beyond our control, and we may not be able to satisfy them. A breach of any of these covenants would be an event of default. In the event of a default under any of our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the agreements governing our senior secured credit facilities to be immediately due and payable or terminate their commitments to lend additional money. If the indebtedness under our senior secured credit facilities accelerates, the indebtedness under the notes would also accelerate and our assets may not be sufficient to repay such indebtedness in full. In particular, holders of senior notes will be paid only if we have assets remaining after we pay amounts due on our secured indebtedness, including our senior secured credit facilities and the secured notes. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities and the secured notes.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

     Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.

     If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indentures governing the notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit facilities and the indentures governing the notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our debt service obligations.

Our note holders’ right to receive payments on the senior notes is effectively junior to the right of lenders who have a security interest in our assets to the extent of the value of those assets.

     Our obligations under the senior notes and our guarantors’ obligations under their guarantees of the senior notes are unsecured, but our obligations under our senior secured credit facilities and the secured notes and each guarantor’s obligations under its guarantee of our senior secured credit facilities and secured notes are secured by a security interest in substantially all of our domestic tangible and intangible assets, including the stock of substantially all of our wholly-owned U.S. subsidiaries and all or a portion of the stock of certain of our non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior secured credit facilities or the secured notes, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the senior notes, even if an event of default exists under the indenture governing the senior notes at such time. Furthermore, if the lenders foreclose and sell the pledged equity interests in any guarantor under the senior notes, then that guarantor will be released from its guarantee of the senior notes automatically and immediately upon such sale. In any such event, because the senior notes will not be secured by any of our assets or the equity interests in the guarantors, it is possible that there would be no assets remaining from which our note holders’ claims could be satisfied or, if any assets remained, they might be insufficient to satisfy our note holders’ claims in full.

     As of September 30, 2010, we had:

	•		$361.4 million of senior secured debt, including borrowings under our senior secured credit facilities, and the secured notes;
	•		an additional $115.0 million of borrowing capacity under our senior secured revolving credit facility, which, if borrowed, would be senior secured indebtedness; and
	•		subject to our compliance with certain covenants under the terms of our senior secured credit facilities, the option to increase our senior secured term loan facility by up to $75 million, which, if borrowed, would be senior secured indebtedness.

     Subject to the limits set forth in the indentures governing the notes, we may also incur additional secured debt.

Our ability to repay our debt is affected by the cash flow generated by our subsidiaries.

     Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries will not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures governing the notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes.

Claims of note holders will be structurally subordinated to claims of creditors of certain of our subsidiaries that will not guarantee the notes.

     The notes are not guaranteed by certain of our subsidiaries, including all of our significant non-U.S. subsidiaries (other than Axcan Pharma Inc.). Accordingly, claims of holders of the notes will be structurally subordinated to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. All obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon liquidation or otherwise, to us or a guarantor of the notes.

     For fiscal year 2010, our non-guarantor subsidiaries accounted for approximately $64.0 million, or 18.0% of our consolidated revenue. As of September 30, 2010, our non-guarantor subsidiaries accounted for approximately $168.4 million, or 23.6% of our consolidated total assets and $13.2 million, or 1.8% of our consolidated total liabilities. All amounts are presented after giving effect to intercompany eliminations. The indentures governing the notes permit these subsidiaries to incur certain additional debt and does not limit, or will not limit, their ability to incur other liabilities that are not considered indebtedness under the indentures.

The lenders under our senior secured credit facilities have the discretion to release any guarantors under these facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes.

     While any obligations under our senior secured credit facilities remain outstanding, any guarantee of the notes may be released without action by, or consent of, any holder of the notes or the trustee under the indentures governing the notes, at the discretion of lenders under our senior secured credit facilities, if the related guarantor is no longer a guarantor of obligations under our senior secured credit facilities or any other indebtedness. The lenders under our senior secured credit facilities have the discretion to release the guarantees under our senior secured credit facilities in a variety of circumstances. Any of our subsidiaries that is released as a guarantor of our senior secured credit facilities will automatically be released as a guarantor of the notes. Our note holders will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of note holders.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.

     Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness (including covenants in our senior secured credit facilities and the indentures governing the notes), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facilities and the indentures governing the notes. In the event of such default:

	•		the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;
	•		the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and
	•		we could be forced into bankruptcy or liquidation.

     If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

We may not be able to repurchase the notes upon a change of control.

     Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest, if any. The source of funds for any such purchase of the notes will be our available cash or cash generated from our operations or the operations of our subsidiaries or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Further, under the terms of our senior secured credit facilities, a change of control is an event of default that permits lenders to accelerate the maturity of borrowings and requires us to offer to repay loans thereunder. Any of our future debt agreements may contain similar provisions. Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our senior secured credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indentures governing the notes and a cross-default under our senior secured credit facilities.

Insolvency and fraudulent transfer laws and other limitations may preclude the recovery of payment under the notes and the guarantees.

     Federal bankruptcy and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of any guarantees. In addition, insolvency, fraudulent transfer and conveyance statutes in Canada, the Netherlands and Luxembourg may apply to the incurrence of the guarantees by our subsidiaries organized in these countries. Although laws differ among these jurisdictions, in general, under applicable fraudulent transfer or conveyance laws, the notes or guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors; (2) in the case of a guarantee incurred by any of our foreign subsidiaries, such subsidiary issued the guarantee in a situation where a prudent businessperson as a shareholder of such a subsidiary would have contributed equity to such subsidiary; or (3) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the guarantees and, in the case of (3) only, one of the following is also true:

	•		We or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the guarantees or subsequently become insolvent for other reasons.
	•		The issuance of the notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business.
	•		We or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay such debts as they mature.
	•		We or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

     A court could find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or such guarantor did not substantially benefit directly or indirectly from the issuance of the notes or the applicable guarantee. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the debtor. In addition, because the debt was incurred for our benefit, and only indirectly for the benefit of the guarantors, a court could conclude that the guarantors did not receive fair value.

     Different jurisdictions evaluate insolvency on various criteria. Generally, however, an entity would be considered insolvent if, at the time it incurred indebtedness,

	•		the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;
	•		the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
	•		it could not pay its debts as they become due.

     We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the senior notes and the incurrence of the guarantees would not be held to constitute fraudulent transfers or conveyances on other grounds. If a court were to find that the issuance of the notes or the incurrence of the guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or further subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the notes to repay any amounts received with respect to such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, our note holders may not receive any repayment on the notes.

     Although each guarantee entered into by a guarantor will contain a provision intended to limit that guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not

be effective to protect those guarantees from being voided under fraudulent transfer or conveyance laws, or may reduce that guarantor’s obligation to an amount that effectively makes its guarantee worthless.

     In addition, enforcement of any of the guarantees against any guarantor will be subject to certain other defenses available to guarantors generally. These laws and defenses include those that relate to voidable preference, financial assistance, corporate purpose or benefit, preservation of share capital, thin capitalization, and regulations or defenses affecting the rights of creditors generally. If one or more of these laws and defenses are applicable, a guarantor may have no liability or decreased liability under its guarantee.

Enforcing our note holders’ rights under the guarantees entered into by certain of our foreign subsidiaries across multiple jurisdictions may be difficult.

     We are a U.S. company incorporated in the state of Delaware. The notes are guaranteed by all of our significant U.S. subsidiaries and certain of our foreign subsidiaries in Canada, the Netherlands and Luxembourg. In the event of bankruptcy, insolvency or a similar event, proceedings could be initiated in any of these jurisdictions and in the jurisdiction of organization of any future guarantor of the notes. Our note holders’ rights under the notes and the guarantees will thus be subject to the laws of several jurisdictions, and they may not be able to effectively enforce our note holders’ rights in multiple bankruptcies, insolvency and other similar proceedings. Moreover, such multi jurisdictional proceedings are typically complex and costly for creditors and often result in substantial uncertainty and delay in the enforcement of creditors’ rights.

We are indirectly owned and controlled by the Sponsor, and the Sponsor’s interests as equity holders may conflict with the interests of our note holders.

     The Sponsor owns approximately 70% of our indirect parent’s equity and, accordingly, has the ability to control our policies and operations. The Sponsor does not have any liability for any obligations under the notes, and the interests of the Sponsor may not in all cases be aligned with our note holders’ interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with our note holders’ interests. In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our note holders. Furthermore, the Sponsor may in the future own businesses that directly or indirectly compete with us. The Sponsor also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. For information concerning our arrangements with the Sponsor, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

Holders of secured notes may not be able to fully realize the value of their liens.

The security for the benefit of holders of secured notes may be released without such holders’ consent.

     The liens for the benefit of the holders of secured notes may be released without vote or consent of such holders, as summarized below:

	•		The security documents generally provide for an automatic release of all liens on any asset that is disposed of in compliance with the provisions of the senior secured credit facilities.
	•		Any lien can be released if approved by the requisite number of lenders under our senior secured credit facilities.
	•		The collateral agent and the issuer may amend the provisions of the security documents with the consent of the requisite number of lenders under our senior secured credit facilities and without consent of the holders of secured notes.
	•		The lenders under our senior secured credit facilities will have the sole ability to control remedies (including upon sale or liquidation of the collateral after acceleration of the secured notes or debt under the senior secured credit facilities) with respect to the collateral.
	•		So long as we have the senior secured credit facilities or another senior secured credit facility, the secured notes will automatically cease to be secured by those liens if those liens no longer secure our senior secured credit facilities for other reasons.

     As a result, we cannot assure holders of secured notes that the secured notes will continue to be secured by a substantial portion of our assets. Holders of secured notes will have no recourse if the lenders under our senior secured credit facilities approve the release of any or all of the collateral, even if that action adversely affects any rating of the secured notes.

     In addition, securities of our subsidiaries will be excluded from the liens to the extent liens thereon would trigger reporting obligations under Rule 3-16 of Regulation S-X, which requires financial statements from any company whose securities are collateral if its book value or market value would exceed 20% of the principal amount of the notes secured thereby. However, the liens on such securities will continue to secure obligations under our senior secured credit facilities.

The collateral may not be valuable enough to satisfy all the obligations secured by the collateral.

     We secured our obligations under the secured notes by the pledge of certain of our assets. This pledge is also for the benefit of the lenders under the senior secured credit facilities.

The value of the pledged assets in the event of a liquidation will depend upon market and economic conditions, the availability of

buyers and similar factors. As of September 30, 2010, before taking into consideration the effect of intercompany eliminations, the pledged assets had a book value of approximately $1,952.7 million, approximately $347.6 million of which consisted of intangible assets, including goodwill. Accordingly, we cannot assure holders of secured notes that the proceeds of any sale of the pledged assets following an acceleration to maturity with respect to the secured notes would be sufficient to satisfy, or would not be substantially less than, amounts due on the secured notes and the other debt secured thereby.

     If the proceeds of any sale of the pledged assets were not sufficient to repay all amounts due on the secured notes, the holders of secured notes (to the extent their secured notes were not repaid from the proceeds of the sale of the pledged assets) would have only an unsecured claim against our remaining assets. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. Likewise, we cannot assure holders of secured notes that the pledged assets will be saleable or, if saleable, that there will not be substantial delays in their liquidation. To the extent that liens, rights and easements granted to third parties encumber assets located on property owned by us or constitute subordinate liens on the pledged assets, those third parties may have or may exercise rights and remedies with respect to the property subject to such encumbrances (including rights to require marshalling of assets) that could adversely affect the value of the pledged assets located at that site and the ability of the collateral agent to realize or foreclose on the pledged assets at that site.

     In addition, the indenture governing the secured notes permits us, subject to compliance with certain financial tests, to issue additional secured debt, including debt secured equally and ratably by the same assets pledged for the benefit of the holders of secured notes. This would reduce amounts payable to holders of secured notes from the proceeds of any sale of the collateral.

Bankruptcy laws may limit the ability of holders of secured notes to realize value from the collateral.

     The right of the collateral agent to repossess and dispose of the pledged assets upon the occurrence of an event of default under the indenture is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the collateral agent repossessed and disposed of the pledged assets. For example, under Title 11 of the U.S. Code, or the U.S. Bankruptcy Code, pursuant to the automatic stay imposed upon the bankruptcy filing, a secured creditor is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, or taking other actions to levy against a debtor, without bankruptcy court approval. Moreover, the U.S. Bankruptcy Code permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances (and is within the discretion of the bankruptcy court), but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the collateral as a result of the automatic stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. Generally, adequate protection payments, in the form of interest or otherwise, are not required to be paid by a debtor to a secured creditor unless the bankruptcy court determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. Due to the imposition of the automatic stay, the lack of a precise definition of the term “adequate protection” and the broad discretionary powers of a bankruptcy court, it is impossible to predict (1) how long payments under the secured notes could be delayed following commencement of a bankruptcy case, (2) whether or when the collateral agent could repossess or dispose of the pledged assets or (3) whether or to what extent holders of the secured notes would be compensated for any delay in payment or loss of value of the pledged assets through the requirement of “adequate protection.” Similar and other provisions of Canadian, Dutch and Luxembourg bankruptcy laws may preclude holders of secured notes to realize value from the collateral granted by foreign subsidiaries in Canada, the Netherlands and Luxembourg.

The collateral is subject to casualty risks and no mortgage title insurance has been obtained.

     We are obligated under our senior secured credit facilities to at all times cause all the pledged assets to be properly insured and kept insured against loss or damage by fire or other hazards to the extent that such properties are usually insured by corporations operating properties of a similar nature in the same or similar localities. There are, however, some losses, including losses resulting from terrorist acts, which may be either uninsurable or not economically insurable, in whole or in part. As a result, we cannot assure holders of secured notes that the insurance proceeds will compensate us fully for our losses. If there is a total or partial loss of any of the pledged assets, we cannot assure holders of secured notes that the proceeds received by us in respect thereof will be sufficient to satisfy all the secured obligations, including the secured notes.

     In the event of a total or partial loss to any of the mortgaged facilities, certain items of equipment and inventory may not be easily replaced. Accordingly, even though there may be insurance coverage, the extended period needed to manufacture replacement units or inventory could cause significant delays.

     Additionally, we are not required under our senior secured credit facilities and the security documents to purchase any title insurance insuring the collateral agent’s lien on the respective mortgaged properties if the costs of creating or perfecting liens would be considered excessive in view of the benefits obtained therefrom by the lenders under the senior secured credit facilities. If a loss occurs arising from a title defect with respect to any mortgaged property, we cannot assure holders of secured notes that we could replace such property with collateral of equal value.

Rights of holders of secured notes in the collateral may be adversely affected by the failure to perfect security interests in collateral.

     Applicable law requires that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The liens in the collateral securing the secured notes may not be perfected with respect to the claims of the secured notes if the collateral agent was not able to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing the secured notes. There can be no assurance that the lenders under the senior secured credit facilities have taken all actions necessary to create properly perfected security interests, which may result in the loss of the priority of the security interest in favor of the holders of the secured notes to which they would otherwise have been entitled. In addition, applicable law requires that certain property and rights acquired after the grant of a general security interest, such as real property, equipment subject to a certificate of title and certain proceeds, can only be perfected at the time such property and rights are acquired and identified. We and the guarantors have limited obligations to perfect the security interest of the holders of secured notes in specified collateral. There can be no assurance that the trustee or the collateral agent for the secured notes will monitor, or that we will inform such trustee or collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. Neither the trustee nor the collateral agent for the secured notes has an obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest. Such failure may result in the loss of the security interest in the collateral or the priority of the security interest in favor of the secured notes against third parties.

Any future pledge of collateral in favor of the holders of secured notes might be voidable in bankruptcy.

     Any future pledge of collateral in favor of the holders of secured notes, including pursuant to security documents delivered after the date of the indenture governing the secured notes, might be voidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, under the U.S. Bankruptcy Code, if the pledgor is insolvent at the time of the pledge, the pledge permits the holders of secured notes to receive a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced with 90 days following the pledge, or, in certain circumstances, a longer period. Similar and other provisions of Canadian, Dutch and Luxembourg bankruptcy laws may make any future pledge of collateral granted by foreign subsidiaries in Canada, the Netherlands and Luxembourg voidable.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

     We own and lease space for manufacturing, warehousing, research, development, sales, marketing, and administrative purposes. All these facilities are inspected on a regular basis by regulatory authorities, and our own internal auditing team ensures compliance on an ongoing basis with such standards.

     We own 107,000 square feet of office space, manufacturing facilities and warehousing in Mont-Saint-Hilaire, Quebec (Canada). The building houses administrative and pharmaceutical manufacturing operations as well as our research and development activities. We further own property next to that building, which could be used to expand. The building and real estate we own is subject to security granted in favor of our lenders, pursuant to the credit facilities described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources.”

     We own 606,837 square feet of office space, manufacturing facilities and land in Houdan, France.

     We lease approximately 18,233 square feet of office space in Birmingham, Alabama, (U.S.A.) under a lease expiring in December 2013.

     We lease approximately 18,584 square feet of office space in Bridgewater, New Jersey, (U.S.A.), under a lease expiring in June 2014.

     We believe that we have sufficient facilities to conduct our operations during fiscal year 2011 and that our facilities are in satisfactory condition and are suitable for their intended use, although investments to improve and expand our manufacturing and other related facilities are contemplated, as our business requires.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, we are party to various legal proceeding or claims, either asserted or unasserted, which arise in the ordinary course of business. We have reviewed pending legal matters and believe that the resolution of such matters will not have a significant adverse effect on our financial condition or results of operations.

     One of our subsidiaries, Axcan Scandipharm (now Axcan Pharma US, Inc.), has been a party to several legal proceedings related to the product line it markets under the trademark ULTRASE and, in particular, with respect to dosage strengths that are no longer marketed by us.

These lawsuits were filed and claims were asserted against Axcan Scandipharm and other defendants, including the products’ manufacturer and a related company and, in certain cases, the manufacturers and distributors of other similar enzyme products, stemming from allegations that, among other things, the defendant’s enzyme products caused colonic strictures. In October 2006, in O’Mahony v. Axcan Scandipharm, Inc., et al., a complaint alleging a claim for damages related to products taken in the early part of the 1990’s, while the plaintiff was a minor, was filed in the Supreme Court of the state of New York. This complaint was settled in March 2009. Of the twelve other previous lawsuits, the last of which was filed in 2001, Axcan Scandipharm was dismissed from one, non-suited in another and settled ten. All these cases relates to product taken in or before early 1994. Because of the young age of the patients involved, Axcan Scandipharm’s product liability exposure for this issue in the U.S. will remain for a number of years. Axcan Scandipharm’s insurance carriers have defended the lawsuits to date and we expect them to continue to defend Axcan Scandipharm (to the extent of its product liability insurance) should other lawsuits be filed in the future. In addition, the enzyme manufacturer and a related company had claimed a right to recover amounts paid by them to defend and settle these claims and seeking a declaration that we were required to provide indemnification. These claims were submitted to binding arbitration and we were successful in obtaining a ruling which dismissed those claims. The arbitrators’ final ruling in the matter was appealed by one of the plaintiffs and in January 2010, the Court dismissed the appeal and further awarded damages to the defendants, including Axcan Scandipharm Inc., to compensate for certain legal fees incurred in defending the matter.

     In December 2003 and May 2004, Pharmascience Inc., or PMS, served us two notices of allegation in accordance with section 5 of the Patented Medicines (Notice of Compliance) Regulations in Canada, or the Regulations. The first notice of allegation indicated that PMS was seeking a regulatory approval to market a generic version of URSO 250 in the Canadian market, or the PMS Product, for use in gallstone dissolution, an indication for which URSO 250 was formerly approved and marketed in Canada. The second notice of allegation dealt with the validity of our Canadian PBC use patent. We opposed both these notices of allegation by seeking prohibition orders. In September 2005, with respect to the first notice of allegation, the Federal Court of Canada held that, for purposes of the Regulations, the PMS Product did not infringe the patent that we own for the use of URSO in the treatment of PBC.

     In May 2006, the second application seeking a prohibition order was dismissed as our Canadian PBC use patent was held to be invalid for purposes of the Regulations. PMS has since filed a claim against us pursuant to section 8 of the Regulations seeking recovery of alleged damages sustained by reason of the delay to commercialize its product sustained as a result of our opposition.

     In September 2010, one of our subsidiaries, and our indirect parent, received notice of sanofi-aventis U.S. LLC’s (“SA”) complaint filed with the Superior Court of New Jersey, Somerset County, requesting certain remedies in connection with SA’s stated intention to close its Kansas City facility where CARAFATE product is currently manufactured. The supply agreement with SA, as amended, provides that the CARAFATE product’s manufacturing site may not be changed without our subsidiary’s prior written consent. Pursuant to the complaint filed, SA is seeking an order for specific performance compelling the defendants to consent to the transfer of the manufacturing site of CARAFATE product to an alleged SA facility located in Laval, Canada and to execute related documentation, and for a declaration that SA will not be liable, including for lost profits, for any interruption in supply by reason of the current site’s closure or by reason of a site transfer to Laval. Our subsidiary removed the case to the United States District Court for the District of New Jersey; SA has moved to remand the case back to the Superior Court of New Jersey. The defendants believe that SA’s claims lack merit, and that under the supply agreement as amended, our subsidiary is entitled to have CARAFATE product continue to be manufactured at the Kansas City site until the expiry of that agreement as amended which, assuming our subsidiary exercises its option to extend the term as amended, will be in August 2016. Because of ongoing discussions and by agreement of the parties extending deadlines in the case, the defendants have yet to file responses to the SA complaint, including any counterclaims, or to file responses to SA’s motion to remand the case.

ITEM 4. (REMOVED AND RESERVED)

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market and other information

     We are a privately-owned company with no established public trading market for our common stock.

Holders

     As of December 16, 2010, there was one holder of our common stock, Axcan MidCo Inc., one holder of Axcan MidCo Inc.’s common stock, Axcan Holdings Inc. and 55 holders of Axcan Holdings Inc.’s common stock. See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for additional information about the ownership of Axcan Holdings Inc.’s common stock.

Dividends

     We are currently restricted in our ability to pay dividends under various covenants of our debt agreements, including our senior secured credit facilities and the indentures governing our notes. Save to the extent required to finance the repurchase by our indirect parent corporation, Axcan Holdings Inc., of stock issued pursuant to our equity-based compensation programs, in connection with the administration of this program, we do not expect for the foreseeable future to pay dividends on our common stock. Any future determination to pay dividends will depend upon, among other factors, our results of operations, financial condition, capital requirements, any contractual restrictions and any other considerations our Board of Directors deems relevant.

ITEM 6. SELECTED FINANCIAL DATA

Transactions

  The February 2008 Transactions

     On November 29, 2007, Axcan Intermediate Holdings Inc., then known as Atom Intermediate Holdings Inc., entered into an Arrangement Agreement with Axcan Pharma Inc., or Axcan Pharma, pursuant to which we agreed to acquire, through an indirect wholly-owned subsidiary, all of the outstanding common stock of Axcan Pharma and enter into various other transactions in accordance with the Plan of Arrangement. We refer to such transactions collectively in this report as the Arrangement.

     The Arrangement was financed through the proceeds from the initial offering of $228.0 million aggregate principal amount of our 9.25% secured notes due in 2015, or the secured notes, the initial borrowings under a credit facility composed of term loans and a revolving credit facility, collectively the new senior secured credit facilities, borrowings under a senior unsecured bridge facility maturing on February 25, 2009, or the senior unsecured bridge facility, equity investments funded by direct and indirect equity investments from the Sponsor Funds, or certain investment funds associated with or designated by TPG Capital, or the Sponsor, certain investors who co-invested with the Sponsor Funds, including investment funds affiliated with certain of the initial purchasers of the outstanding notes, or the Co-investors, and the cash on hand of Axcan Pharma and its subsidiaries. The closing of the offering of the secured notes, the new senior secured credit facilities and the senior unsecured bridge facility occurred substantially concurrently with the closing of the Arrangement on February 25, 2008. We refer to the Arrangement, the closing of the transactions relating to the Arrangement, and our payment of any fees and expenses related to the Arrangement and such transactions collectively in this report as the February 2008 Transactions.

     Subsequent to the February 2008 Transactions, we became an indirect wholly-owned subsidiary of Axcan Holdings Inc., or Holdings, an entity controlled by the Sponsor Funds and the Co-investors, and Axcan Pharma became our indirect wholly-owned subsidiary.

The Refinancing

     On May 6, 2008, we completed our offering of $235.0 million aggregate principal amount of our 12.75% senior unsecured notes due in 2016, or the senior notes. The net proceeds from this offering, along with our cash on hand, were used to repay in full our senior unsecured bridge facility. We refer to this offering of our senior notes, along with the related use of proceeds, as the Refinancing and, collectively, with the February 2008 Transactions, as the Transactions.

Financial Information

     Financial information for the fiscal year ended September 30, 2008, including product revenue, is presented as the mathematical combination of the relevant financial information of the Predecessor (from October 1, 2007, to February 25, 2008) and the Successor (from February 26, 2008, to September 30, 2008) for the period. The financial information presented for the Predecessor is the financial information for Axcan Pharma Inc. and its consolidated subsidiaries and the financial information presented for the Successor is the financial information for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

     Our results of operations for the Predecessor Periods and the Successor Periods should not be considered representative of our future results of operations.

		Successor												Predecessor
										February 26,				October 1,
										2008				2007
		Fiscal Year				Fiscal Year				through				through
		Ended				Ended				September 30,				February 25,				Fiscal Years Ended September 30,
		September 30, 2010				September 30, 2009				2008				2008				2007				2006
		($ in thousands)												($ in thousands)
Statement of Operations Data:
Net product sales		$	354,587			$	409,826			$	223,179			$	158,579			$	348,947			$	292,317
Other Revenue			—				7,113				—				—				—				—
Total Revenue		$	354,587			$	416,939			$	223,179			$	158,579			$	348,947			$	292,317
Cost of goods sold(1)			130,915				103,023				77,227				38,739				83,683				72,772
Selling and administrative expenses(1)(2)			115,033				122,942				88,246				76,198				101,273				93,338
Management Fees			4,412				5,351				99				—				—				—
Research and development expenses(1)(3)			31,715				36,037				17,768				10,256				28,655				39,789
Depreciation and amortization			61,011				60,305				35,579				9,595				22,494				22,823
Acquired in-process research			7,948				—				272,400				—				10,000				—
Partial write-down of intangible assets			107,158				55,665				—				—				—				5,800
Operating Income (loss)			(103,605	)			33,616				(268,140	)			23,791				102,842				57,795
Financial expenses			64,956				69,809				41,513				262				4,825				6,988
Other interest income			(688	)			(389	)			(808	)			(5,440	)			(11,367	)			(5,468	)
Other income			(9,704	)			(3,500	)			—				—				—				—
Loss (gain) on foreign currency			1,247				(328	)			(1,841	)			(198	)			2,352				(1,110	)
Income (loss) before income taxes			(159,416	)			(31,976	)			(307,004	)			29,167				107,032				57,385
Income taxes			10,950				(24,082	)			(17,740	)			12,042				35,567				18,266
Net income (loss)		$	(170,366	)		$	(7,894	)		$	(289,264	)		$	17,125			$	71,465			$	39,119
Balance Sheet Data (at period end):
Cash and cash equivalents		$	161,503			$	126,435			$	56,105			$	348,791			$	179,672			$	55,830
Short-term investments, available for sale			—				—				—				—				129,958				117,151
Total current assets			226,749				250,682				176,980				471,170				402,127				262,378
Total assets			713,177				914,602				944,812				902,384				832,611				695,817
Total short-term borrowings			13,163				30,708				10,938				373				527				681
Total debt			594,475				613,294				622,184				441				649				126,246
Total current liabilities			111,329				121,022				99,300				166,456				104,737				64,617
Total liabilities			734,209				750,838				779,142				206,903				142,414				228,393
Total shareholders’ equity(4)			(21,032	)			163,764				165,670				695,401				690,197				467,424
Statement of Cash Flows Data:
Net cash from (used in):
Operating activities		$	63,120			$	92,382			$	(47,512	)		$	73,245			$	136,102			$	84,334
Investing activities			(6,058	)			(10,600	)			(961,556	)			126,630				(19,415	)			(108,139	)
Financing activities			(21,338	)			(11,594	)			1,066,053				(31,243	)			6,553				(616	)
Other Financial Data:
EBITDA(5)			(34,137	)			97,749				(230,720	)			33,584				122,984				81,728
Adjusted EBITDA(5)			162,397				172,828				84,539				70,119				141,407				92,582

•		EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures, or contractual commitments;
•		EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;
•		EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
•		Adjusted EBITDA reflects additional adjustments as provided in the indentures governing our secured and unsecured notes and new senior secured credit facilities; and
•		Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in our business. Our management compensates for these limitations by relying primarily on the U.S. GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.

		Successor												Predecessor
										February 26,				October 1,
										2008				2007
		Fiscal Year				Fiscal Year				through				through				Fiscal Years Ended
		Ended				Ended				September 30,				February 25,				September 30,
		September 30, 2010				September 30, 2009				2008				2008				2007				2006
		($ in thousands)												($ in thousands)
Net income to EBITDA:
Net income (loss)		$	(170,366	)		$	(7,894	)		$	(289,264	)		$	17,125			$	71,465			$	39,119
Financial expenses			64,956				69,809				41,513				262				4,825				6,988
Interest income			(688	)			(389	)			(808	)			(5,440	)			(11,367	)			(5,468	)
Income taxes expense (benefit)			10,950				(24,082	)			(17,740	)			12,042				35,567				18,266
Depreciation and amortization			61,011				60,305				35,579				9,595				22,494				22,823
EBITDA		$	(34,137	)		$	97,749			$	(230,720	)		$	33,584			$	122,984			$	81,728
EBITDA to Adjusted EBITDA:
EBITDA		$	(34,137	)		$	97,749			$	(230,720	)		$	33,584			$	122,984			$	81,728
Transaction, integration refinancing costs and other payments to third parties(a)			9,058				7,891				12,603				26,489				—				—
Management Fees(b)			4,412				5,351				99				—				—				—
Stock-based compensation expense excluding impact of the unapproved PEPs event(c)			4,540				6,172				7,443				10,046				4,548				3,554
Impairment of intangible assets and goodwill related to the unapproved PEPs event(d)			107,158				—				—				—				—				—
Partial write-down of intangible assets(e)			—				55,665				—				—				—				5,800
Other adjustments related to the unapproved PEPs event(f)			63,418				—				—				—				—				—
Acquired in-process research			7,948				—				272,400				—				10,000				1,500
Loss of disposal and write-down of assets			—				—				—				—				3,875				—
Inventories stepped-up value expensed(g)			—				—				22,714				—				—				—
Adjusted EBITDA(h)		$	162,397			$	172,828			$	84,539			$	70,119			$	141,407			$	92,582

	•		EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures, or contractual commitments;
	•		EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;
	•		EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
	•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
	•		Adjusted EBITDA reflects additional adjustments as provided in the indentures governing our secured and unsecured notes and new senior secured credit facilities; and
	•		Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in our business. Our management compensates for these limitations by relying primarily on the U.S. GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with “Item 6. Selected Financial Data” and the historical audited consolidated financial statements and related notes included elsewhere in this Report. The results of operations for the fiscal years ended September 30, 2010, and September 30, 2009, and the seven-month period ended September 30, 2008, reflect the results of operations for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries (the Successor). The results of operations for the five-month period ended February 25, 2008, reflect the results of operations for Axcan Pharma Inc. and its consolidated subsidiaries (the Predecessor).

Unless the context otherwise requires, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the terms “Axcan”,“Axcan Pharma Inc.”, “Company”, “we”, “us” and “our” refer (i) for the period prior to the consummation of the February 2008 Transactions (as defined in this section), to Axcan Pharma Inc. and its consolidated subsidiaries and (ii) for periods following the consummation of the February 2008 Transactions, to Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

This discussion contains forward-looking statements and involves numerous risk and uncertainties, including but not limited to those described in “Item 1A Risk Factors and Forward-Looking Statements”. Actual results may differ materially from those contained in any forward-looking statements.

Overview

Our Business

We are a specialty pharmaceutical company focused on marketing and selling pharmaceutical products used in the treatment of a variety of gastrointestinal, or GI, diseases and disorders, which are those affecting the digestive tract. Our vision is to become the reference gastrointestinal company, and we hope to achieve this through our mission: to improve the quality of care and health of patients suffering from gastrointestinal diseases and disorders by providing effective therapies for patients and specialized caregivers.

In addition to our marketing activities, we carry out research and development activities on products at late stages of development. These activities are carried out primarily with respect to products we currently market in connection with lifecycle management initiatives, as well as product candidates in late stage of development that we acquired or licensed from third parties. Our focus on products in late-stage development enables us to reduce risks and expenses typically associated with new drug development.

We intend to enhance our position as the leading specialty pharmaceutical company concentrating in the field of gastroenterology by pursuing the following strategic initiatives: 1) growing sales of existing products; 2) launching new products; 3) selectively acquiring or in-licensing complementary products; 4) pursuing growth opportunities through development pipeline; and 5) expanding internationally.

Business Environment

While the ultimate end users of our products are the individual patients to whom our products are prescribed by physicians, our direct customers include a number of large pharmaceutical wholesale distributors and large pharmacy chains. The pharmaceutical wholesale distributors that comprise a significant portion of our customer base sell our products primarily to retail pharmacies, which ultimately dispense our products to the end consumers.

Increasingly, in North America, third-party payors, such as private insurance companies and drug plan benefit managers, aim to rationalize the use of pharmaceutical products and medical treatments, in order to ensure that prescribed products are necessary for the patients’ disorders. Moreover, large drug store chains now account for an increasing portion of retail sales of prescription medicines. The pharmacists and managers of such retail outlets are under pressure to reduce the number of items in inventory in order to reduce costs.

We use a “pull-through” marketing approach that is typical of pharmaceutical companies. Under this approach, our sales representatives actively promote our portfolio products by demonstrating the features and benefits of our products to physicians and, in particular, gastroenterologists who may prescribe our products for their patients. The patients, in turn, take the prescriptions to pharmacies to be filled. The pharmacies then place orders, directly or through buying groups, with the wholesalers, to whom we sell our products.

Our expenses are comprised primarily of selling and administrative expenses (including marketing expenses), cost of goods sold (including royalty payments to those companies from which we license some of our commercialized products), research and development expenses, financial expenses as well as depreciation and amortization.

Since 2005, some U.S. wholesalers have changed their business model from one depending on drug price inflation to a fee-for-service arrangement, whereby manufacturers pay wholesalers a fee for inventory management and other services. These fees typically are a percentage of the wholesaler’s purchases from the manufacturer or a fixed charge per item or per unit. The fee-for-service approach results in wholesalers’ compensation being more stable and volume-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 have reduced their inventories from their historical levels. As a consequence of the new model, manufacturers now realize the benefit of price increases more rapidly in return for paying

wholesalers for the services they provide, on a fee-for-service basis. Fees resulting from distribution services agreements, or DSAs, are deducted from gross sales. We have had DSAs in place with our three largest U.S. wholesalers since the first quarter of fiscal year 2009.

In March 2010, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, known together as the Affordable Care Act, was enacted in the U.S. This legislation contains several provisions that impact our business, which include expanding rebate coverage to managed Medicaid and an increase to the rate of rebates for all our drugs dispensed to Medicaid beneficiaries; expanding the 340(B) drug pricing program requiring drug manufacturers to provide discounted product to reduce the Medicare Part D coverage gap; and assessing a new fee on manufacturers and importers of branded prescription drugs paid for pursuant to coverage provided under specified government programs. The impact of these changes is further discussed below under the “Affordable Care Act” subsection.

On April 29, 2010, we announced that we had taken steps to cease the distribution of ULTRASE MT and VIOKASE, effective April 28, 2010, in response to FDA guidance related to the distribution of unapproved pancreatic enzyme products, or PEPs. The effects of ceasing to distribute these product lines on our financial statements are summarized in the section “Unapproved pancreatic enzyme products (“PEPs”) event” below. Reserves recorded at that time were based on Management’s estimates and, as previously disclosed, were subject to change. We have reflected certain adjustments to these reserves in our financial statements for the fiscal year ended September 30, 2010, in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

The Transactions

The February 2008 Transactions

On November 29, 2007, Axcan Intermediate Holdings Inc., then known as Atom Intermediate Holdings Inc., entered into an Arrangement Agreement with Axcan Pharma Inc., or Axcan Pharma, pursuant to which we agreed to acquire, through an indirect wholly-owned subsidiary, all of the outstanding common stock of Axcan Pharma and enter into various other transactions in accordance with the Plan of Arrangement. We refer to such transactions collectively in this report as the Arrangement or the Acquisition.

On February 25, 2008, the Arrangement was completed and as a result,

	•		each share of Axcan Pharma common stock outstanding was deemed transferred to Axcan Intermediate Holdings Inc. and holders of such common stock received $23.35 per share of Axcan Pharma common stock, or the offer price, in compensation from us, without interest and less any required withholding taxes;
	•		all granted and outstanding options to purchase common stock of Axcan Pharma under Axcan Pharma’s stock plans, other than those options held by Axcan Holdings Inc. or its affiliates, were deemed vested and transferred to Axcan Pharma and cancelled in exchange for an amount in cash equal to the excess, if any, of the offer price over the applicable exercise price for the option for each share of common stock subject to such option, less any required withholding taxes; and
	•		all vested and unvested deferred stock units, or DSUs, and restricted stock units, or RSUs, issued under Axcan Pharma’s stock option plans, were deemed vested and then cancelled and terminated. Each holder of a DSU or RSU received the offer price, less any required withholding taxes, for each DSU and RSU formerly held.

The Arrangement was financed through the proceeds from the initial offering of $228.0 million aggregate principal amount of our 9.25% secured notes due in 2015, or the secured notes, the initial borrowings under a credit facility (the “Credit Facility”) composed of term loans and a revolving credit facility, collectively the new senior secured credit facilities, borrowings under a senior unsecured bridge facility maturing on February 25, 2009, or the senior unsecured bridge facility, equity investments funded by direct and indirect equity investments from the Sponsor Funds, or certain investment funds associated with or designated by TPG Capital (“TPG”), or the Sponsor, certain investors who co-invested with the Sponsor Funds, including investment funds affiliated with certain of the initial purchasers of the outstanding notes, or the Co-investors, and the cash on hand of Axcan Pharma and its subsidiaries. The closing of the offering of the secured notes, the new senior secured credit facilities and the senior unsecured bridge facility occurred substantially concurrently with the closing of the Arrangement on February 25, 2008. We refer to the Arrangement, the closing of the transactions relating to the Arrangement, and our payment of any fees and expenses related to the Arrangement and such transactions collectively in this report as the February 2008 Transactions.

Subsequent to the February 2008 Transactions, we became an indirect wholly-owned subsidiary of Axcan Holdings Inc., or Holdings, an entity controlled by the Sponsor Funds and the Co-investors, and Axcan Pharma became our indirect wholly-owned subsidiary.

The Refinancing

On May 6, 2008, we completed our offering of $235.0 million aggregate principal amount of our 12.75% senior unsecured notes (“Senior Unsecured Notes”) due in 2016, or the senior notes. The net proceeds from this offering, along with our cash on hand, were used to repay in full our senior unsecured bridge facility. We refer to this offering of our senior notes, along with the related use of proceeds, as the Refinancing and, collectively, with the February 2008 Transactions, as the Transactions.

In connection with the Transactions, we incurred significant indebtedness. See “Liquidity and Capital Resources”. In addition, we accounted for the acquisition as a business combination and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.

The final purchase price allocation is as follows (in millions of U.S. dollars):

		$
Cash			348.8
Inventories			54.1
Other current assets			91.9
Property, plant and equipment			36.9
Intangible assets			581.7
Acquired in-process research			272.4
Goodwill			169.6
Deferred debt issue expenses			0.9
Deferred income tax assets			7.2
Current liabilities			(174.5	)
Long-term debt			(0.1	)
Deferred income tax liabilities			(81.6	)
Total			1,307.3

Presentation of Financial Information

In this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when financial information for the fiscal year ended September 30, 2008, is presented, including the results of operations, the information presented is the mathematical combination of the relevant financial information of the Predecessor (from October 1, 2007, to February 25, 2008) and the Successor (from February 26, 2008, to September 30, 2008) for such period. This mathematical combination is presented because we believe it assists in a reader’s analysis of our fiscal years 2010 and 2009 results as compared to our fiscal year 2008 results in comparable time periods. However, this approach is not consistent with U.S. GAAP and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the February 2008 Transactions and the lack of substantial debt outstanding of the Predecessor as compared to the Successor. In addition, the “combined” financial information has not been prepared as pro forma information and does not reflect all of the adjustments that would be required if the results and cash flows for the period were reflected on a pro forma basis. Furthermore, this financial information may not reflect the actual financial results we would have achieved if the February 2008 Transactions had occurred prior to such period and may not be predictive of future financial results.

FINANCIAL OVERVIEW FOR FISCAL YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008

This discussion and analysis is based on our audited annual consolidated financial statements and the related notes thereto reported under U.S. GAAP. For a description of our products, see the section entitled “Business Products”.

For the fiscal year ended September 30, 2010, total revenue was $354.6 million ($416.9 million in fiscal year 2009 and $381.8 million in fiscal year 2008), operating loss was $103.6 million ($33.6 million of operating income in fiscal year 2009 and $244.3 million of operating loss in fiscal year 2008) and net loss was $170.4 million ($7.9 million of net loss in fiscal year 2009 and $272.2 million of net loss in fiscal year 2008). Net product sales in the U.S. were $259.0 million (73.0% of net product sales) for the fiscal year ended September 30, 2010, compared to $319.6 million (78.0% of net product sales) for the fiscal year ended September 30, 2009, and $280.4 million (73.4% of net product sales) for the fiscal year ended September 30, 2008. In the European Union, net product sales were $63.2 million (17.8% of net product sales) for the fiscal year ended September 30, 2010, compared to $58.7 million (14.3% of net product sales) for the fiscal year ended September 30, 2009, and $66.0 million (17.3% of net product sales) for the fiscal year ended September 30, 2008. In Canada, net product sales were $32.4 million (9.1% of net product sales) for the fiscal year ended September 30, 2010, compared to $30.9 million (7.5% of net product sales) for the fiscal year ended September 30, 2009, and $34.9 million (9.1% of net product sales) for the fiscal year ended September 30, 2008.

Unapproved pancreatic enzyme products (“PEPs”) event

As previously disclosed, we ceased distributing our ULTRASE MT and VIOKASE product lines in the U.S. effective April 28, 2010. ULTRASE MT and VIOKASE have accounted for approximately 19% of our total net sales in the last three fiscal years ended September 30, 2009.

This action was taken as we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products. . We also interrupted shipments of ULTRASE MT from the U.S. to Canada and export markets to allow time for the FDA to review our request confirming that applicable export requirements were being met. As of September 30, 2010, this interruption of shipments was still in place.

We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our response to this letter, we received a second complete response letter from the FDA in the fourth quarter of fiscal 2009. On May 5, 2010 the FDA issued an additional complete response with respect to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient of ULTRASE MT be addressed before approval can be granted. We have submitted our response to this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA, date for our ULTRASE MT NDA.

The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal 2010. At the time we completed this submission we requested a priority review and the FDA advised us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to complete their review.

On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE MT and VIOKASE be addressed before approval can be granted. The letters also require that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs can be approved. We are in ongoing discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible. However, those remaining issues do not require additional clinical studies.

As a result of taking steps to cease distribution of ULTRASE MT and VIOKASE and in accordance with U.S. GAAP, we recorded an additional $23.4 million sales deduction reserve for the fiscal year ended September 30, 2010. This reserve was an estimate of our liability for ULTRASE MT and VIOKASE that may be returned by the original purchaser under our DSAs or applicable return policies as well as other incremental sales deductions that may be incurred in addition to those previously recorded for ULTRASE MT and VIOKASE prior to the PEPs event. The cease distribution order issued by the FDA was not considered as a product recall. This reserve was based on management estimates of ULTRASE MT and VIOKASE inventory in the distribution channel, assumptions on related expiration dates of this inventory as well as estimated erosion of ULTRASE MT and VIOKASE demand, based on competition from approved PEPs and the resulting estimated sell-through of ULTRASE MT and VIOKASE, actual return activity and other factors. As at September 30, 2010, the remaining PEP liability reserve balance was $11.0 million which is equal to sales value of the estimated remaining inventory in the distribution channel as at September 30, 2010.

We recorded a charge of $44.9 million during the fiscal year ended September 30, 2010, to cost of goods sold to reduce inventories to their net realizable value and for estimated loss for purchase and other materials and supply commitments related to ULTRASE MT and VIOKASE products. We recorded this charge for inventory related to ULTRASE MT and VIOKASE, in light of the fact that these products did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA.

This event has also resulted in a change in circumstance that caused us to review the carrying value of our U.S. reporting unit long lived intangible assets, including goodwill. Based on this review, an impairment charge of $107.2 million was recorded during the fiscal year ended September 30, 2010.

The income tax benefits of the above charges were estimated and an additional $31.1 million was recorded in income taxes benefit during the fiscal year ended September 30, 2010. We also recorded an increase in valuation allowance on deferred tax assets of $57.2 million during the fiscal year ended September 30, 2010.

The charges that we have taken as a result of having ceased distribution of our PEPs reflect many subjective estimates that were required to be made by management. These estimates include:

a)		The quantity and expiration dates of PEPs inventory in the distribution channel;
b)		Short-term prescription demand during the period of time during which the products continued to be available at the pharmacy level;
c)		Assumptions regarding the probability of obtaining an eventual NDA approval for our PEPs and the time required for such approval;
d)		Assumptions regarding market share growth after an eventual re-launch of our PEPs; and
e)		Other factors.

In future periods, we will monitor and review the assumptions and estimates and will prospectively record changes to provisions reflected in the fiscal year ended September 30, 2010.

The following table summarizes the assessment by management of the impacts of our ceasing to distribute ULTRASE MT and VIOKASE, or the “unapproved PEPs event’’ as it is sometimes referred to herein, on our consolidated financial statements of operations for the fiscal year ended September 30, 2010:

		For the fiscal
		year ended
		September 30,
(in millions of U.S. dollars)		2010
		$
Net product sales (increase in product returns)			(23.4	)
Cost of goods sold (inventory net realizable value adjustment and estimated loss for purchase and other materials and supply commitments)			44.9
Impairment of intangible assets and goodwill			107.2
Selling and administrative expenses (decrease in stock-based compensation expense)			(4.9	)
Total operating expenses			147.2
Operating loss			(170.6	)
Income tax expense (tax benefit of above items, net of an increase in valuation allowance)			26.1
Net loss			(196.7	)

Financial highlights

		September 30,				September 30,
(in millions of U.S. dollars)		2010				2009
		$				$
Total assets			713.2				914.6
Long-term debt (a)			594.5				613.3
Shareholders’ equity (deficiency)			(21.0	)			163.8

(a)

Including the current portion

														For the				For the
		For the fiscal				For the fiscal				For the fiscal				seven-month				five-month
		year ended				year ended				year ended				period ended				period ended
		September 30,				September 30,				September 30,				September 30,				February 25,
(in millions of U.S. dollars)		2010				2009				2008				2008				2008
										Combined
										Predecessor/
		Successor				Successor				Successor				Successor				Predecessor
		$				$				$				$				$
Total revenue			354.6				416.9				381.8				223.2				158.6
EBITDA (1)			(34.1	)			97.7				(197.1	)			(230.7	)			33.6
Adjusted EBITDA (1)			162.4				172.8				154.6				84.5				70.1
Net income (loss)			(170.4	)			(7.9	)			(272.2	)			(289.3	)			17.1

(1)

A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA to Adjusted EBITDA (a non-U.S. GAAP measure) for the fiscal years ended September 30, 2010, 2009 and 2008 are as follows:

														For the				For the
		For the fiscal				For the fiscal				For the fiscal				seven-month				five-month
		year ended				year ended				year ended				period ended				period ended
		September 30,				September 30,				September 30,				September 30,				February 25,
(in millions of U.S. dollars)		2010				2009				2008				2008				2008
										Combined
										Predecessor/
		Successor				Successor				Successor				Successor				Predecessor
		$				$				$				$				$
Net income (loss)			(170.4	)			(7.9	)			(272.2	)			(289.3	)			17.1
Financial expenses			65.0				69.8				41.8				41.5				0.3
Interest income			(0.7	)			(0.4	)			(6.2	)			(0.8	)			(5.4	)
Income tax expense (benefit)			11.0				(24.1	)			(5.7	)			(17.7	)			12.0
Depreciation and amortization			61.0				60.3				45.2				35.6				9.6
EBITDA i)			(34.1	)			97.7				(197.1	)			(230.7	)			33.6
Transaction, integration, refinancing costs and other payments to third parties a)			9.0				7.8				39.1				12.6				26.5
Management fees b)			4.4				5.4				0.1				0.1				—
Stock-based compensation expense excluding impact of the unapproved PEPs event c)			4.5				6.2				17.4				7.4				10.0
Impairment of intangible assets and goodwill related to the unapproved PEPs event d)			107.2				—				—				—				—
Partial write-down of intangible assets e)			—				55.7				—				—				—
Other adjustments related to the unapproved PEPs event f)			63.4				—				—				—				—
Acquired in-process research g)			8.0				—				272.4				272.4				—
Inventory stepped-up value expenses h)			—				—				22.7				22.7				—
Adjusted EBITDA i)			162.4				172.8				154.6				84.5				70.1

	•		EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures, or contractual commitments;
	•		EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;
	•		EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
	•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
	•		Adjusted EBITDA reflects additional adjustments as provided in the indentures governing our secured and unsecured notes and new senior secured credit facilities; and
	•		Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in our business. Our management compensates for these limitations by relying primarily on the U.S. GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.

Fiscal year ended September 30, 2010, compared to fiscal year ended September 30, 2009

Overview of results of operations

		For the fiscal				For the fiscal
		year ended				year ended
		September 30,				September 30,
(in millions of U.S. dollars)		2010				2009				Change
		$				$				$				%
Net product sales b)			354.6				409.8				(55.2	)			(13.5	)
Other revenue			—				7.1				(7.1	)			(100.0	)
Total revenue			354.6				416.9				(62.3	)			(14.9	)
Cost of goods sold a) b)			130.9				103.0				27.9				27.1
Selling and administration expenses a) b)			115.0				122.9				(7.9	)			(6.4	)
Management fees			4.4				5.4				(1.0	)			(18.5	)
Research and development expenses a)			31.7				36.0				(4.3	)			(11.9	)
Acquired in-process research			8.0				—				8.0				—
Depreciation and amortization			61.0				60.3				0.7				1.2
Impairment of intangible assets and goodwill b)			107.2				55.7				51.5				92.5
Total operating expenses			458.2				383.3				74.9				19.5
Operating income (loss)			(103.6	)			33.6				(137.2	)			(408.3	)
Financial expenses			65.0				69.8				(4.8	)			(6.9	)
Interest income			(0.7	)			(0.4	)			(0.3	)			(75.0	)
Other income			(9.7	)			(3.5	)			(6.2	)			(177.1	)
Loss (gain) on foreign currencies			1.2				(0.3	)			1.5				500.0
Total other expenses			55.8				65.6				(9.8	)			(14.9	)
Income (loss) before income taxes			(159.4	)			(32.0	)			(127.4	)			(398.1	)
Income taxes expense (benefit) b)			11.0				(24.1	)			35.1				145.6
Net income (loss)			(170.4	)			(7.9	)			(162.5	)			(2,057.0	)

a)		Exclusive of depreciation and amortization
b)		2010 includes charges related to the unapproved PEPs event

Net product sales

For the fiscal year ended September 30, 2010, net product sales were $354.6 million compared to $409.8 million for the preceding fiscal year, a decrease of 13.5%.

This decrease was primarily derived from lower sales in the U.S., which amounted to $259.0 million for the fiscal year ended September 30, 2010, compared to $319.6 million for the preceding fiscal year, a decrease of 19.0%. The decrease in sales in the U.S. is mainly due to the effects of the unapproved PEPs event and the continued decrease in sales of certain of our URSO branded products. This decrease in URSO sales resulted from the entry on the U.S. market of generic versions of URSO 250 and URSO FORTE following their approval by the Office of Generic Drugs on May 13, 2009, combined with increases in sales deductions discussed hereafter in the gross-to-net product sales analysis.

Net product sales in the European Union increased 7.7%, to $63.2 million for the fiscal year ended September 30, 2010, from $58.7 million for the preceding fiscal year. The increase in sales resulted primarily from higher sales volume of DELURSAN, and the introduction of a new product, FLEET PHOSPHO-SODA in our distribution channel.

Net product sales in Canada increased 4.9%, to $32.4 million for the fiscal year ended September 30, 2010, from $30.9 million for the preceding fiscal year. The increase in sales resulted primarily from the positive impact of currency fluctuations compared to the preceding fiscal year, as the value of the Canadian dollar improved against the U.S. dollar by 10.9%. This increase was partially offset by the decrease in sales of certain products.

Net product sales are stated net of deductions for product returns, chargebacks, contract rebates, DSA fees, discounts and other allowances. The following table summarizes our gross-to-net product sales adjustments for each significant category:

		For the fiscal				For the fiscal
		year ended				year ended
		September 30,				September 30,
(in millions of U.S. dollars)		2010				2009				Change
		$				$				$				%
Gross product sales			474.6				503.1				(28.5	)			(5.7	)
Gross-to-net product sales adjustments
Product returns			9.3				10.7				(1.4	)			(13.1	)
Chargebacks			37.3				33.7				3.6				10.7
Contract rebates			36.3				36.5				(0.2	)			(0.5	)
DSA fees			5.6				3.6				2.0				55.6
Discounts and other allowances			8.1				8.8				(0.7	)			(8.0	)
Provisions related to the unapproved PEPs event			23.4				—				23.4				—
Total gross-to-net product sales adjustments			120.0				93.3				26.7				28.6
Total net product sales			354.6				409.8				(55.2	)			(13.5	)

Product returns, contract rebates, DSA fees, discounts and other allowances totalled $120.0 million (25.3% of gross product sales) for the fiscal year ended September 30, 2010, compared to $93.3 million (18.5% of gross product sales) for the preceding fiscal year. The increase in total deductions as a percentage of gross product sales was mainly due to the additional provision of $23.4 million for the fiscal year ended September 30, 2010, related to the unapproved PEPs event and to an increase of 1.2% in chargebacks. The increase in chargebacks is primarily due to Medicaid and the Affordable Care Act.

In May 2009, we entered into an agreement with the Department of Defense, or DOD, to remain eligible for inclusion on the DOD’s formulary and pursuant to which we agreed to pay rebates under the TRICARE retail pharmacy program. We began accounting for these rebates in the third quarter of fiscal year 2009. Under its contracting process, the DOD is further seeking rebates from pharmaceutical manufacturers on all prescriptions of covered prescription drugs filled under TRICARE from January 28, 2008, forward, unless DOD agrees to a waiver or compromise of amounts due. On November 30, 2009, in litigations initiated by third parties seeking to have the DOD’s ability to seek retroactive rebates invalidated, the Court affirmed DOD’s position that it is entitled to retroactive refunds on prescriptions filled on or after January 28, 2008. In October 2010, the DOD affirmed its former rulemaking which was the subject of litigation and its intention to seek to collect rebates for periods prior to the contract date. We have estimated that our exposure to the retroactive rebates claimed by the DOD would not be material and have recorded an accrual in fiscal year 2010.

Deductions also increased due to increases in DSA fees resulting from new DSA agreements signed with two additional U.S. wholesalers during the previous year.

     Affordable Care Act

The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, known together as the Affordable Care Act, enacted in the U.S in March 2010 contain several provisions that could impact our business.

Although many provisions of the new legislation do not take effect immediately, several provisions became effective during the fiscal year ended September 30, 2010. These include (1) an increase in the minimum Medicaid rebate to States participating in the Medicaid program on our branded prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340(B) Public Health Service Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain children’s hospitals, free standing cancer hospitals, critical access hospitals, and rural referral centers.

In addition, beginning in 2011, the new law requires drug manufacturers to provide a 50% discount to Medicare beneficiaries for any covered prescription drugs purchased during a Medicare Part D coverage gap (i.e. the “donut hole”). Also, beginning in 2011, new fees will be assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare Parts B and D, Medicaid, Department of Veterans Affairs and Department of Defense programs and TRICARE retail pharmacy program) made during the previous fiscal year. The aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. The Internal Revenue Service, or IRS, has issued guidance for calculating preliminary fees, but there is still uncertainty as to final implementation, since the IRS has requested public comment and may make changes in response. The new law also imposes a 2.3% excise tax on sales of certain taxable medical devices that are made after December 31, 2012, including our FLUTTER mucus clearance device. Further, effective March 31, 2013, the law requires pharmaceutical, medical device, biological, and medical supply manufacturers to begin reporting to the federal government the payments they make to physicians and teaching hospitals, and physician ownership interests in those entities. The law also provides for the creation of an abbreviated regulatory pathway for FDA approval of biosimilars and interchangeable biosimilar products. While creation of the biosimilars program is authorized as of passage of the legislation in 2010, the process of creating the regulatory pathway for approval of biosimilars will likely be lengthy, and the FDA is in the process of soliciting public input.

The impact in terms of additional reserves recorded in contract rebates has been $1.8 million for the fiscal year ended September 30, 2010. However, we continue to assess the full extent of this legislation’s longer-term impact on our business. While certain aspects of the new legislation implemented in 2010 are expected to reduce our revenues in future years, other provisions of this legislation may offset, at some level, any reduction in revenues when these provisions become effective. In future years, based on our understanding, these other provisions are expected to result in higher revenues due to an increase in the total number of patients covered by health insurance and an expectation that existing insurance coverage will provide more comprehensive consumer protections. This would include a federal subsidy for a portion of a beneficiary’s out-of-pocket cost under Medicare Part D. However, these higher revenues will be negatively impacted by the branded prescription drug manufacturers’ fee.

     Performance of our main product lines

Variations in sales performance in fiscal year 2010 versus the preceding fiscal year were the result of a combination of changes in sales volume as well as price increases.

Key sales figures for our main product lines for the fiscal year 2010 are as follows:

•		Sales of pancreatic enzyme products (ULTRASE, PANZYTRAT and VIOKASE) decreased $44.5 million (39.5%) to $68.3 million from $112.8 million for the preceding fiscal year mainly due to decreases in sales volume as a result of the unapproved PEPs event.
•		Sales of ursodiol products (URSO, URSO 250, URSO FORTE, URSO DS and DELURSAN,) decreased $29.3 million (39.6%) to $44.6 million from $73.9 million for the preceding fiscal year. This decrease resulted mainly in sales volume from the entry of generic versions of URSO 250 and URSO FORTE on the U.S. market, approved by the Office of Generic Drugs on May 13, 2009.
•		Sales of mesalamine products (CANASA and SALOFALK) decreased $3.0 million (2.9%) to $100.7 million from $103.7 million for the preceding fiscal year.
•		Sales of sucralfate products (CARAFATE and SULCRATE) increased $18.0 million (26.3%) to $86.5 million from $68.5 million for the preceding fiscal year. The increase mainly resulted from price increases announced during the preceding fiscal year and, to a lesser extent, from an increase in prescription volumes.
•		Sales of other products increased $3.6 million (7.1%) to $54.5 million from $50.9 million for the preceding fiscal year.

Other revenue

In April 2009, we entered into a license agreement with a leading multi-national company (the “Licensee”) whereby we granted the Licensee the right to use the active ingredient contained in one of our commercialized products, LACTEOL, to develop and commercialize new food products that will contain this active ingredient. Under the terms of the agreement, the Licensee will have exclusive rights to commercialize these new products. We will continue to own all other rights related to the active ingredient, including the right to use the active ingredient and develop,

manufacture and commercialize non-food products containing the active ingredient, including pharmaceutical products. For the fiscal year ended September 30, 2009, we recorded as revenue milestones that we are entitled to receive under the agreements in the amount of $7.1 million.

Cost of goods sold

Cost of goods sold consists principally of the costs of raw materials, royalties and manufacturing. We outsource most of our manufacturing requirements. For the fiscal year ended September 30, 2010, cost of goods sold increased $27.9 million (27.1%) to $130.9 million from $103.0 million for the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the fiscal year ended September 30, 2010, increased compared to the preceding fiscal year from 25.1% to 36.9%. The increase in cost of goods sold is mostly due to adjustments to reduce certain inventory to net realizable value and purchase commitments reserves related to the unapproved PEPs event that amounted to $44.9 million (12.7% of net product sales) for the fiscal year ended September 30, 2010,. Excluding the impact related to the unapproved PEPs event, cost of goods sold as a percentage of net product sales would have been 22.8% for the fiscal year ended September 30, 2010.

Selling and administrative expenses

Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other costs associated with our sales force and marketing activities. For the fiscal year ended September 30, 2010, selling and administrative expenses decreased $7.9 million (6.4%) to $115.0 million from $122.9 million for the preceding fiscal year. This decrease in selling and administrative expenses is mainly due to a reduction of PEPs marketing expenses combined with the adjustment of $6.5 million for stock-based compensation further to changes in assumptions affecting our valuation of these expenses primarily due to the impact of the unapproved PEPs event on our business amounting to $4.9 million. This decrease was partially offset by an increase in non-recurring professional fees.

Management fees

Management fees consist of fees and other charges associated with the Management Services Agreement with TPG. For the fiscal year ended September 30, 2010, management fees decreased $1.0 million (18.5%) to $4.4 million from $5.4 million for the preceding fiscal year. The variance was due to the fact that historically, these fees were previously unallocated to subsidiaries of Axcan Holdings Inc., the indirect parent company of Axcan Intermediate Holdings Inc. In the fiscal year ended September 30, 2009, they were allocated from the closing date of February 2008 Transactions based on revenue.

Research and development expenses

Research and development expenses consist principally of fees paid to outside parties that we use to conduct clinical studies and to submit governmental approval applications on our behalf, as well as the salaries and benefits paid to personnel involved in research and development projects. For the fiscal year ended September 30, 2010, research and development expenses decreased $4.3 million (11.9%) to $31.7 million, from $36.0 million for the preceding fiscal year. The research and development expenses include a reduction in expenses related to the development work on PEPs and European clinical trial costs for PYLERA as compared to the previous fiscal year. This decrease was offset by the effect of foreign currencies on some of our expenses denominated in Canadian dollars and in Euros.

Acquired in-process research

During the fiscal year ended September 30, 2010, we entered into an asset purchase and license agreement to acquire rights in and to the intellectual property, assigned contracts, permits and inventories related to a compound to be used in the development of an undisclosed product in the field of gastroenterology. Certain other rights were licensed under the agreement. Pursuant to the agreement, we made an upfront payment of $8.0 million on closing and will make additional payments of up to $86.0 million may be required based on the achievement of certain development, regulatory and commercialization milestones. In addition, we will pay royalties on the basis of net sales. We completed the asset acquisition in April 2010 and recorded an expense of $8.0 million for the payment of acquired in-process research in the third quarter of fiscal year 2010.

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. For the fiscal year ended September 30, 2010, depreciation and amortization increased $0.7 million (1.2%) to $61.0 million from $60.3 million for the preceding fiscal year.

Impairment of intangible assets and goodwill

The value of goodwill and intangible assets with an indefinite life are subject to an annual impairment test unless events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. The intangible assets with a finite life and property, plant and equipment are subject to an impairment test whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. As a result of the unapproved PEPs event, we compared the carrying value of the intangible assets with a finite life affected by the unapproved PEPs event to estimated future undiscounted cash flows. The change in circumstances associated with the unapproved PEPs event also caused us to review the carrying value of our long lived intangible assets including goodwill. Based on this review,

an impairment charge of $107.2 million was recorded during the fiscal year ended September 30, 2010, reflecting charges of $91.4 million for the goodwill allocated to our U.S. reporting unit and of $15.8 million related to finite life intangible assets.

As a result of certain factors related to the ongoing marketing of certain of our products including the approval of a generic formulation of URSO 250 and URSO FORTE^, during the fiscal year ended September 30, 2009, we reviewed the carrying amount of our intangible assets specifically related to these products. Based on a discounted cash-flow analysis and market prices, we concluded that a $55.7 million reduction to the carrying value of the related intangible assets totalling $83.7 million prior to the write-down was required in that year.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed for acquisitions. For the fiscal year ended September 30, 2010, financial expenses decreased $4.8 million (6.9%) to $65.0 million from $69.8 million for the preceding fiscal year. The decrease in financial expenses is mainly due to the reduction of interest on long-term debt of $3.2 million as a result of the decrease in interest rates combined with lower capital outstanding and the change in the fair value of derivatives of $1.2 million. We also had two interest rate swaps with a combined notional amount of $63.0 million that were designated as cash-flow hedges of interest rate risk. These swaps matured during the three-month period ended March 31, 2010, and were not renewed.

Interest income

For the fiscal year ended September 30, 2010, total interest income increased $0.3 million (75.0%) to $0.7 million from $0.4 million for the preceding fiscal year. This increase is mainly due to the increase in our cash and cash equivalent investments.

Other income

We initiated claims in damages under the U.S. Lanham Act against a number of defendants alleging they falsely advertised their products to be similar or equivalent to ULTRASE. During the fiscal year ended September 30, 2009, a settlement arrangement with respect to these claims was entered into with certain of these defendants and in the second quarter of fiscal 2010, another settlement agreement was entered into with the remaining defendants. Pursuant to each of the agreements, the settling defendants agreed to pay a confidential global amount in one or several installments; all of which have now been paid. Additionally, in the fourth quarter of fiscal year 2010, pursuant to the settlement of another matter in which we were a defendant, we received compensation for legal fees incurred by reason of having to defend against unfounded claims made by the plaintiff. A total amount of $9,704,000 was paid to us during the fiscal year ended September 30, 2010, ($3,500,000 during the fiscal year ended September 30, 2009) in respect of these settlement agreements. These amounts were recorded as other income in the statement of operations.

Income taxes

For the fiscal year ended September 30, 2010, income tax expense amounted to $11.0 million compared to an income tax benefit of $24.1 million for the preceding fiscal year. The effective tax rate was minus 6.9% for the fiscal year ended September 30, 2010, compared to 75.3% for the preceding fiscal year. The effective tax rate for the fiscal year ended September 30, 2010, is affected by a number of elements, the most important being the non-deductible provisions related to the unapproved PEPs event and the valuation allowance taken against deferred tax assets attributable to the U.S. reporting unit. During the fiscal year ended September 30, 2010, we recorded a valuation allowance of $57.5 million against our net deferred tax assets mostly attributable to the U.S. reporting unit. If, in future periods, the deferred tax assets are determined by management to be more likely than not to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded.

The difference between our effective tax rate and the statutory income tax rate is summarized as follows:

		For the fiscal								For the fiscal
		year ended								year ended
		September 30,								September 30,
(in millions of US dollars)		2010								2009
		%				$				%				$
Combined statutory rate applied to pre-tax income (loss)			35.00				(55.8	)			35.00				(11.2	)
Increase (decrease) in taxes resulting from:
Change in promulgated rates			0.01				0.0				(0.91	)			0.3
Difference with foreign tax rates			1.70				(2.7	)			8.10				(2.6	)
Valuation allowance			(36.09	)			57.5				(2.30	)			0.7
Tax benefit arising from a financing structure			11.18				(17.8	)			44.46				(14.2	)
Non-deductible items			(21.89	)			34.9				(9.72	)			3.1
Investment tax credits			0.96				(1.5	)			4.24				(1.3	)
State taxes			1.95				(3.1	)			(0.34	)			0.1
Other			0.31				(0.5	)			(3.22	)			1.0
			(6.87	)			11.0				75.31				(24.1	)