Annual Report



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________________
 
FORM 10-K
______________________
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2009
 
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______to ________
 
 Commission File Number 333-153896
 
______________________

AXCAN INTERMEDIATE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)

74-3249870
 
(IRS Employer Identification Number)

22 Inverness Center Parkway
Suite 310
Birmingham, AL 35242
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number, including area code: (205) 991-8085
 
Securities registered pursuant to Section 12(b) of the Act: NONE
 
Securities registered pursuant to Section 12(g) of the Act: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes                No [X]
 
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 [X]          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 [X] 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
 
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
 
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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.   [X]
 
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
Accelerated filer
Non-accelerated filer [X]
Smaller reporting company

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                No [X]

As of March 31, 2009, 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, 2009, 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.
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  TABLE OF CONTENTS
     
 
Part I
 
5
   
5
Item 1.
Business
5
Item 1a.
Risk Factors
23
Item 1b.
Unresolved Staff Comments
44
Item 2.
Properties
44
Item 3.
Legal Proceedings
44
Item 4.
Submission Of Matters To A Vote Of Security Holders
45
     
Part II
 
46
     
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
46
Item 6.
Selected Financial Data
47
Item 7.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
50
Item 7a.
Quantitative And Qualitative Disclosures About Market Risk
76
Item 8.
Financial Statements And Supplementary Data
77
Item 9.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
125
Item 9a(T).
Controls And Procedures
125
Item 9b.
Other Information
125
     
Part III
 
126
     
Item 10.
 Directors, Executive Officers And Corporate Governance
126
Item 11.
 Executive Compensation
129
Item 12.
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
147
Item 13.
Certain Relationships And Related Transactions,  And Director Independence
149
Item 14.
Principal Accounting Fees And Services
150
     
Part IV
 
151
     
Item 15.
Exhibits And Financial Statement Schedules
151
 
Signatures
152
 
 
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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

 
·
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;
 
·
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 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;
 
·
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.

 
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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 in, or may be accessed through, the “Investor Relations” section of the Company’s website as soon as reasonably practicable after the Company files or furnishes 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. 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” 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 mission is 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 various 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 acquired or licensed from third parties. By combining our marketing capabilities with our research and development experience, we distinguish ourselves from other specialty pharmaceutical companies that focus solely on product distribution and we offer licensors the prospect of rapidly expanding the potential market for their products on a multinational basis. As a result, we are presented with opportunities to acquire or in-license products that have been advanced to the later stages of development by other companies. Our focus on products in late-stage development enables us to reduce risks and expenses typically associated with new drug development.
 
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.
 
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 RSUs received the offer price, less any required withholding taxes, for each DSU and RSUs 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 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.

 
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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.
 
Industry Overview
 
According to a report entitled “ Opportunities & Challenges in Digestive Diseases Research,” (publication of the   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 around the world. Even more worrying, digestive diseases are associated with significant mortality, morbidity and loss of quality of life. Digestive diseases, including cancer of the gastrointestinal tract, are known to be a primary cause of over 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.
 
With a reported $49.9 billion in worldwide revenue in 2007, the GI disorders market has been one of the largest therapeutic areas in the global pharmaceutical industry. It competes consistently with cardiovascular diseases and oncology for the top three therapeutic areas in terms of market value. In the U.S. alone, the total market for GI disorder treatments is expected to amount to $22.8 billion in 2009, an average annual growth rate of approximately 7.3% for the last five years (sales of $16.1 billion for 2004).
 
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 seven product categories that treat a broad range of GI diseases and disorders. During fiscal year 2009, four product lines contributed 67% of our revenues, but no single product line accounted for more than 20% of our revenues. Our portfolio of products is also geographically diverse, with approximately 24% of our revenues being generated from sales outside the U.S. in fiscal year 2009.
 
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, ULTRASE/VIOKASE and PYLERA are currently the Company’s only branded product which are actively promoted in the U.S.; CARAFATE is the only branded suspension-form sucralfate product in its market in the U.S. All these product lines enjoy good market positions in terms of sales in their respective markets: CARAFATE is used to treat gastric and duodenal ulcers and accounted for 43.2% of the U.S. market for sucralfate products in terms of sales in fiscal year 2009; and CANASA is used to treat ulcerative proctitis and colitis and accounted for 67.0% of the U.S. market for rectally-administered mesalamine products in terms of sales in fiscal year 2009. In addition, VIOKASE is the only branded non-enteric-coated pancreatic enzyme product in its market. VIOKASE is used to treat pancreatic insufficiency and it accounted for 19.8%   of the U.S. market for non-enteric-coated pancreatic enzyme products in terms of sales in fiscal year 2009. ULTRASE, our enteric-coated pancreatic enzyme product accounted for 37.0% of the U.S. market for enteric-coated pancreatic enzyme products in term of sales. We believe that our products are often the first line of treatment prescribed by physicians for these diseases and disorders. 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.
 
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Non-Patent Barriers 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 barriers to entry, including, depending upon the product line and the product, the requirement to obtain certain regulatory approvals by a specified date, the requirement to conduct clinical trials, the ability to source certain high-grade active pharmaceutical ingredients and the know-how required to manufacture certain dosage forms. We believe that these barriers to entry may create impediments for generic competitors to introduce and market generic versions of certain of our products, including products from our ULTRASE, VIOKASE, CANASA and CARAFATE 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, 2009, our sales force numbers 163 representatives, located in the U.S., in the EU (including a contracted sales force in Germany devoted exclusively to selling our products) and in Canada.
 
Consistently Strong Historical Organic Growth and High Free Cash Flow Generation. Our business is characterized by strong free cash flows due to our robust operating history and minimal capital intensity. Over the last five fiscal years, we have increased revenue on a consistent basis. In addition, our capital expenditure requirements have historically been minimal, providing for strong free-cash-flow conversion. Over the last six fiscal years, we have generated cumulative free cash flow of approximately $382.1 million. We believe, but cannot guarantee, that our strong free cash flow will enable us to adequately service debt and will provide us with financial flexibility to invest in our business. 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 brings 20 years of experience in the health-care industry. Steve Gannon , our Senior Vice President, Finance, 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. 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. Theresa Stevens joined Axcan Intermediate Holdings as Senior Vice President, Business Development, in June 2009, having played a number of senior business roles at Novartis Pharmaceuticals as Executive Committee member and Vice President, U.S. Business Development and Licensing, Life Cycle Management and Generics-Brands Strategies. Martha Donze has been our Vice President, Corporate Administration, since August 1999, when we acquired Scandipharm, where she had been working since 1993. Ms. Donze has more than 30 years of professional experience in the fields of human resources and communications. Richard Tarte , formerly a partner with the law firm of Coudert Brothers, joined Axcan Pharma as Vice President, Corporate Development, and General Counsel in 2001.
 
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 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 situation as well as the high degree of patient loyalty to our products in order 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,
 
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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 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 the 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
 
Our focus is on the field of gastroenterology. Our current portfolio of commercial products includes a number of pharmaceuticals 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.
 
While our business focus is to sell products in the U.S., the EU and Canada, several of our products have been commercialized on 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.”
 
The majority of the products that we market do not benefit from any patent protection. We believe, however, that certain of our products benefit from other barriers to the entry of competitors or generics. Our products nevertheless remain subject to competition and generic product entries into their markets, which especially in the case of generics, typically sold at a significant discount from reference drug prices could significantly and negatively affect our revenues. As of September 30, 2009, our main product lines are CANASA, CARAFATE, ULTRASE, URSO 250 / URSO FORTE and PYLERA in the U.S., SALOFALK and URSO in Canada, and DELURSAN, PANZYTRAT and LACTEOL in the EU.

On November 19, 2007, the patent for URSO 250 / URSO FORTE’s use in the treatment of primary biliary cirrhosis (PBC), a chronic liver disease, expired in the U.S. On May 14, 2009, Teva Pharmaceutical Industries Ltd announced that the U.S. Food and Drug Administration had approved its Abbreviated New Drug Application (ANDA) for a generic formulation of URSO 250 and URSO FORTE that was launched in the U.S. As a result, we have seen a decline in sales of URSO 250/URSO FORTE in the U.S. and we anticipate this to continue, which could have a material adverse effect on our results of operations and financial condition for the coming years.
 
On November 5, 2007, the market exclusivity obtained on CANASA pursuant to the clinical investigation exclusivity provisions of the Drug Price Competition and Patent Term Restoration Act, known as the Hatch-Waxman Act, covering a change in the formulation of this drug from a 500-mg to a 1,000-mg suppository formulation, expired. However, 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 to launch such a product. 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.
 
Our main product lines, their sales, patent/regulatory protection and certain other barriers to entry are discussed below.
 
Pancreatic Enzyme Products
 
ULTRASE
 
In the U.S. and Canada, we market 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. ULTRASE is also supplied to export markets in Latin America.
 
We reported net sales of $75.9 million, $58.6 million and $47.5 million for ULTRASE in fiscal years 2009, 2008, and 2007, respectively. The increase in sales can partly be attributed to price increases implemented during that time. ULTRASE sales also benefited from FDA’s formal notification to manufacturers of pancreatic insufficiency products, which include ULTRASE, of the requirement to submit a New Drug Application (“NDA”) by April 28, 2009 and receive regulatory approval under an NDA by April 28, 2010 in order to avoid FDA regulatory enforcement action to remove unapproved products from the market. As a consequence, most unbranded pancreatic enzyme products for which an NDA had not been submitted by April 2009 have been withdrawn from the market by their distributors, leaving room for ULTRASE to
 
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capture a portion of their market share.

We completed the submission of our NDA for ULTRASE MT and , in the fourth quarter of fiscal year 2008, received a first complete response letter (formerly known as an ‘’approvable letter’’ prior to recent amendments of the Food Drug and Cosmetics Act, or FDCA) citing  only certain chemistry, manufacturing and control data, or CMC, work requirements to which we responded.  Further to the filing of our response, we received a second complete response letter in the fourth quarter of fiscal year 2009, again citing certain CMC work the FDA requested we complete in order to obtain approval.  This request was addressed in a complete response we prepared in collaboration with our manufacturing partners and filed with the FDA.  While we cannot provide any assurances, we expect to receive regulatory approval within the timeframe set for approval under FDA’s guidance to the industry. See “Item 1A. Risk Factors—Risks Related to Our Pancreatic Enzyme Products.”

ULTRASE competes with a number of branded pancreatic enzyme products, including CREON ® (Solvay Pharmaceuticals, Inc.), PANCREASE ®   (Ortho-McNeil Pharmaceutical, Inc.), PANCRECARB ®   (Digestive Care, Inc.). Digestive Care, Inc. and ZENPEP TM (Eurand N.V.). CREON ® received FDA approval in April 2009 and the approved product was recently launched. We believe an NDA was submitted for PANCREASE ® , but the status of this submission is not known to us. Digestive Care, Inc. has recently announced that it has received a complete response letter from the FDA and has moved closer to obtaining approval of its NDA for PANCRECARB ® . ZENPEP TM , was approved by the FDA in August 2009 and has recently been launched in the U.S. market.

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 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, both CREON ® and ZENPEP TM 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
 
We market as VIOKASE, non-enteric-coated pancreatic replacement enzymes for the treatment of exocrine pancreatic insufficiency. VIOKASE, although not actively promoted, is sold in the U.S. and Canada.
 
We reported net sales of $22.7 million, $15.1 million and $11.2 million for VIOKASE in fiscal years 2009, 2008, and 2007, respectively. The increase in sales is mainly caused by the impact of most of the unbranded pancreatic enzyme products being discontinued or withdrawn from the market because of the FDA’s requirement that pancreatic enzyme products, or PEPs, file for and, by April 28, 2010 obtain approval under an NDA, which gave VIOKASE the opportunity to capture a portion of these unbranded PEP product’s market share. As it is the case for ULTRASE, the FDA formally notified manufacturers of pancreatic insufficiency products that these drugs, which include VIOKASE, must receive regulatory approval under an NDA by April 28, 2010 in order to avoid FDA regulatory action to remove unapproved products from the market.

We have submitted our NDA for VIOKASE and while we cannot provide any assurances, we expect to receive approval within the timeframe set for approval under FDA’s guidance to the industry. See “Item 1A. - Risk Factors -Risks related to our Pancreatic Enzyme Products”.

We believe that VIOKASE is currently the only non-enteric-coated pancreatic enzyme product commercially available in the U.S. VIOKASE therefore competes with the coated pancreatic enzymes 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 approval of our NDA.
 
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 and the Netherlands, as well as a few export markets. We reported net sales of $14.2 million, $16.6 million and $14.8 million for PANZYTRAT in fiscal years 2009, 2008 and 2007, respectively.

 
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The main competitor for PANZYTRAT in Germany and the Netherlands is KREON ® ( Solvay Pharmaceuticals, Inc.). 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.
 
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.
 
Ursodiol
 
URSO 250 and URSO FORTE (U.S.)
 
In the U.S., we have been marketing URSO 250, a 250-mg ursodiol tablet for the treatment of PBC, a chronic liver disease, since May 1998. URSO FORTE, a 500-mg ursodiol tablet, was launched in November 2004.
 
We reported net sales of $50.0 million, $67.0 million and $68.1 million for URSO 250/ URSO FORTE in the U.S. in fiscal years 2009, 2008 and 2007, respectively. The decrease in sales in fiscal year 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 will market and sell 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 (250-mg) and URSO DS (500-mg) for the treatment of cholestatic liver diseases, which include PBC and primary sclerosing cholangitis (PSC). URSO/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 / URSO DS since fiscal year 2007.
 
We reported net sales of $3.0 million, $3.9 million and $9.0 million in net sales for URSO/URSO DS in Canada for fiscal years 2009, 2008 and 2007, respectively.
 
URSO/URSO DS does not benefit from any other patent protection or other form of regulatory exclusivity in Canada.
 
DELURSAN
 
DELURSAN is an ursodiol preparation 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 $20.8 million, $21.4 million and $16.7 million for DELURSAN in fiscal years 2009, 2008, and 2007, 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 €15.4 million, €14.2 million and €12.5 million in fiscal years 2009, 2008 and 2007, 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 2010. A request for marketing approval was submitted for an ursodiol product, based on well-established use. Under this procedure, a company can seek approval for a product similar to one that is already on the market 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 preparation were to be launched, it could have a significant negative impact on sales of DELURSAN in France. See “Item 1A. Risk Factors – Risks Related to Our Business.”

Mesalamine
 
CANASA
 
CANASA is a mesalamine suppository, indicated for the treatment of distal ulcerative proctitis, an inflammatory bowel disease, which we sell in the U.S. We believe that CANASA is currently the only commercially available mesalamine suppository in the U.S.
 
We reported net sales of $84.7 million, $72.1 million and $65.1 million for CANASA in fiscal years 2009, 2008 and 2007, respectively.

 
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CANASA competes 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 Alaven Pharmaceutical LLC and with various generic mesalamine enemas.
 
CANASA does not have any patent protection in the U.S. On November 5, 2007, the 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 May 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 for the U.S. market. The draft guidance specifies in part that a request of approval must be supported by placebo and reference-drug controlled clinical studies with clinical endpoints demonstrating safety and effectiveness in patients with ulcerative proctitis.
 
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 to launch such a product. 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.

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 $19.0 million, $21.0 million and $19.3 million for SALOFALK in fiscal years 2009, 2008 and 2007, 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 Canadian dollar depreciated against the U.S. dollar by 17.0%. It is also caused by the launch of a new competitive product on the market.

In Canada, SALOFALK competes with several products containing mesalamine in controlled-release tablets or capsules, including ASACOL™, a product sold by The Proctor & Gamble Company, DIPENTUM™, a product sold by UCB Pharma, Inc., and MEZAVANT ® , a product sold by 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 / SULCRATE
 
Our CARAFATE/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 net sales of $68.5 million, $52.5 million and $52.2 million for CARAFATE/SULCRATE in fiscal years 2009, 2008 and 2007, respectively. The increase in sales from fiscal year 2008 to fiscal year 2009 mainly resulted from an increase in prescription volumes and from price increases announced during the year.

We are not aware of any generic versions of CARAFATE / SULCRATE oral suspension that are commercially available in the U.S. or Canada. If a generic version of these drugs were to be launched, it could have a significant negative impact on sales of CARAFATE/SULCRATE oral suspension in the U.S. and Canada.

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

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 $8.2 million, $6.6 million and $1.8 million for PYLERA in fiscal years 2009, 2008 and 2007, respectively.
 
Other pre-packaged products (all in blister packs) that compete with PYLERA include HELIDAC®, a product sold by Prometheus Laboratories Inc., and PREVPAC®, sold by TAP Pharmaceutical Products Inc.
 
PYLERA is protected by patent claims covering triple and quadruple therapies for Helicobacter pylori eradication. These claims cover the

 
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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 expire 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 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”.

Other Products
 
LACTEOL
 
LACTEOL is a product containing specific proprietary strains of Lactobacillus acidophilus in a lyophilized powder form. It is available in a number of dosage forms, including capsules, and is primarily indicated for the treatment of diarrhea. LACTEOL is mainly sold in France and in over 40 export markets.
 
We reported net sales of $16.5 million, $19.0 million and $16.3 million for LACTEOL in fiscal years 2009, 2008 and 2007, respectively including $9.3 million, $11.1 million and $9.9 million outside of France. The decline in sales 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 enjoys no patent protection or regulatory exclusivity. However, the product is derived from proprietary strains of a 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.

On April 6, 2009, we entered into a license agreement with a leading multi-national company (the “Partner”), whereby the Partner is granted the right to develop and commercialize new food products that will contain the active ingredient of LACTEOL. Under the terms of the agreement, the Partner 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 it and develop, manufacture and commercialize non-food products, including pharmaceutical products, containing it.

PHOTOFRIN PHOTOBARR
 
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. 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 reported net sales of $4.2 million, $6.5 million and $5.9 million for PHOTOFRIN/PHOTOBARR in fiscal years 2009, 2008 and 2007, respectively. The decline in sales 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%. The decline in the U.S. was also a result of the loss of supply of the balloon centering catheter that is required for the treatment of high-grade dysplasia associated with Barrett’s esophagus.
 
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, has been marketed as a device for use in the treatment of broad oncological applications.
 
PHOTOFRIN/PHOTOBARR is covered by a number of patents 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 expires May 2016.

 
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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) 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 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 2009, our R&D expenses were approximately $36 million or 8.8% of our total revenue ($28.1 million, or 7.4% of revenue in fiscal year 2008 and $28.6 million, or 8.2% of revenue, in fiscal year 2007).
 
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.”
 
Pancreatic Enzyme Products
 
ULTRASE
In April 2004, the FDA formally notified manufacturers of pancreatic insufficiency products that these drugs, which include ULTRASE, must submit an NDA by April 28, 2009 and receive regulatory approval under an NDA by April 28, 2010 in order to avoid FDA regulatory enforcement action to remove them from the market.

We completed the submission of our NDA for ULTRASE MT and , in the fourth quarter of fiscal year 2008, received a first complete response letter (formerly known as an ‘’approvable letter’’ prior to recent amendments of the Food Drug and Cosmetics Act, or FDCA) citing  only certain chemistry, manufacturing and control data, or CMC, work requirements to which we responded.  Further to the filing of our response, we received a second complete response letter in the fourth quarter of fiscal year 2009, again citing certain CMC work the FDA requested we complete in order to obtain approval.  This request was addressed in a complete response we prepared in collaboration with our manufacturing partners and filed with the FDA.  While we cannot provide any assurances, we expect to receive regulatory approval within the timeframe set for approval under FDA’s guidance to the industry. See “Item 1A. Risk Factors—Risks Related to Our Pancreatic Enzyme Products.”

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

VIOKASE
As it did for ULTRASE, in April 2004, the FDA formally notified manufacturers of pancreatic insufficiency products that these drugs, which include ULTRASE, must submit an NDA by April 28, 2009 and receive regulatory approval under an NDA by April 28, 2010 in order to avoid FDA regulatory enforcement action to remove them from the market.

 
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We have completed the clinical portion of our program, which confirmed that VIOKASE is well tolerated and that lipase is available at high levels within the duodenal space. Results also confirmed that similar to other pancreatic enzyme products, VIOKASE is effective in the control of steatorrhea in chronic pancreatitis patients. We have submitted our NDA for VIOKASE and while we cannot provide any assurances, we expect to receive approval within the timeframe set for approval under FDA’s guidance to the industry. See “Item 1A. - Risk Factors -Risks related to our Pancreatic Enzyme Products”.


PANZYTRAT
We intend to initiate a multicenter Phase IIIb 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 market where it is currently available.

NMK 150
 
We were developing NMK 150, a new high-protease pancrelipase preparation for the relief of pain in small-duct chronic pancreatitis. Based on results of preliminary studies, we have decided not to pursue this development program.
 

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. NASH affects 2% to 5% of Americans and approximately the same number of people in Western Europe.
 
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.
 
SUDCA (Ursodiol Disulfate)
 
We were studying the use of SUDCA, a new ursodiol derivative, in the prevention of the recurrence of colorectal adenomateous polyps, considered to be a pre-cancerous stage of colorectal cancer. Based on results of preliminary studies, we have decided not to pursue this development program.

Mesalamine
 
MAX-002
 
We have initiated the MAX-002 program, a Phase III clinical trial to evaluate the efficacy and safety of this novel, high- concentration, 1,000-mg mesalamine suppository for the treatment of mild to moderate ulcerative proctitis.
 
Inflammatory bowel disease (IBD) consists of two major multifactorial disease entities of unknown etiology, Crohn’s disease and ulcerative colitis (UC). Contrary to Crohn’s disease, UC is characterized by the presence of mucosal inflammation beginning at the anal verge and extending without interruption in a proximal fashion. Ulcerative proctitis (UP) is a subcategory of UC in which the inflammation is restricted to the rectal area (up to 15 cm from the anal verge). The prevalence of UP may be as high as 44%-60% of all patients. Although unknown, the incidence rate has been estimated to represent 25%-75% of new UC cases. This chronic debilitating disease can have a significant negative impact on the patient’s quality of life, especially during active episodes, and to a lesser extent, during quiescence. Altogether, the course of the disease (e.g., severity, extent, and pattern of relapse), therapeutic regimen (e.g., efficacy, side effects and burden of administration) and non-disease-related factors (e.g., demographic characteristics and psychosocial and socioeconomic influences) have been reported to affect the quality of life. In an effort to further enhance patient comfort during use of the 1-g mesalamine suppository, we have developed a new patented formulation, MAX-002, characterized by its smaller size and lower melting temperature. We believe that this latter property may facilitate the release of mesalamine from the suppository.

Helicobacter pylori eradication
 
PYLERA
 
The Helicobacter pylori bacterium is believed to cause a spectrum of diseases in humans, including gastritis, ulcer disease (gastric and duodenal), gastric cancer and gastric lymphoma. In North America, 10% of the population will have an ulcer in their lifetime; and many treatments end up with a high rate of recurrences. In fact, 40%-80% of patients experience a recurrence within only a year after undergoing short-term treatment of gastric acid suppression therapy. Studies have shown that the gastroduodenal reoccurrence rate is only 2% for patients in whom the organism has been eradicated.
 
We have successfully developed PYLERA and launched it in the U.S. in May 2007. PYLERA given in combination with a proton pump

 
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inhibitor such as omeprazole is presented in the form of a single capsule (single-capsule formula of bismuth subcitrate potassium, metronidazole and tetracycline hydrochloride, three ingredients used separately for the eradication of Helicobacter pylori ). Under the terms of FDA approval, we were required to conduct a post-marketing pediatric study. However, the FDA has granted us a waiver for this requirement.
 
We conducted a Phase III clinical program with PYLERA in the EU to obtain approval to market this therapy for the eradication of Helicobacter pylori in combination with a proton pump inhibitor. The Phase III clinical trial compared our PYLERA regimen, given in combination with omeprazole, to the widely used OAC triple therapy (20-mg of omeprazole, 1-g of amoxicillin and 500-mg of clarithromycin, all given twice a day). The study was successfully completed in fiscal year 2009 and we intend to submit our application for Marketing Authorization in major EU markets in fiscal year 2010. We expect to file this submission using the decentralized procedure process. For a discussion on the decentralized procedure, see “Item 1 – Business – Government Regulation – European Economic Area – Decentralized Procedure”

 
Others
 
AGI-010
 
We and AGI Therapeutics, plc (“AGI”) were co-developing AGI-010, a delayed/controlled-release formulation of the proton pump inhibitor drug omeprazole, for the treatment of symptoms associated with GERD and the control of night-time gastric acidity.
 
On August 14, 2009, AGI and Axcan announced that their codevelopment/cofunding and licensing agreement for AGI-010 had been terminated by mutual agreement. As a consequence, AGI regained full control of AGI-010 and neither party has any outstanding or future obligations to the other.
 
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 is responsible for the costs of developing and commercializing Cx401 in North America.

A Phase II trial conducted in 50 patients in the EU demonstrated the efficacy and safety of Cx401. This randomized, open-label, parallel assignment study evaluated the safety and efficacy of Cx401 in the treatment of perianal fistulas in Crohn’s and non-Crohn’s disease patients. The primary endpoint for this study was photographically assessed complete closure and healing, and showed a 71% response rate in the acute phase, both in Crohn’s and non-Crohn’s disease patients. Results of the study were presented at Digestive Disease Week in May 2007 [D. Garci-Olmo et al., “Expanded Adipose-Derived Stem Cells (Cx401) for the Treatment of Complex Perianal Fistula: A Phase II Clinical Trial” - Digestive Disease Week 2007; Abstract: 492] and are pending publication.

Cellerix is currently conducting a Phase III clinical program in Europe. Once results are available, it will allow us to make a decision on the most appropriate development and filing strategy for this product in North America.
 

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 organizations. As of September 30, 2009, we had 94 sales representatives, 12 regional sales managers managed by 2 zone directors and 5 national account managers in our managed-care group, all located in the U.S., who call on high-volume prescribing gastroenterology physicians, cystic fibrosis centers, hepatologists and transplant centers, potential and current PHOTOFRIN 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.

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 and are actively promoted by our 11 sales representatives, under the supervision of the regional sales manager, to gastroenterologists and internal medicine specialists with a particular interest in GI diseases, as well as to 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, 2009, we had 42 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 15 sales representatives under the supervision of a regional sales director and in the United Kingdom, we have 1 sales representative. We have also signed 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, and continuing medical

 
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education 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.
 

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 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 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 sales in any of the last three fiscal years.
 
   
For the fiscal years
ended September 30,
 
   
2009
   
2008
   
2007
 
Customer A
    37.4 %     39.0 %     41.2 %
Customer B
    30.4 %     26.6 %     25.0 %
Customer C
    11.7 %     10.3 %     11.1 %
Total
    79.5 %     75.9 %     77.3 %
 
Competition
 
Our business is highly competitive. Competition within the gastroenterology industry is primarily based upon product effectiveness, side effects 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.

Manufacture and Supply
 
While we manufacture LACTEOL at our French facility and SALOFALK in Canada, we outsource all aspects of the manufacturing of our other products. Our third-party manufacturers are subject to extensive governmental regulation. For example, the FDA mandates that the drug be manufactured, packaged and labeled in conformity with current good manufacturing practices, or cGMP. In complying with cGMP regulations, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to ensure that their services and products meet applicable specifications and other requirements. The same applies to our manufacturers outside of the U.S. We intend to continue to outsource the manufacture and distribution of most of our products for the foreseeable future, and we believe this manufacturing strategy will enable us to direct our financial resources to product in-licensing and acquisition, product development and sales and marketing efforts, without devoting resources and capital required to build compliant manufacturing facilities and maintain them.
 
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, quality assurance and regulatory affairs oversee the activities of contract

 
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manufacturing organizations and suppliers of active ingredients. We ensure continuity of supply through optimum inventory levels, dual sourcing, where feasible, and contracts. We usually build up inventory prior to switching 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 five year terms and some of our current contracts will expire at various dates over the next five years.

For all of our marketed products other than LACTEOL and SALOFALK, we have entered into agreements with third parties to manufacture the finished dosage form of the product. 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 for almost all of our products and product candidates.

While we believe that there are alternative sources of supply for the active pharmaceutical ingredients and raw materials required for the manufacture of our products, if any of our current suppliers were unable to meet our needs, we might not be able to have these alternative suppliers qualified in a timely manner, and we might not be able to obtain the required materials on 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 packager.

Our agreements with suppliers, manufacturers and laboratories testing our product include customary supply terms, including product specifications, batch size requirements, price, payment terms, requirements forecasting, delivery mechanics and quality assurance. Under most 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 also generally permit the manufacturer or supplier to pass on to us increases in costs of production or materials.

With the exception of the manufacturers of ULTRASE, MODULON, PHOTOFRIN and PYLERA, the manufacturer and supplier of CANASA, and, to a certain extent, the manufacturer of CARAFATE, our manufacturers and suppliers are not prevented from supplying product to third parties. Eurand, our supplier for 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, for which it recently obtained FDA regulatory approval in the U.S., and which is expected to be in competition with ULTRASE.

Our primary supplier of mesalamine and the manufacturer of CANASA have each agreed not to supply mesalamine or a mesalamine product to a third-party in the U.S. or Canada.

Our agreements for the manufacture of our certain of our core products expire at various dates over the next five years. We believe, but cannot assure you, that we will be able to renew these agreements on satisfactory terms as they expire or find suitable alternative suppliers and manufacturers. If we are unable to renew these agreements on favorable terms or find suitable alternatives, however, our business could 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 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 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, with the exception of the pancreatic enzyme products which require an NDA approval by April 28, 2010. 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.

 
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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 to 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 , or active moiety. 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.
 

 
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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.

Patents and Trademarks
 
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 maintain trademark registrations in a number of jurisdictions where we sell our products. In the U.S., trademark registrations remain in force for 10 years and may be renewed every 10 years after issuance,

 
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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, secret formulas 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, use or market certain of 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 principal products.

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.

ULTRASE 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, both CREON ® and ZENPEP TM 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.

 
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Ursodiol
 
URSO
 
We developed URSO for the Canadian market in collaboration with Falk Pharma GmbH, or Falk, and acquired the rights to manufacture, use and market URSO in the U.S. in March 1993 through the acquisition of the shares of a subsidiary that we did not already own. 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 the PBC treatment under a patent, 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 expires in 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.

SUDCA (Ursodiol Disulfate)
 
In September 2000, we entered into a licensing agreement with the Children’s Hospital Research Foundation, an operating division of Children’s Hospital Medical Center of Cincinnati, Ohio, for a series of patented sulfated derivatives of ursodeoxycholic acid compounds, also known as SUDCA, or ursodiol disulfate. According to the terms of this agreement, we have exclusive worldwide rights to commercially exploit formulations of SUDCA under the licensed patents and know-how developed by Children’s Hospital Research Foundation. To date, we have paid approximately $600,000 in up-front fees. In fiscal year 2009, we have decided to terminate the development of the program we had initiated for this compound.
 
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, expires 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, provides 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; the patents expire in March 2010 in the U.S.
 
In May 1999, we acquired the rights to a double-capsule delivery technology to be used for PYLERA from Gephar S.A., or Gephar, in an asset swap transaction, whereby we sold to Gephar our interest in Axcan Ltd., a manufacturer and distributor of the PROTECTAID™ contraceptive sponge. 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 in the FDA’s Orange Book.  Accordingly,
 
 
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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”.

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 ) 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 “Partner”) whereby the Partner is granted the right to develop and commercialize new food products containing the active ingredient of LACTEOL. Under the terms of the agreement, the Partner 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 the active ingredient. We recorded milestones that we are entitled to receive under the agreement, equal to $7.1 million and we may receive additional potential milestone payments up to the equivalent of $1.9 million, as well as certain royalties on the net sales of these new food products.
 
LACTEOL enjoys 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.

AGI-010
 
On September 25, 2006, we entered into a license and co-development agreement with AGI Therapeutics plc, or AGI. Pursuant to this agreement, we and AGI had agreed to co-develop AGI-010 to be used for the treatment of symptoms associated with GERD, and, in particular, to be used for the control of night-time gastric acidity, known as nocturnal acid breakthrough. Under the agreement, we had licensed exclusive rights to patent applications and know-how related to AGI-010 and had retained rights to any improvements to the product for North America and, if extended by us, to other territories. We and AGI had further agreed to share certain development expenses, and we paid a $1.5 million up-front fee (which was charged to expense in fiscal year 2006).
 
On August 14, 2009, together with AGI, we announced that our codevelopment/cofunding and licensing agreement for AGI-010 has been terminated by mutual agreement. As a consequence, AGI regained full control of AGI-010 and neither party has any outstanding or future obligations to the other.
 
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.

Furthermore, under the terms of the agreement with Cellerix, we will pay scaled royalties of up to 18% based on net sales of Cx401. We have also agreed to make an equity investment of up to $5.0 million in Cellerix, should Cellerix complete its initial public offering by September 30, 2010. We are responsible for the costs of development of the product for our licensed markets.

Employees
 
As of September 30, 2009, we employed 529 people. Of these employees, 191 were located in the U.S., 197 were located in Canada and 141 were located in the EU. In Canada, we are a party to a collective bargaining agreement, which was recently renewed and expires March 24, 2011. As of September 30, 2009, this agreement covers 56 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.
 
 
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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

We currently depend on four categories of products for a large portion of our revenues; any material decline in the sales of any of them 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. Pancreatic enzyme products (ULTRASE, VIOKASE and PANZYTRAT), ursodiol products (URSO 250/URSO DS/URSO FORTE and DELURSAN), mesalamine products (CANASA and SALOFALK) and sucralfate products (CARAFATE and SULCRATE) accounted for 23.8%, 24.2%, 24.4% and 13.8%, respectively, of our net product sales for fiscal year 2008 and for 46.0%, 18.0%, 25.3% and 16.7%, respectively, of our net product sales for fiscal year 2009. 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.

The entry of generics versions of our ursodiol product line in the U.S. and Canada could have a material adverse impact on our financial position, cash flows or overall trends in results of operations.
 
On November 19, 2007, our U.S. patent covering URSO 250/URSO FORTE’s use in the treatment of PBC expired and on May 13, 2009, the Office of Generic Drugs approved a generic to URSO 250/URSO FORTE which was launched 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. Despite measures taken to defend our URSO franchise, we expect future sales to continue to decline. In addition, the validity of our Canadian patent for the similar use of URSO and URSO DS in Canada was successfully challenged in 2006 by Pharmascience Inc., a generic product manufacturer, under the Health Canada’s Notice of Compliance Regulation procedures.

As a result, competition from generic products that treat the same conditions have increase both in the U.S. and Canada, which has already had a negative sales impact on our sales of ursodiol products in North America. Sales of these products made up approximately 18.0% of net product sales in fiscal year 2009 and 24.2% of our net product sales in fiscal year 2008. Although we have undertaken certain measures to protect our franchise, there is no assurance, however, that any of these measures will allow us to meaningfully mitigate the expected decline of ursodiol sales in North America, which 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 $20.8 million, $21.4 million and $16.7 million for DELURSAN in fiscals 2009, 2008, and 2007, respectively. (In local currency, net sales of DELURSAN were €15.4 million, € 14.2 million and €12.5 million in fiscal years 2009, 2008 and 2007, 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 2010. A request for marketing approval was submitted 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 5% of our net product sales in fiscal year 2009, could have a material adverse effect on our results of operations and financial condition.
 
 
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We no longer have clinical investigation exclusivity in the U.S. for our CANASA product line. This could result in competition from generic products leading to a significant reduction in sales of this product line.
 
Although our CANASA product line has no patent protection in the U.S., we previously had clinical investigation exclusivity from the FDA covering a change in the formulation of this drug from a 500-mg formulation to a 1,000-mg formulation. This clinical investigation exclusivity effectively precluded the FDA from approving a competitor’s ANDA for a 1,000-mg mesalamine product for a period of three years. However, pursuant to the Hatch-Waxman Act, this exclusivity expired in November 2007.

The lack of patent protection and the loss of exclusivity for this product in the U.S. could give rise to competition from generic products or therapeutically substitutable products. A significant reduction in the sales for this product, which made up 18.8% of our net product sales in fiscal year 2008 and 20.0% of our net product sales in fiscal year 2009, could have a material adverse effect on our results of operations and financial condition.

In May 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 to launch such a product in the U.S. market. The draft guidance specifies in part that a request for approval must be supported by placebo and reference-drug controlled clinical studies with clinical endpoints demonstrating safety and effectiveness in patients with ulcerative proctitis.
 
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 to launch such a product. 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.

Some of our key products face competition from generic or unbranded products.
 
Some of our key products, including products from our ULTRASE, URSO and CANASA lines, currently face competition from generic or unbranded products (such as ACTIGALL™ , its generics and the recently launched generic in the case of URSO, other branded and unbranded pancreatic enzyme products, or PEPs, in the case of ULTRASE and other rectal dosage forms of mesalamine 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.

Products which are no longer protected by marketing exclusivity or patent are subject to generic competition. Generic competition against any of our products would 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.


 
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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 2009, sales to our main customer, Customer A, accounted for 37.4% of our net product sales, sales to Customer B accounted for 30.4% of our net product sales, and sales to Customer C accounted for 11.7% 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 $2.1 million and $3.6 million for fiscal year 2008 and fiscal year 2009, respectively, from our total revenues. In the quarter ended September 30, 2006, we chose to classify these fees as a deduction from sales. Previously, the fees were included in selling and administrative expenses. 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 perform analytical testing for almost all of our products and product candidates. This may increase the risk that we will not have sufficient quantities of our products or product candidates or such quantities at an acceptable cost, which could adversely affect sales of our products and could result in the clinical development and commercialization  of our product candidates being delayed, prevented or impaired.
 
With the exception of SALOFALK and LACTEOL, we have limited experience and capabilities in manufacturing pharmaceutical products. We do not generally expect to engage directly in the manufacturing of products, but instead contract with others for these services. There are only a limited number of manufacturers capable of manufacturing our marketed products and our product candidates. We might fail to contract with the necessary manufacturers or might contract with manufacturers on terms 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 in our products and product candidates, and (ii) the manufacture and testing of the finished forms of these drugs and their packaging. The current manufacturers of our products and product candidates are, and any future third-party manufacturers that we enter into agreements with will likely be, our sole suppliers of our product candidates for a significant period of time. These manufacturers are commonly referred to as single source suppliers. Our agreements for the manufacture of our core products expire at various dates over the next five years. If we are unable to renew these agreements on favorable terms or find suitable alternatives, our business could be adversely affected. Some of our contracts prohibit us from using alternative manufacturers or suppliers for the products supplied under these contracts, which prevents us from diversifying manufacturing and supply sources. In addition, we currently purchase clinical supplies for many of our product candidates from third-party manufacturers on a purchase order basis under short-term supply agreements. If any of these manufacturers should become unavailable to us for any reason, we may be unable to conclude agreements with replacements on favorable terms, if at all, and may be delayed in identifying and qualifying such replacements. In any event, identifying and qualifying a new third-party manufacturer could involve significant costs associated with the transfer of the active pharmaceutical ingredient or finished-product manufacturing process. A change in manufacturers or testers requires formal approval by the FDA before the new manufacturer may produce commercial supplies of our products. 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

 
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candidates ourselves, including the following
 
 
·
The manufacture of products might be difficult to scale up when required and 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.
 
·
The cost of manufacturing certain products might make them prohibitively expensive.
 
·
Delays in scale-up to commercial quantities and any change in manufacturers could delay clinical studies, regulatory submissions and commercialization of our products.
 
·
If we need to change manufacturers, the FDA and comparable foreign regulators would require new testing and compliance inspections and the new manufacturers would have to be educated in the processes necessary for the production of our products.
 
·
Our products and product candidates might compete with other products and product candidates for access to manufacturing facilities.
 
·
There are 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 should cease to continue to do so for any reason, we likely would experience delays in obtaining sufficient quantities of our products for us to meet commercial demand or in advancing our clinical trials while we identify and qualify replacement suppliers.
 
·
If, for any reason, we are not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.

Our current and anticipated future dependence upon others for the manufacture of our products and product candidates may 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 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

 
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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.

 
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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 (like our co-development of Cx401) 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, like Cellerix S.L. 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 revenues from ULTRASE and VIOKASE are subject to regulatory risk.
 
Existing products to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there are currently marketed PEPs that have not been approved by the FDA. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products 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 exocrine pancreatic insufficiency drug products until April 28, 2010, for those companies that were (a) marketing unapproved pancreatic enzyme products as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval.

 
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We reported net sales of $75.9 million, $58.6 million and $47.5 million for ULTRASE in fiscal years 2009, 2008, and 2007, respectively. We completed the submission of our NDA for ULTRASE MT and , in the fourth quarter of fiscal year 2008, received a first complete response letter (formerly known as an ‘’approvable letter’’ prior to recent amendments of the Food Drug and Cosmetics Act, or FDCA) citing  only certain chemistry, manufacturing and control data, or CMC, work requirements to which we responded.  Further to the filing of our response, we received a second complete response letter in the fourth quarter of fiscal, 2009, again citing certain CMC work the FDA requested we complete in order to obtain approval.  This request was addressed in a complete response we prepared in collaboration with our manufacturing partners and filed with the FDA.

We reported net sales of $22.7 million, $15.1 million and $11.2 million for VIOKASE in fiscal years 2009, 2008, and 2007, respectively. We have submitted our NDA for VIOKASE and while we cannot provide any assurances, we expect to receive approval within the timeframe set for approval under FDA’s guidance to the industry.

If we are unable to obtain FDA approval to market ULTRASE or VIOKASE prior to April 28, 2010,
 
·
we would be subject to FDA regulatory action to remove these products from the market,
 
·
certain wholesalers and other clients may refuse to purchase or distribute these products, and
 
·
governmental and other third-party payors may no longer agree to reimburse or pay for the cost of these drugs.

As a result, our market for ULTRASE and VIOKASE may be significantly adversely affected, or we may no longer be able to sell ULTRASE or VIOKASE in the U.S., which would impair our results of operations and liquidity.

Competition in the PEP market could be more intense than expected.
 
The level of competition that ULTRASE and VIOKASE will face from these products in the U.S. will depend on whether and how many manufacturers of unapproved products maintain them on the market after the applicable date, when and whether the FDA requests the withdrawal of unapproved products, and on the number of manufacturers that obtain approval for their NDAs by the deadline set by the FDA and, if they are unable to do so, whether the FDA takes regulatory action against manufacturers if they do not exit the market and the nature of any such action, as the FDA did in 2007.
 
We face competition from PEPs which have been FDA-approved and the FDA may not remove existing unapproved PEPs from the market in April 2010, even if they have not been FDA-approved.
 
Two products have received NDA approval since the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products must file an NDA and receive approval for their products. CREON®, which is marketed by Solvay Pharmaceuticals, was approved by the FDA in May 2009 and the approved product was recently launched. ZENPEP™, marketed by Eurand, was approved by the FDA in August 2009 and was recently launched. Other manufacturers are believed to be actively seeking FDA NDA approval for their product, including PANCREASE®, marketed by Ortho-McNeil Pharmaceuticals, Inc., and PANCRECARB®, marketed by Digestive Care, Inc. Accordingly, our ULTRASE and VIOKASE products face competition from products which have already received FDA approval under an NDA, and competition from approved products may further increase if other products for which manufacturers are seeking approval obtain FDA approval before ULTRASE MT or VIOKASE. Patient and physician acceptance of our products may be adversely affected by the fact that they are not yet approved while other approved products are available, which could also have a material adverse effect on our business and our financial results.
 
Further, despite the FDA’s announcement, its position is non-binding, and the agency may not pursue regulatory action against companies that fail to meet any applicable deadline. If the FDA does not enforce its stated positions by the applicable deadline, the level of competition that ULTRASE and VIOKASE will face will be greater than we anticipate, as some non-approved PEP products might remain on the market. In addition, the FDA could change its position or suspend enforcement again as it did in October 2007.

If we are unable to continue to obtain adequate reimbursement for ULTRASE and VIOKASE from government health administration authorities, private health insurers and other organizations, ULTRASE and VIOKASE may be too costly for regular use and our ability to generate revenues would be harmed.

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 and VIOKASE to the consumer. If these entities do not provide coverage and reimbursement for ULTRASE and VIOKASE or determine to provide an insufficient level of coverage and reimbursement, ULTRASE 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

 
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commercialize ULTRASE and VIOKASE may be adversely impacted. Any limitation on the use of ULTRASE and VIOKASE or any decrease in the price of ULTRASE 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, 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. For example, in fiscal year 2005, our clinical trials of itopride hydrochloride, or ITAX, a proposed treatment for functional dyspepsia, were not successful and we terminated the program in 2006. 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.
 
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, such as Cx401, our biological product for the treatment of perianal fistulas; or ULTRASE and VIOKASE, our pancreatic enzyme products, for which we need to comply with FDA’s requirement in order to remain on 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.
 
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.

 
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We may find it difficult to achieve market acceptance of 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, 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 or TPD 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, 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.
 
 
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We are subject to ongoing regulatory review of our currently marketed products.
 
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. Recently, 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.
 
 
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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 reform, pharmaceutical reimbursements and pricing in general could decrease our revenue s.
 
Our ability to successfully commercialize our products and product candidates—even if FDA or TPD 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 legislative proposals to reform health-care and government insurance programs, 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. Further, a number of other legislative and regulatory proposals aimed at changing the health-care system have been proposed. While we cannot predict whether any such proposals will be adopted or the effect such proposals may have on our business, the existence of such proposals, as well as the adoption of any proposal, may increase industry-wide pricing pressures, 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.

Uncertainties regarding health-care reform 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.

 
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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.
 
Recently enacted legislation 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.
 
On September 27, 2007, President Bush signed the Food and Drug Administration Amendments Act of 2007, or FDAAA, into law. The FDAAA grants a variety of new 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. While we expect the FDAAA to have a substantial effect on the pharmaceutical industry, the extent of that effect is not yet known. 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 new 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 or TPD (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.
 
 
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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.
 
 
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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 years ended September 30, 2007, 2008 and 2009, approximately 28.1%, 28.0% and 24.5% 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 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 2009, approximately 15.9% of our revenues was denominated in euros, 7.4% 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 2009, we experienced a negative foreign exchange effect on revenues of approximately 2.8%. 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

 
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results of operations.
 
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 2010. 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, 2009, our total indebtedness was $613.3 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, 2009.

($ in millions of dollars)
     
Debt:
     
Senior secured term loan facility (1)
  $ 154.8  
Senior secured revolving credit facility
    0  
Secured Notes (2)
    225.8  
Senior Notes (3)
    232.7  
         
Total
  $ 613.3  
 
 
 (1)        Represents the net proceeds received on our $175.0 million senior secured term loan facility after original issue discount.
 
(2)         Represents the net proceeds received on $228.0 million aggregate principal amount of secured notes after original issue discount.
 
(3)        Represents the net proceeds received on $235.0 million aggregate principal amount of senior notes after original issue discount.
 
 
In addition, we have significant other commitments, including milestone and royalty payments. See Note 21 in “Notes to Consolidated Financial Statements”. As of September 30, 2009, we had outstanding approximately $154.8 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

 
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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. As of September 30, 2009, we had two interest rate swaps with a combined $102 million notional that were designated as cash flow hedges of interest rate risk. 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, 2009
 
 
we had $380.6 million of senior secured debt, including borrowings under our senior secured credit facilities, and the secured notes;

 
we had $232.7 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;
 
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•       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, 2009, we had:

 
$380.6 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.

 
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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 will not be 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 2009, our non-guarantor subsidiaries accounted for approximately $68.1 million, or 16.3% of our consolidated revenue. As of September 30, 2009, our non-guarantor subsidiaries accounted for approximately $205.6 million, or 22.5% of our consolidated total assets and $8.0 million, or 1.1% 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.
 

 
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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

 
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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, 2009, before taking into consideration the effect of intercompany eliminations, the pledged assets had a book value of

 
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approximately $2,298.2 million, approximately $500.9 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.

 
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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 2010 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,

 
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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 has been appealed by one of the plaintiffs alleging, among others, that the arbitrator acted beyond his authority and reached an incorrect result.
 
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.

 
ITEM 4.                    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Not applicable.
 

 

 
 
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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, 2009, 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.
 


 
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ITEM 6.                    SELECTED FINANCIAL DATA
 
As part of the February 2008 Transactions, we, through an indirect wholly-owned subsidiary, purchased all of the outstanding common stock of Axcan Pharma Inc. on February 25, 2008. Prior to the February 2008 Transactions, Axcan Intermediate Holdings Inc. had no independent operations or assets. Accordingly, our financial information in the table below for the relevant fiscal years ended is presented separately for the periods prior to the completion of the February 2008 Transactions (from October 1, 2007 through February 25, 2008, as well as all previous fiscal years presented,  the “Predecessor” or “Predecessor Periods”) and the period after the completion of the February 2008 Transactions (fiscal year ended September 30, 2009, as well as the seven-month period from February 26, 2008 through September 30, 2008, the “Successor” or “Successor Periods”), which relate to the accounting periods preceding and succeeding the completion of the February 2008 Transactions. 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. The summary financial information as of September 30, 2009 and as of September 30, 2008 and for the Successor Periods are not comparable to the summary financial information as of and for the fiscal year ended September 30, 2007 or for prior fiscal years because of the new basis of accounting resulting from the February 2008 Transactions. 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
 
               
           
  Fiscal Years Ended September 30,
 
   
Fiscal Year
Ended
September 30, 2009
February 26,
2008
through
September 30,
2008
   
October 1,
2007
through
February 25,
2008
   
2007
   
2006
   
2005
 
   
($ in thousands)
         
($ in thousands)
       
Statement of Operations Data:
                                   
Net product sales
  $ 409,826     $ 223,179     $ 158,579     $ 348,947     $ 292,317     $ 251,343  
Other Revenue
    7,113                                
Total Revenue
  $ 416,939     $ 223,179     $ 158,579     $ 348,947     $ 292,317     $ 251,343  
Cost of goods sold (1)
    103,023       77,227       38,739       83,683       72,772       71,534  
Selling and administrative expenses (1)(2)
    122,942       88,246       76,198       101,273       93,338       85,997  
Management Fees
    5,351       99                          
Research and development expenses (1)(3)
    36,037       17,768       10,256       28,655       39,789       31,855  
Depreciation and amortization
    60,305       35,579       9,595       22,494       22,823       21,532  
Acquired in-process research
          272,400             10,000              
Partial write-down of intangible assets
    55,665                         5,800        
                                                 
Operating Income (loss)
    33,616       (268,140 )     23,791       102,842       57,795       40,425  
Financial expenses
    69,809       41,513       262       4,825       6,988       7,140  
Other interest income
    (389 )     (808 )     (5,440 )     (11,367 )     (5,468 )     (1,340 )
Other income
    (3,500 )                              
Loss (gain) on foreign currency
    (328 )     (1,841 )     (198 )     2,352       (1,110 )     (213 )
                                                 
Income (loss) before income taxes
    (31,976 )     (307,004 )     29,167       107,032       57,385       34,838  
Income taxes
    (24,082 )     (17,740 )     12,042       35,567       18,266       8,413  
                                                 
Net income (loss)
  $ (7,894 )   $ (289,264 )   $ 17,125     $ 71,465     $ 39,119     $ 26,425  
                                                 
Balance Sheet Data (at period end):
                                               
Cash and cash equivalents
  $ 126,435     $ 56,105     $ 348,791     $ 179,672     $ 55,830     $ 79,969  
Short-term investments, available for sale
                      129,958       117,151       17,619  
Total current assets
    250,682       176,980       471,170       402,127       262,378       190,357  
Total assets
    914,602       944,812       902,384       832,611       695,817       641,407  
Total short-term borrowings
    30,708       10,938       373       527       681       1,497  
Total debt
    613,294       622,184       441       649       126,246       127,829  
Total current liabilities
    121,022       99,300       166,456       104,737       64,617       58,336  
Total liabilities
    750,838       779,142       206,903       142,414       228,393       223,803  
Total shareholders’ equity (4)
    163,764       165,670       695,401       690,197       467,424       417,604  
                                                 
Statement of Cash Flows Data:
                                               
Net cash from (used in):
                                               
Operating activities
  $ 92,382     $ (47,512 )   $ 73,245     $ 136,102     $ 84,334     $ 67,745  
Investing activities
    (10,600 )     (961,556 )     126,630       (19,415 )     (108,139 )     (8,078 )
Financing activities
    (11,594 )     1,066,053       (31,243 )     6,553       (616 )     (1,375 )
                                                 
Other Financial Data:
                                               
EBITDA (5)
    97,749       (230,720 )     33,584       122,984       81,728       62,170  
                                                 
Adjusted EBITDA (5)
    172,828       84,539       70,119       141,407       92,582       62,170  
 
  (1)        Exclusive of depreciation and amortization.
 
  (2)     Amounts shown for the fiscal year ended September 30, 2007, five-month period ended February 25, 2008, seven-month period

 
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(3)
ended September 30, 2008 and  for the fiscal year ended September 30, 2009 include approximately $800,000, $26,500,000, $11,800,000 and $2,900,000 of expenses related to the February 2008 Transactions, respectively.
 
Amount shown for the fiscal year ended September 30, 2006 includes an up-front licensing fee equal to $1,500,000 paid in connection with a co-development agreement with AGI Therapeutics Ltd. Such amount is counted as acquired in-process research for purposes of calculating Adjusted EBITDA.
 
 
(4)
A portion of our common stock was issued to our parent company, Axcan MidCo Inc., in the February 2008 Transactions in exchange for a note receivable amounting to $133,154,405. Pursuant to U.S. GAAP, we report the principal amount as a separate balance offset against shareholders’ equity. Furthermore, we do not recognize interest income related to this note receivable due from Axcan MidCo Inc. in our income statement.
 
 
(5)
EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are presented in this report because our management considers them important supplemental measures of our performance and believes that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income before financial expenses, interest income, income taxes and depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. We believe that EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items and other adjustments set forth below. Adjusted EBITDA is calculated in the same  manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indentures governing our notes and credit facility further described in the section “Liquidity and Capital Resources—Long-term Debt and New Senior Secured Credit Facility”. We believe that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in such indentures and credit facility. Adjusted EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and they should not be considered in isolation, or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 
·
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.
 


 
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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
             
           
  Fiscal Years Ended September 30,
   
Fiscal Year
Ended
September 30, 2009
February 26,
2008
through
September 30,
2008
   
October 1,
2007
through
February 25,
2008
   
2007
   
2006
 
2005
   
($ in thousands)
         
($ in thousands)
   
Net income to EBITDA:
                                   
Net income (loss)
  $ (7,894 )   $ (289,264 )   $ 17,125     $ 71,465     $ 39,119     $ 26,425  
Financial expenses
    69,809       41,513       262       4,825       6,988       7,140  
Interest income
    (389 )     (808 )     (5,440 )     (11,367 )     (5,468 )     (1,340 )
Income taxes
    (24,082 )     (17,740 )     12,042       35,567       18,266       8,413  
Depreciation and amortization
    60,305       35,579       9,595       22,494       22,823       21,532  
                                                 
EBITDA
  $ 97,749     $ (230,720 )   $ 33,584     $ 122,984     $ 81,728     $ 62,170  
                                                 
EBITDA to Adjusted EBITDA:
                                               
EBITDA
  $ 97,749     $ (230,720 )   $ 33,584     $ 122,984     $ 81,728     $ 62,170  
Transaction, integration and refinancing costs (a)
    7,674       12,603       26,489                    
Management Fees (b)
    5,351       99                          
Stock-based compensation expense (c)
    6,172       7,443       10,046       4,548       3,554        
Acquired in-process research (d)
          272,400             10,000       1,500        
Inventories stepped-up value expensed (e)
          22,714                          
Loss of disposal and write-down of assets (f)
                      3,875              
Unrealized loss on foreign exchange
    217                                
Partial write-down of intangible assets (g)
    55,665                         5,800        
Adjusted EBITDA
  $ 172,828     $ 84,539     $ 70,119     $ 141,407     $ 92,582     $ 62,170  
 
 
a)
Represents investment banking and other professional fees associated with the February 2008 Transactions, as well as integration and refinancing costs. It also includes costs related to non recurring transactions and payments to third parties in respect of research and development milestones and other progress payments as defined within our credit agreement.
 
b)
Represents management fees and other charges associated with the Management Services Agreement with TPG further described in the “Item 13 – Certain Relationships and Related Transactions, and Director Independence” section below. As of September 30, 2009 the amount of those charges incurred since the date of the February 2008 Transactions was allocated among the subsidiaries of Axcan Holdings Inc., our indirect parent company, on the basis of revenue. Management fees charged prior to September 2008 were previously unallocated by the Company’s parent, Axcan Holdings Inc.
 
c)
Represents stock-based employee compensation expense under the provisions of FASB guidance.
 
d)
Represents the acquired in-process research, arising from the February 2008 Transactions, expensed in the period of acquisition.
 
e)
Represents inventories stepped-up value, arising from the February 2008 Transactions, expensed as acquired inventory is sold.
 
f)
Represents loss on disposal and write-down on assets.
 
g)
As explained in note 10 of the Consolidated Financial Statements.
 

 
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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 year ended September 30, 2009 and seven-month period ended September 30, 2008 reflect the results of operations for Axcan Intermediate Holdings Inc. and its consolidated subsidiaries (the Successor) and the results of operations for the five-month period ended February 25, 2008 and the fiscal year ended September 30, 2007 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 mission is 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.

Our main product lines include ULTRASE, PANZYTRAT and VIOKASE, which are pancreatic enzyme products for the treatment of exocrine pancreatic insufficiency; URSO / URSO 250, URSO FORTE / URSO DS, and DELURSAN, which are ursodiol products for the treatment of certain cholestatic liver diseases; SALOFALK and CANASA, which are mesalamine-based products for the treatment of certain inflammatory bowel diseases; CARAFATE and SULCRATE, which are sucralfate products for the treatment of gastric and duodenal ulcers; and PYLERA, a product for the eradication of Helicobacter pylori in patients with duodenal ulcer disease.

In addition to our marketing activities, we carry out research and development activities on products at various 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 acquired or licensed from third parties. By combining our marketing capabilities with our research and development experience, we distinguish ourselves from other specialty pharmaceutical companies that focus solely on product distribution and we offer licensors the prospect of rapidly expanding the potential market for their products on a multinational basis. As a result, we are presented with opportunities to acquire or in-license products that have been advanced to the later stages of development by other companies. 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 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.

 
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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 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 services agreements, or DSAs, are deducted from gross sales.  We have DSAs in place with our three largest U.S. wholesalers since the first quarter of fiscal year 2009.

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 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.

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.

 
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As of September 30, 2008, we finalized our allocation of purchase price. As a result of the finalization of the purchase price allocation, we recorded an adjustment of $1.1 million to other current assets, $4.9 million to property, plant and equipment, $7.1 million to goodwill, $1.5 million to deferred income taxes assets and $1.7 million to deferred income taxes liabilities.

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 taxes assets
7.2
Current liabilities
(174.5)
Long-term debt
(0.1)
Deferred income taxes 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 year 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 YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007

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, 2009, total revenue was $416.9 million ($381.8 million in fiscal year 2008 and $348.9 million in fiscal year 2007), operating income was $33.6 million ($244.3 million of operating loss in fiscal year 2008 and $102.8 million of operating income in fiscal year 2007) and net loss was $7.9 million ($272.2 million of net loss in fiscal year 2008 and $71.5 million of net income in fiscal year 2007). Net product sales in the United States were $319.6 million (78.0  % of net product sales) for the fiscal year ended September 30, 2009, compared to $280.4 million (73.4% of net product sales) for the fiscal year ended September 30, 2008 and $254.7 million (73.0% of net product sales) for the fiscal year ended September 30,2007. In Canada, net product sales were $30.9 million (7.5% of net product sales) for the fiscal year ended September 30, 2009, compared to $34.9 million (9.1% of net product sales) for the fiscal year ended September 30, 2008 and $38.0 million (10.9% of net product sales) for the fiscal year ended September 30,2007. In the European Union, net product sales were $58.7 million (14.3% of net product sales) for the fiscal year ended September 30, 2009, compared to $66.0 million (17.3% of net product sales) for the fiscal year ended September 30, 2008 and $55.9 million (16.0% of net product sales) for the fiscal year ended September 30, 2007.


 
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Financial highlights
 

(in millions of U.S. dollars)
 
For the fiscal
year ended
September 30,
2009
   
For the fiscal
year ended
September 30,
2008
 
   
Successor
   
Successor
 
   
$
   
$
 
Total assets
    914.6       944.8  
Long-term debt (a)
    613.3       622.2  
Shareholders’ equity
    163.8       165.7  

(a)
Including the current portion

(in millions of U.S. dollars)
 
For the fiscal year ended
September 30,
2009
   
For the fiscal
year ended
September 30,
2008
   
For the
seven-month
period ended
September 30,
2008
   
For the
five-month
period ended
February 25,
2008
   
For the fiscal
year ended
September 30,
2007
 
   
Successor
   
Combined
Predecessor/
Successor
   
Successor
   
Predecessor
   
Predecessor
 
   
$
   
$
   
$
   
$
   
$
 
Total revenue
    416.9       381.8       223.2       158.6       348.9  
EBITDA (1)
    97.7       (197.1 )     (230.7 )     33.6       122.9  
Adjusted EBITDA (1)
    172.8       154.6       84.5       70.1       141.4  
Net income (loss)
    (7.9 )     (272.2 )     (289.3 )     17.1       71.5  

(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  years ended September 30, 2009, 2008 and 2007 are as follows:

(in millions of U.S. dollars)
 
For the fiscal
year ended
September 30,
2009
   
For the fiscal
year ended
September 30,
2008
   
For the
seven-month
period ended
September 30,
2008
   
For the
five-month
period ended
February 25,
2008
   
For the fiscal
year ended
September 30,
2007
 
   
Successor
   
Combined
Predecessor/
Successor
   
Successor
   
Predecessor
   
Predecessor
 
   
$
   
$
   
$
   
$
   
$
 
Net income (loss)
    (7.9 )     (272.2 )     (289.3 )     17.1       71.5  
Financial expenses
    69.8       41.8       41.5       0.3       4.8  
Interest income
    (0.4 )     (6.2 )     (0.8 )     (5.4 )     (11.4 )
Income taxes expense (benefit)
    (24.1 )     (5.7 )     (17.7 )     12.0       35.5  
Depreciation and amortization
    60.3       45.2       35.6       9.6       22.5  
EBITDA h)
    97.7       (197.1 )     (230.7 )     33.6       122.9  
Transaction, integration, refinancing costs and nonrecurring payments to third parties a)
    7.8       39.1       12.6       26.5       -  
Management fees b)
    5.4