**Exhibit 99.2**

 

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**Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

(All amounts are expressed in U.S. dollars)

 

**INTRODUCTION**

** **

Axcan Pharma Inc. (“Axcan” or “the Company”) isa leading specialty pharmaceutical company concentrating in the field ofgastroenterology, with operations in North America and Europe. Axcan marketsand sells pharmaceutical products used in the treatment of a variety ofgastrointestinal diseases and disorders. The Company’s main products include pancreaticenzymes (ULTRASE, PANZYTRAT and VIOKASE) for the treatment of exocrinepancreatic insufficiency; bile acid (URSO/URSO 250, URSO FORTE/URSO DS andDELURSAN) for the treatment of certain cholestatic liver diseases; mesalamine(SALOFALK and CANASA) for the treatment of certain inflammatory bowel diseases;and sucralfate (CARAFATE and SULCRATE) for the treatment of duodenal ulcers.Axcan also has a number of projects in all phases of clinical development.

 

On November 29, 2007, Axcan announced thatit had entered into an agreement for Axcan to be acquired by TPG Capital andits affiliates in an all-cash transaction with a total value of approximately$1.3 billion. Under the terms of the transaction, TPG Capital and itsaffiliates will acquire all of the common shares of Axcan for an offer price of$23.35 per common share. Axcan anticipates that the transaction will becompleted in the first calendar quarter of 2008. However, there can be noassurances that the proposed transaction will be completed at that time or atall. The transaction will be financed through a combination of equitycontributed by TPG Capital and its affiliates and debt financing that has beencommitted by Bank of America, HSBC, and the Royal Bank of Canada. Thetransaction is not contingent on financing commitments. Completion of thetransaction is subject to the affirmative vote of Axcan shareholders and othercustomary conditions, including regulatory approvals. The arrangement agreementcontains customary provisions including the payment of a break-up fee in theevent of termination in certain circumstances. The arrangement agreementoutlining conditions associated with this transaction is available on SEDAR andEDGAR. Following the completion of the transaction, the Company’s common shareswill be delisted and no longer trade publicly. The Company’s headquarters willremain in Quebec, Canada.

 

**VISION**

 

Axcan’s vision is to become the referencegastroenterology specialty pharmaceutical company. The Company’s vision issupported by goals to provide value-added therapeutics for a broad spectrum ofunmet needs in gastroenterology, achieve a leadership position in its targetedgastroenterology segments, offer stimulating and rewarding opportunities forits employees and create shareholder value and a competitive shareholderreturn.

 

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**STRATEGY**

 

Axcan seeks to develop its gastrointestinalfranchise by 1) growing its base business; 2) launching new products;3) making strategic acquisitions; 4) advancing its research and developmentportfolio; and 5) expanding internationally.

 

*Base Business and New Products*: Axcan’s intention is to grow sales by building onits solid base business and introducing new products onto the market. TheCompany’s strategy brings together its focus on product differentiation and acompetitive time-to-market for its products, combined with astute portfoliomanagement and a heightened sales focus. Axcan believes that its revenuesshould be enhanced through increased sales of the Company’s existing products.

 

*Strategic Acquisitions*: Axcan’s goal is to build on its proven acquisitionstrategy and continue to aggressively seek products and/or companies to fuelfuture growth. By capitalizing on its current business model, the Company seeksto leverage its strengths and capabilities in order to develop and acquireproducts that have significant market potential and complement its area offocus.

 

*Research and Development*: Axcan’s products continue to provide great benefitto patients. The Company will sustain investment into research and development,in order to develop the next generation of products to address unmet needs ingastroenterology.

 

*International Expansion*: Axcan’s current infrastructure, both in NorthAmerica and Europe, will form the basis of the Company’s internationalexpansion, as management believes that it will serve as a springboard toincrease Axcan’s sales and marketing footprint worldwide.

 

**BUSINESS ENVIRONMENT**

 

Axcan’s revenue in North America has historicallybeen and continues to be principally derived from sales of pharmaceuticalproducts to large pharmaceutical wholesalers and large pharmacy chains. Axcanutilizes a “pull-through” marketing approach that is typical of pharmaceuticalcompanies. According to this approach, Axcan’s sales representativesdemonstrate the features and benefits of its products to gastroenterologists,who may write their patients prescriptions for Axcan’s products. The patients,in turn, take the prescriptions to pharmacies to be filled. The pharmacies thenplace orders with the wholesalers or, in the case of large pharmacy chains,their distribution centres, to which Axcan sells its products. Axcan’s revenuein Europe and other markets has historically been and continues to be principallyderived from sales of pharmaceutical products to institutional buyers andpharmacies through a network of distributors. The level of patient andphysician acceptance of Axcan’s products, as well as the availability ofsimilar therapies, which may be less effective but also less expensive thansome of Axcan’s products, impact Axcan’s revenues by driving the level andtiming of prescriptions for its products.

 

Axcan’s expenses are comprised primarily ofselling and administrative expenses (including marketing expenses), cost ofgoods sold (including royalty payments to those companies from which Axcanlicenses some of its commercialized products), research and developmentexpenses, as well as depreciation and amortization.

 

Axcan’s operating revenues are primarilyaffected by three factors: the level of acceptance of Axcan’s products bygastroenterologists and their patients; the ability of Axcan to convincepractitioners to use Axcan’s products for approved indications; and wholesalerbuying patterns.

 

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Historically, wholesalers’ business models inthe United States were dependent on drug price inflation. Their profitabilityand gross margins were directly tied to the speculative purchasing of pharmaceuticalproducts at pre-increase prices, and the selling of their product inventory totheir customers at the increased price. This inventory price arbitrageaccounted for a predominant portion of wholesalers’ compensation for theirdistribution services and had a dramatic effect on wholesaler buying patterns,as they invested in inventories in anticipation of generating higher grossmargins from manufacturer price increases. Since fiscal 2005, pharmaceuticalmanufacturers have not been increasing drug prices as frequently, and thepercentage increases have been lower. For these and other reasons, somewholesalers have changed their business model 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 themanufacturer or a fixed charge per item or per unit. The fee-for-serviceapproach results in wholesalers’ compensation being more stable, andvolume-based as opposed to price-increase based.

 

As a result of the move to a fee-for-servicebusiness model, many wholesalers are no longer investing in inventory ahead ofanticipated price increases and are reducing their inventories from theirhistorical levels. Under the new model, the consequence of manufacturers usingwholesalers is that they now realize the benefit of price increases morerapidly in return for paying wholesalers for the services they provide, on afee-for-service basis. This change in wholesalers’ business models has affectedAxcan’s revenue since fiscal 2005, and the resulting distribution servicesagreement (“DSA”) fees are deducted from gross sales. Currently, only one suchDSA is in place and Axcan expects to enter into further DSAs with its otherwholesalers.

 

***Principal Marketed Products***

 

The majority of the products that Axcan marketsdo not benefit from extensive patent protection. The Company believes howeverthat certain of its products benefit from other barriers to the entry ofcompetitors or generics. The Company’s products nevertheless remain subject tocompetition and generic product entries into their respective markets, whichcould significantly and negatively affect Axcan’s revenues, including, in thecase of generics, since they are typically sold at a significant discount toreference drug prices. Intellectual property protection, regulatoryexclusivities and certain other barriers to entry are discussed below on aproduct-by-product basis. As of September 30, 2007, Axcan’s main productsare ULTRASE, CANASA, URSO 250/URSO FORTE, PYLERA and CARAFATE in the UnitedStates, SALOFALK, SUCRALFATE and URSO in Canada and LACTEOL, DELURSAN andPANZYTRAT in Europe. Since the end of fiscal 2007, the patent covering URSO250/URSO FORTE’s use in the treatment of Primary Biliary Cirrhosis (“**PBC**”) has expired in the United States (November 19,2007) and the market exclusivity obtained on CANASA pursuant to the clinicalinvestigation exclusivity provisions of the Hatch-Waxman Act, covering a change in the formulation of this drug from a 500mgformulation to a 1,000mg suppository formulation, has expired (November 5, 2007).

 

Axcan’s main marketed products, their sales,prescriptions and patent/regulatory protection are discussed below.

 

**PANCREATIC ENZYMES**

 

***ULTRASE***

 

Axcan markets under the trademark ULTRASEcertain pancreatic enzyme microsphere (ULTRASE MS) and mini-tablet (ULTRASE MT)formulations designed to help patients with exocrine pancreatic insufficiency,(including pancreatic insufficiency associated with Cystic 

 

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Fibrosis) better digest food. ULTRASE ismarketed in the United States, Canada and a few export markets but this productis actively promoted solely in the United States.

 

For the year ended September 30, 2007,Axcan reported sales of $47.9 million ($39.1 million in 2006 and$36.0 million in 2005) for ULTRASE. ULTRASE competes with a number ofpancreatic enzyme formulations including PANCREASE® (Ortho-McNeilPharmaceutical), CREON® (Solvay Pharmaceuticals, Inc.) and PANCRECARB®(Digestive Care, Inc.), as well as with various other unbranded products.

 

ULTRASE is licensed exclusively from EurandInternational S.p.A (“**Eurand**”) underan exclusive license and supply agreement. This agreement which was entered into in 2000, initially was for aperiod of ten years with automatic renewals for subsequent periods of twoyears.  This agreement was amended in2007 and extended to 2015.  Axcan haspaid Eurand licensing fees totalling $3.5 million, and Axcan agreed to pay toEurand royalties of 6% on annual net sales.

 

In April 2004, the FDA formally notifiedmanufacturers of pancreatic insufficiency products that these drugs, whichinclude ULTRASE, must receive regulatory approval under a New Drug Application(“NDA”), before April 2008, in order to remain on the market. The FDArecently extended this deadline to April 2010. Axcan completed thesubmission of its NDA for ULTRASE MT in the fourth quarter of fiscal 2007,which filing was accepted by the FDA in December 2007.

 

ULTRASE MT was also granted a priority reviewor accelerated approval (as defined by the FDA) designation by the FDA. Underthe Prescription Drug User Fee Act the file must be reviewed by the FDA by atarget date of April 2008.

 

ULTRASE does not currently benefit from patentprotection. The Company believes that it will be entitled to receive NewProduct Exclusivity pursuant to the Hatch-Waxman Act upon approval of its NDA.This exclusivity is expected to prohibit the FDA from approving abbreviated newdrug applications for products containing the same active moiety, for a periodof five years. Further in its guidelines, entitled “Guidance for Industry - ExocrinePancreatic Insufficiency Drug Products - Submitting NDAs” dated April 2006, theFDA has stated that because of their complexity, pancreatic enzyme extractproducts are not likely to be appropriate for Abbreviated NDA filings (“**ANDAs**”).

 

Other manufacturers currently pursuing approval forporcine derived pancreatic enzymeproducts are Eurand International S.p.A. (“**Eurand**”) andSolvay Pharmaceuticals, Inc. Eurand announced on December 20, 2007that it had completed its NDA submission for its ZENTASE® product line and wasgranted priority review. Solvay Pharmaceuticals submitted an NDA for its CREON®Product Line in 2003. Solvay reported that it received a letter from the FDA inAugust 2007 citing certain chemistry, manufacturing and control data workand clinical concerns. Solvay has not reported further on its application.

 

Of the other pancreatic enzyme products currently onthe market PANCRECARB® (Digestive Care, Inc.) and PANCREASE® (Ortho-McNeilPharmaceutical), we are not aware that any NDA filings were made for theseproducts. Digestive Care Inc. has initiated a Phase III clinical trial forPANCRECARB® (completion was expected June 2007).  Although, Johnson & Johnson of whichOrtho-McNeil Pharmaceutical is a subsidiary had completed a Phase II forPANCREASE® in 2006, we are not aware of a Phase III ongoing at this time. Weare currently not aware of any clinical trial activities being conducted by anygeneric manufacturers.

 

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***VIOKASE***

 

Axcan markets under the brand name VIOKASEnon-enteric coated pancreatic replacement enzymes for the treatment of exocrinepancreatic insufficiency. VIOKASE, although not actively promoted, is sold inthe United States and Canada.

 

For the year ended September 30, 2007,Axcan reported sales of $11.2 million ($7.6 million in 2006 and $7.8 million in2005) for VIOKASE. VIOKASE is the only branded non-enteric coated replacementenzyme and competes with a number of generic products.

 

In April 2004, the FDA formally notifiedmanufacturers of pancreatic insufficiency products that these drugs, whichinclude VIOKASE, must receive regulatory approval under a New Drug Application(“NDA”) before April 2008, in order to remain on the market. The FDArecently extended this deadline to April 2010. Axcan is currently advancing the completion of itsNDA for VIOKASE.

 

VIOKASE does not currently benefit from patentprotection. The Company believes that it will be entitled to receive NewProduct Exclusivity pursuant to the Hatch-Waxman Act upon approval of its NDA.This exclusivity prohibits the FDA from approving abbreviated new drugapplications for products containing the same active moiety, for a period offive years. Further in its guidelines, entitled “Guidance for Industry -Exocrine Pancreatic Insufficiency of Drug Products - Submitting NDAs” datedApril 2006, the FDA stated that because of their complexity, pancreatic enzymeextract products are not likely to be appropriate for ANDA filings.

 

The Company believes that VIOKASE is currentlythe only branded uncoated pancreatic enzyme formulation commercially availablein the United States.

 

***PANZYTRAT***

 

PANZYTRAT consists of enteric coatedmicrotablets for use in the treatment of exocrine pancreatic insufficiency andpancreatic enzyme deficiency. PANZYTRAT is marketed in several countries,mainly Germany and the Netherlands as well as a few export markets. For theyear ended September 30, 2007, Axcan reported sales of $14.8 million($12.1 million in 2006 and $14.8 million in 2005) for PANZYTRAT, including$1.4 million ($0.8 million in 2006 and $2.9 million in 2005) inexport markets. Sales in Germany and the Netherlands represent 80% of the totalsales of PANZYTRAT and the main competitor in these territories is CREON®(Solvay Pharmaceuticals, Inc.).

 

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

 

**URSODIOL**

 

***URSO 250 and URSO FORTE - (United States)***

 

In the United States, Axcan has been marketingURSO 250, a 250-milligram ursodiol tablet for the treatment of PBC, since May 1998.URSO FORTE, a 500-milligram ursodiol tablet, was launched in November 2004.

 

For the year ended September 30, 2007,Axcan reported sales of $68.1 million ($49.3 million in 2006 and$36.0 million in 2005) for URSO250 / URSO FORTE in the United States.

 

In the United States, there is currently notherapy specifically approved to be marketed for the treatment of PBC otherthan URSO 250/URSO FORTE. However, other ursodiol

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products, approved and prescribed for gallstonedissolution as associated with active weight loss, are sometimes used for thetreatment of various liver diseases, including PBC. These products includeACTIGALLTM (Watson Pharmaceuticals) and generic versions of ACTIGALLTM.

 

In addition, on November 19, 2007 the FDAOrange book listed patent covering the use of URSO 250/USO FORTE, expired. URSO250/URSO FORTE does not benefit from any other patent protection or other formof regulatory exclusivity in the United States. As a result, if a generic ursodiol tablet were to be launched, it couldhave a significant negative impact on sales of URSO 250/ URSO FORTE in theUnited States.

 

In order to minimize the impact of anypotential generic competition for URSO in the United States, the Company hasundertaken, and plans to continue to undertake, certain strategic and tacticalmeasures, including the sequential modification and improvements to URSO’sattributes and specifications. forexample in July 2007, the Company introduced a scored tablet version ofURSO FORTE (which differentiates URSO from its competitors by giving physiciansmore flexible dosing options).

 

The Company believes that these sequentialmodifications and improvements coupled with URSO’s recognized brand name, itsspecific approval for the treatment of PBC, its similar pricing compared tocomparable generics of ACTIGALLTM, and its targeted marketingapproach aimed at hepatology specialists, provide a competitive advantage toURSO250 and URSO FORTE in the United States.

 

***URSO and URSO DS - (Canada)***

 

In Canada, Axcan markets URSO (250 mg) and URSODS (500 mg) for the treatment of cholestatic liver diseases, which include PBCand Primary Sclerosing Cholangitis (“**PSC**”).URSO/URSO DS were covered by a patent relating to the use ursodiol for thetreatment of PBC in Canada, which was to expire in 2010. However, in 2006, thegeneric product manufacturer, Pharmascience Inc. successfully challenged thevalidity of this patent under the Notice of Compliance Regulation procedures ofHealth Canada. In May 2006, generic versions of URSO and URSO DS receivedapproval for sale in Canada and were launched in fiscal 2007. The launch ofthese generic products has had a negative impact on sales of URSO/URSO DS inthe second half of fiscal 2007 and is expected to continue to negatively impactsales going forward.

 

URSO/URSO DS does not benefit from any otherpatent protection or other form of regulatory exclusivity in Canada.

 

For the year ended September 30, 2007,Axcan reported sales of $9.0 million ($11.4 million in 2006 and $11.1million in 2005) for URSO/URSO DS in Canada.

 

***DELURSAN***

 

DELURSAN is an ursodiol preparation marketed inFrance and indicated for the treatment of cholestatic liver diseases, includingPBC, PSC and liver disorders related to Cystic Fibrosis. DELURSAN does not haveany patent protection or any regulatory exclusivity in France.  For the year ended September 30, 2007,Axcan reported sales of $16.7 million ($13.9 million in 2006 and$13.1 million in 2005) for DELURSAN. As a result, if a generic ursodiolpreparation were to be launched, it could have a significant negative impact onsales of DELURSAN in France.

 

In France, DELURSAN currently competes mainlywith URSOLVAN® (Sanofi-Aventis S.A.).

 

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**MESALAMINE**

 

***CANASA***

 

CANASA is a mesalamine suppository sold by Axcan in the United Statesfor the treatment of distal ulcerative proctitis (UP). The Company believesthat CANASA currently is the only commercially available mesalamine suppositoryin the United States.

 

For the year ended September 30, 2007,Axcan reported sales of $65.1 million ($53.1 million in 2006 and$28.7 million in 2005) for CANASA in the United States.

 

CANASA competes with topical corticosteroidenemas and suppositories, as well as mesalamine enemas.

 

CANASA does not have any patent protection inthe United States. On November 5, 2007 the previously granted clinicalinvestigation exclusivity pursuant to the Hatch-Waxman Act, covering a changein the formulation of this drug from a 500mg formulation to a 1,000mgsuppository formulation, expired.  As aresult, if a generic mesalamine suppository were to be launched, it could havea significant negative impact on sales of CANASA in the United States.

 

However, in June 2007, the FDA publisheddraft guidance on the requirements it expects manufacturers seeking approval ofa mesalamine suppository to meet, in order to obtain approval for such aproduct. The guidance specifies, among other things, that a request of approvalmust be supported by placebo and reference-drug controlled clinical studies withclinical endpoints demonstrating efficacy in patients with UP.

 

The Company believes that it is unlikely thatgeneric competitors will be able to meet the requirements of this FDA guidance,since ethical review boards in the United States may not allow companies toconduct the FDA required placebo-controlled studies on their UP patients.However, the Company cannot provide assurances that any potential generic competitorwill not be able to meet such requirements.

 

Moreover, on July 27, 2007, the Companyfiled a Citizen’s Petition asking the FDA to require manufacturers seekingapproval of mesalamine rectal suppositories to perform an adequate andwell-controlled clinical safety and efficacy trial that provides substantialevidence that the generic product demonstrates therapeutic equivalence toCANASA in patients with UP, and to perform a pharmacokinetic study to evaluatethe systemic exposure in patients with UP. This petition has not yet beenheard. The Company believes this request to be consistent with the standardsthe FDA has previously applied to other topically acting or non-systemicallyabsorbed drugs and with the above referenced draft guidance published in June2007; but cannot provide assurances that its request will be granted.

 

***SALOFALK***

 

SALOFALK is a mesalamine-based product line(tablets, suspensions and suppositories) sold by Axcan in Canada, for thetreatment of certain inflammatory bowel diseases, such as ulcerative colitis,ulcerative proctitis and Crohn’s Disease. In Canada, SALOFALK does not have anypatent protection, or any regulatory exclusivity.

 

For the year ended September 30, 2007,Axcan reported sales of $19.3 million ($16.5 million in 2006 and$14.5 million in 2005) for SALOFALK.

 

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Severalproducts containing mesalamine in controlled-release tablets or capsules areavailable on the Canadian market, including ASACOLTM(The Proctor & Gamble Company) and DIPENTUMTM(UCB Pharma).

 

**SUCRALFATE**

 

***CARAFATE / SULCRATE***

 

CARAFATE / SULCRATE line of products isindicated for the treatment of gastric and duodenal ulcers. CARAFATE is sold inthe United States as oral tablets and an oral suspension and SULCRATE oralsuspension in Canada, where it is not actively promoted.

 

For the year ended September 30, 2007,Axcan reported combined sales of $52.2 million ($43.1 million in 2006and $37.7 million in 2005) for CARAFATE / SULCRATE.  CARAFATE / SULCRATE do not have any patentprotection or any regulatory exclusivity in their respective markets. Patentprotection for CARAFATE in fact lapsed in 2001. Currently, no generic versions of CARAFATE / SULCRATE oral suspension areavailable in the United States or Canada. If a generic version of these drugswere to be launched, it could have a significant negative impact on sales ofCARAFATE / SULCRATE suspension in the United States and Canada.

 

The Company believes, but cannot provideassurances, that due to the mode of absorption of CARAFATE oral suspension, theFDA will require manufacturers seeking an ANDA approval for a generic versionof CARAFATE suspension to conduct clinical trials in order to demonstratetherapeutic equivalence, which would likely be a barrier to the introduction ofa competing generic product in the United States.

 

**HELICOBACTER PYLORI ERADICATION**

 

***PYLERA***

 

Since May 7, 2007, Axcan has beenmarketing under the trademark PYLERA a 3-in-1 capsule therapy for theeradication of Helicobacter pylori, a bacterium recognized as being the maincause of gastric and duodenal ulcers. PYLERA is protected by patent claimscovering triple and quadruple therapies for Helicobacter pylori eradication.These claims cover the treatment of duodenal ulcer disease (and in somecountries reflux esophagitis and gastric ulcer) through the eradication ofHelicobacter pylori using a bismuth compound together with two or moreantibiotics. The expiry dates of these patents vary depending on thejurisdiction. In the United States, they expire in March 2010. The doublecapsule formulation of this product and its use in multiple therapies is alsocovered by patent in a number of countries. The US patent expires in December 2018.

 

Since its launch in May 2007, sales ofPYLERA in the United States have amounted to $1.8 million for the yearended September 30, 2007.

 

However, as PYLERA is considered by the FDA aspre-1997 antibiotic, the U.S. patent claims covering triple and quadrupletherapies for Helicobacter pylori eradication and claims covering the capsuleformulation, are not listable in the FDA’s Orange Book and may thus not beeligible to benefit from the automatic stay provisions, normarket-exclusivities pursuant to the Hatch-Waxman Act.

 

PYLERA competes with PREVPAC® (TAP PharmaceuticalProducts Inc.), the market leader and HELIDAC® (Prometheus, Inc.)

 

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**OTHER PRODUCTS**

 

***LACTEOL***

 

LACTEOL is a product containing a specific proprietary strain ofLactobacillus Acidophilus in a lyophilized powder form. It is available in anumber of dosage forms, including capsules, and is primarily indicated for thetreatment of diarrhoea. LACTEOL, which is mainly sold in France and in over 40export markets, does not have any patent protection, or any regulatoryexclusivity. However, the product is derived from a proprietary strain ofbacterium for which the ultimate parent organism is protected by a number ofsecurity safeguards, such that access by third parties seeking to reproduce itfor competitive or other purposes is limited and controlled.

 

For the year ended September 30, 2007,Axcan reported sales of $16.3 million ($18.1 million in 2006 and$20.3 million in 2005) for LACTEOL, including $9.9 million($9.1 million in 2006 and $8.8 million in 2005) outside of France. Salessignificantly decreased in the last two years since, as part of new measuresdesigned to reduce healthcare cost associated with the reimbursement ofprescription drugs, the French government decided to stop the reimbursement ofapproximately 200 drugs, including LACTEOL.

 

LACTEOL competes with a number of genericproducts on most markets. As LACTEOL has been marketed for several decades, thebrand name LACTEOL constitutes a definite marketing advantage wherever theproduct is sold.

 

***PHOTOFRIN / PHOTOBARR***

 

Axcan markets (directly or throughdistributors) PHOTOFRIN / PHOTOBARR in North America, Europe, and otherselected markets, for the treatment of High-Grade Dysplasia associated withBarrett’s Esophagus, obstructing esophageal cancer and non small cell lungcancer, as well as certain types of gastric cancers and cervical dysplasia.PHOTOFRIN / PHOTOBARR is a photo-sensitizer approved for use in photodynamictherapy, an innovative medical therapy based on the use of light-activateddrugs. PHOTOFRIN / PHOTOBARR is covered by a number of patents claimingcompositions (including product by process claims), methods of use in approvedindications, methods of manufacture, as well as patents for certain devicesused in connection with treatment with these products. In the United States,this product’s main market, patent expiries range from June 2009 to May 2016.

 

For the year ended September 30, 2007,Axcan reported sales of $5.9 million ($5.5 million in 2006 and $7.7million for 2005) for PHOTOFRIN / PHOTOBARR.

 

To the Company’s knowledge, there are currentlyno other photo-sensitizers approved as drugs in Canada, the United States andEurope for the treatment of High-Grade Dysplasia associated with Barrett’s Esophagus,obstructing esophageal cancer and lung cancer, gastric cancer or cervicaldysplasia.

 

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**FINANCIAL OVERVIEW**

 

This discussion and analysis is based on theCompany’s audited annual consolidated financial statements and the relatednotes thereto reported under generally accepted accounting principles in theUnited States (“U.S. GAAP”).

 

For the year ended September 30, 2007,revenue was $348.9 million ($292.3 million in 2006 and$251.3 million in 2005), operating income was $102.8 million($57.8 million in 2006 and $40.4 million in 2005) and net income was$71.5 million ($39.1 million in 2006 and $26.4 million in 2005).Revenue from sales of Axcan’s products in the United States was$254.7 million (73.0% of total revenue) for the year ended September 30,2007, compared to $201.8 million (69.0% of total revenue) for fiscal 2006 and$159.7 million (63.5% of total revenue) for fiscal 2005. In Canada,revenue was $38.0 million (10.9% of total revenue) for the year ended September 30,2007, compared to $38.0 million (13.0% of total revenue) for fiscal 2006and $34.4 million (13.7% of total revenue) for fiscal 2005. In Europe,revenue was $55.9 million (16.0% of total revenue) for the year ended September 30,2007, compared to $52.1 million (17.8% of total revenue) for fiscal 2006 and$57.1 million (22.7% of total revenue) for fiscal 2005.

 

In September 2007, Axcan entered into anexclusive license and development agreement with Cellerix SL (“Cellerix”) ofSpain, for the North American (United States, Canada and Mexico) rights toCx401, an innovative biological product candidate in development for thetreatment of perianal fistulas. Cx401 uses non-embryonic stem-cells to treatperianal fistulas in Crohn’s and non-Crohn’s Disease patients. A Phase IIclinical trial photographically assessed complete closure and healing, andshowed a 71% response rate in the acute phase, both in Crohn’s and non-Crohn’sDisease patients. Patent applications have been submitted, which, if granted,could provide protection until 2025. Under the terms of the agreement, as at September 30,2007, Axcan recorded a $10.0 million upfront payment payable to Cellerix, andwill make regulatory milestone payments that could total up to $30.0 million.Furthermore, Axcan will pay scaled royalties based on the net sales of Cx401.Axcan has also agreed to make an equity investment of up to $5.0 million inCellerix, should Cellerix complete its initial public offering by September 30,2010.

 

Duringthe third quarter of fiscal 2007, the Company called for redemption all of its$125.0 million 4.25% Convertible Subordinated Notes (the “Notes”) andthe holders of all of the Notes exercised their right to convert their Notes,in lieu of redemption, which resulted in the Company issuing an aggregate of8,924,080 common shares. Long-term debt was consequently reduced by $125.0million, and capital stock increased by the same amount. The difference betweenthe basic and diluted average number of common shares decreased for thequarters following the conversion. During the period when the Notes wereoutstanding, financial analysts estimated the Company’s earnings per share on afully diluted basis and, as a result, the conversion had no effect on futureestimates of earnings per share other than the elimination of financingexpenses. As a result of the conversion, financial expenses for the year ended September 30,2007, were reduced by $2.5 million in interest on long-term debt and increasedby $0.4 million in amortization of deferred debt issue expenses, comparedto fiscal 2006.

 

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***Financial Highlights***

 
| ** **                                                                                       | ** ** | **For the years ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| (in millions of U.S. dollars, except share related data) | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                       | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| Revenue                                                                                          |       | 348.9                                       |       | 292.3 |   | 251.3 |   |
| Net  income                                                                                      |       | 71.5                                        |       | 39.1 |   | 26.4 |   |
| Income  per common share                                                                         |       |                                        |       |   |   |   |   |
| Basic                                                                                            |       | 1.47                                        |       | 0.86 |   | 0.58 |   |
| Diluted                                                                                          |       | 1.33                                        |       | 0.79 |   | 0.56 |   |

 
| ** **                 | ** ** | **As at September 30,** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **2007**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **$**                        | ** ** | **$** | ** ** | **$** | ** ** |
| Total  assets              |       | 832.6                        |       | 695.8 |   | 641.4 |   |
| Long-term  debt            |       | 0.1                          |       | 125.6 |   | 126.3 |   |
| Shareholders’  equity |       | 690.2                        |       | 467.4 |   | 417.6 |   |

 

Thefollowing table sets forth, for the years indicated, the percentage of revenuerepresented by items in Axcan’s consolidated statements of operations:

 
| ** **                               | ** ** | **For the years ended  September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **%**                                       | ** ** | **%** | ** ** | **%** | ** ** |
| Revenue                                  |       | 100.0                                       |       | 100.0 |   | 100.0 |   |
|                                     |       |                                        |       |   |   |   |   |
| Cost  of goods sold                      |       | 24.0                                        |       | 24.9 |   | 28.5 |   |
| Selling  and administrative expenses     |       | 29.0                                        |       | 31.9 |   | 34.2 |   |
| Research  and development expenses       |       | 8.2                                         |       | 13.6 |   | 12.7 |   |
| Acquired  in–process research       |       | 2.9                                         |       | — |   | — |   |
| Depreciation  and amortization           |       | 6.4                                         |       | 7.8 |   | 8.6 |   |
| Partial  write-down of intangible assets |       | —                                      |       | 2.0 |   | — |   |
|                                     |       | 70.5                                        |       | 80.2 |   | 84.0 |   |
|                                     |       |                                        |       |   |   |   |   |
| Operating  income                        |       | 29.5                                        |       | 19.8 |   | 16.0 |   |
|                                     |       |                                        |       |   |   |   |   |
| Financial  expenses                      |       | 1.4                                         |       | 2.4 |   | 2.8 |   |
| Interest  income                         |       | (3.3                                        | )          | (1.9 | ) | (0.5 | ) |
| Loss  (gain) on foreign currency         |       | 0.7                                         |       | (0.4 | ) | (0.1 | ) |
|                                     |       | (1.2                                        | )          | 0.1 |   | 2.2 |   |
|                                     |       |                                        |       |   |   |   |   |
| Income  before income taxes              |       | 30.7                                        |       | 19.7 |   | 13.8 |   |
| Income  taxes                            |       | 10.2                                        |       | 6.3 |   | 3.3 |   |
| Net  income                              |       | 20.5                                        |       | 13.4 |   | 10.5 |   |

 

11

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***Guidance***

 

Totalrevenues for the year ended September 30, 2007, were $348.9 million,exceeding the top end of the Company’s previously issued guidance of $335.0 to$343.0 million. This compares with $292.3 million for fiscal 2006, andrepresents an increase of 19.4%. The Company’s research and development andselling and administrative expenses were within the range given in previouslyissued guidance.

 

**Year ended September 30,2007 compared to year ended September 30, 2006**

 

*Overview of Results ofoperations*

 
| ** **                                                                                       | ** ** | **For the years ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| (in millions of U.S. dollars, except share related data) | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                                                                       | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                                                                          |       | 348.9                                       |       | 292.3 |   | 56.6 |   | 19.4 |   |
| Cost  of goods sold (a)                                                                          |       | 83.7                                        |       | 72.8 |   | 10.9 |   | 15.0 |   |
| Selling  and administrative expenses (a)                                                         |       | 101.3                                       |       | 93.3 |   | 8.0 |   | 8.6 |   |
| Research  and development expenses (a)                                                           |       | 28.6                                        |       | 39.8 |   | (11.2 | ) | (28.1 | ) |
| Acquired  in–process research                                                               |       | 10.0                                        |       | — |   | 10.0 |   | — |   |
| Depreciation  and amortization                                                                   |       | 22.5                                        |       | 22.8 |   | (0.3 | ) | (1.3 | ) |
| Partial  write-down of intangible assets                                                         |       | —                                      |       | 5.8 |   | (5.8 | ) | (100.0 | ) |
|                                                                                             |       | 246.1                                       |       | 234.5 |   | 11.6 |   | 4.9 |   |
| Operating  income                                                                                |       | 102.8                                       |       | 57.8 |   | 45.0 |   | 77.9 |   |
| Financial  expenses                                                                              |       | 4.8                                         |       | 7.0 |   | (2.2 | ) | (31.4 | ) |
| Interest  income                                                                                 |       | (11.4                                       | )          | (5.5 | ) | (5.9 | ) | (107.3 | ) |
| Loss  (gain) on foreign currency                                                                 |       | 2.4                                         |       | (1.1 | ) | 3.5 |   | 318.2 |   |
|                                                                                             |       | (4.2                                        | )          | 0.4 |   | (4.6 | ) | — |   |
| Income  before income taxes                                                                      |       | 107.0                                       |       | 57.4 |   | 49.6 |   | 86.4 |   |
| Income  taxes                                                                                    |       | 35.5                                        |       | 18.3 |   | 17.2 |   | 94.0 |   |
| Net  income                                                                                      |       | 71.5                                        |       | 39.1 |   | 32.4 |   | 82.9 |   |

 

----

(a)          Exclusiveof depreciation and amortization

 
| Income  per common share |   |   |   |   |   |   |   |   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Basic                    |   | 1.47   |   | 0.86   |   | 0.61   |   | 70.9   |   |
| Diluted                  |   | 1.33   |   | 0.79   |   | 0.54   |   | 68.4   |   |

 

*Revenue*

 

For the year ended September 30, 2007,revenue was $348.9 million compared to $292.3 million for thepreceding fiscal year, an increase of 19.4%.

 

This increase in revenue primarily resultedfrom higher sales in the United States, which amounted to $254.7 millionfor the year ended September 30, 2007 compared to $201.8 million forthe preceding fiscal year, an increase of 26.2%. The end-customer prescriptiondemand resulted in positive growth for most of our products sold in the UnitedStates, which was reflected in sales to our major wholesalers. Although saleshave increased by 19.4%, major wholesalers in the United States slightlydecreased their average inventory 

 

12

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levels in fiscal 2007. Based on its bestestimate derived from information obtained from a number of its wholesalers inthe United States, the Company believes that changes in wholesaler inventorylevels did not have a materialimpact on revenues for the year ended September 30, 2007. The Companyestimates that at the end of its fourth quarter overall wholesaler inventorylevels of key products sold in the United States were at the higher end of thefour- to six-week range. For URSO andCANASA, the Company has seen an increase in the prescription size thatcontributed to higher dollar sales in fiscal 2007 compared to fiscal 2006.Furthermore, as Axcan transitions to new eligibility rules in its patientassistance programs, the Company is now realizing revenues from certainprescriptions that were provided free of charge, or at a reduced cost in priorperiods.

 

Sales in Europe also increased 7.3%, from $52.1million to $55.9 million for the year ended September 30, 2007, mainly dueto a strong sales performance of PANZYTRAT in Germany and DELURSAN in France.This overall increase in sales in Europe was achieved despite the delisting in March 2006by the French government of a number of pharmaceutical products from governmentformularies, including LACTEOL, and the re-pricing of other pharmaceuticals,including TAGAMET. For the year ended September 30, 2007, Axcan reportedsales of $16.3 million ($18.1 million in 2006), for LACTEOL,including $9.9 million ($9.1 million in 2006), outside of France.****The reduction in LACTEOL sales in France has been partiallyoffset by the addition of over-the-counter (“OTC”) sales of the product sincethe end of fiscal 2006 and higher sales outside of France, thus reducing theanticipated decline. As previously disclosed, the Company believes, but cannotprovide assurances, that the sales impact caused by the delisting from French governmentformularies on March 1, 2006, has stabilized.

 

Revenue is stated net of deductions for productreturns, chargebacks, contract rebates, DSA fees, discounts and otherallowances. The following table summarizes the Company’s gross-to-net revenueadjustments for each significant category:

 
| ** **                                        | ** ** | **For the years ended  September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| (in millions of U.S. dollars) | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** | **%** | ** ** |
| Gross  revenue                                    |       | 409.7                                       |       | 350.9 |   | 58.8 |   | 16.8 |   |
| Gross-to-net  revenue adjustments                 |       |                                        |       |   |   |   |   |   |   |
| Product returns                                   |       | 13.1                                        |       | 16.8 |   | (3.7 | ) | (22.0 | ) |
| Chargebacks                                       |       | 14.2                                        |       | 14.5 |   | (0.3 | ) | (2.1 | ) |
| Contract rebates                                  |       | 22.7                                        |       | 20.9 |   | 1.8 |   | 8.6 |   |
| DSA fees                                          |       | 3.6                                         |       | 2.6 |   | 1.0 |   | 38.5 |   |
| Discounts and other  allowances                   |       | 7.2                                         |       | 3.8 |   | 3.4 |   | 89.5 |   |
| Total  gross-to-net revenue adjustments           |       | 60.8                                        |       | 58.6 |   | 2.2 |   | 3.8 |   |
|                                              |       |                                        |       |   |   |   |   |   |   |
| Net  revenue                                      |       | 348.9                                       |       | 292.3 |   | 56.6 |   | 19.4 |   |

 

Product returns, chargebacks, contract rebates,DSA fees, discounts and other allowances totalled $60.8 million (14.8% ofgross revenue) for the year ended September 30, 2007, and$58.6 million (16.7% of gross revenue) for the year ended September 30,2006.

 

13

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The decrease in total deductions as apercentage of gross revenue for the year ended September 30, 2007, wasprimarily due to a decrease in product returns, which is in line with thedecline in wholesaler inventory levels which occurred during the first half offiscal 2007. As stated earlier, DSA fees are included in “Gross-to-net revenueadjustments” since the quarter ended September 30, 2006; prior to July 1,2006, such fees were included in selling and administrative expenses.

 

*Product sales*

 

Key sales figures forfiscal 2007 are as follows:

 

·                  Salesof pancreatic enzymes (ULTRASE, PANZYTRAT and VIOKASE) amounted to$74.0 million, an increase of 25.9% over fiscal 2006 sales of pancreaticenzymes.

 

·                  Salesof ursodiol (URSO/URSO 250, URSO FORTE/URSO DS and DELURSAN) increased 24.3% to$93.7 million.

 

·                  Salesof mesalamine (CANASA and SALOFALK) amounted to $84.5 million, a 21.4%increase from the prior year.

 

·                  Salesof sucralfate (CARAFATE and SULCRATE) amounted to $52.2 million, anincrease of 18.9 % over the previous fiscal year.

 

·                  Salesof other products amounted to $44.5 million, a 0.2% decrease over theprior year.

 

*Cost of goods sold*

 

Cost of goods sold consists principally of thecosts of raw materials, royalties and manufacturing costs. Axcan outsourcesmost of its manufacturing requirements. For the year ended September 30,2007, cost of goods sold increased $10.9 million (15.0%) to$83.7 million from $72.8 million for the preceding fiscal year. As apercentage of revenue, cost of goods sold for the year ended September 30,2007, decreased as compared to the corresponding period of the preceding fiscalyear from 24.9% to 24.0%. This decrease in the cost of goods sold as apercentage of revenue occurred as the Company continues to benefit fromimprovements to its information systems, allowing for better monitoring of itsinventories as well as lower manufacturing and purchasing costs. A reduction incertain project related expenses incurred for technical services and commercialproduct process improvements also contributed to the decrease.

 

*Selling and administrativeexpenses*

 

Selling and administrative expenses consistprincipally of salaries and other costs associated with Axcan’s sales force andits marketing activities. For the year ended September 30, 2007, sellingand administrative expenses increased $8.0 million (8.6%) to$101.3 million from $93.3 million for the preceding fiscal year. Theincrease in selling and administrative expenses is largely attributable tohigher expenses linked to increased sales performance in our base business aswell as the launch of PYLERA in May 2007, in the United States. Launchcosts include certain marketing materials as well as the hiring of additionalseven sales representatives in the second quarter of fiscal 2007 to supportlaunch activities.

 

*Research and developmentexpenses*

 

Research and development expenses consistprincipally of fees paid to outside parties that Axcan uses to conduct clinicalstudies and to submit governmental approval applications on 

 

14

----

 

its behalf, as well as the salaries andbenefits paid to its personnel involved in research and development projects.For the year ended September 30, 2007, research and development expensesdecreased $11.2 million (28.1%) to $28.6 million, from$39.8 million for the preceding fiscal year. Most of the decrease is dueto the termination during the last fiscal year of the development of ITAX forthe treatment of Functional Dyspepsia. This decrease was partially offset bythe costs specifically related to the NDAs for ULTRASE and VIOKASE. In April 2004,the FDA had formally notified manufacturers of pancreatic insufficiencyproducts that these drugs, which include ULTRASE and VIOKASE, must receiveapproval before April 2008, in order to remain on the market.  This deadline was recently extended to April 2010.Axcan recently completed the submission of its NDA for ULTRASE duringfiscal 2007, and is preparing its NDAfor VIOKASE.

 

*Acquired in-process research*

 

Theacquired in-process research of $10.0 million for the year ended September 30,2007, relates to an up-front license fee payable upon signing of the exclusivelicense agreement for North America with Cellerix to develop, manufacture andmarket Cx401, aninnovative biological product candidate in development for the treatment ofperianal fistulas. As this product had not reached technologicalfeasibility, the license fee was considered to be acquired in-process researchand was expensed in the fourth quarter of the year ended September 30,2007, the period of acquisition.

 

*Depreciation andamortization*

 

Depreciation and amortization consistsprincipally of the amortization of intangible assets with a finite life.Intangible assets include trademarks, trademark licenses and manufacturingrights. For the year ended September 30, 2007, depreciation andamortization decreased $0.3 million (1.3%) to $22.5 million from $22.8million for the preceding fiscal year, as some assets reached the end of theirdepreciation period.

 

*Partial write-down of intangible assets*

 

In the second quarter of fiscal 2006 and as aresult of budgetary initiatives implemented by the French government, whichresulted in the delisting of a number of pharmaceutical products fromgovernment formularies and the re-pricing of other pharmaceutical products, theCompany reviewed the appropriate carrying value and useful life of its Frenchsubsidiary’s intangible assets. During the three-month period ended March 31,2006, a partial write-down of $5.8 million was recognized on a French line ofproducts including TAGAMET and TRANSULOSE, as the carrying value of theintangible assets associated with these products, totalling $18.7 millionprior to the write-down, exceeded their estimated fair value since managementexpected a negative effect on TAGAMET and TRANSULOSE future sales as a resultof the budgetary initiatives implemented by the French government.

 

*Financial expenses*

 

Financial expenses consist principally ofinterest and fees paid in connection with funds borrowed for acquisitions. Forthe year ended September 30, 2007, financial expenses decreased $2.2million to $4.8 million from $7.0 million for the preceding fiscalyear. This decrease is mainly due to the reduction in interest on long-termdebt and the increase in amortization of deferred debt issue expenses, whichwere written off in the third quarter, following the conversion of the Notes.

 

*Interestincome*

 

For the year ended September 30, 2007,interest income increased $5.9 million (107.3%) to $11.4 million from$5.5 million for the preceding fiscal year. This increase is related tothe 

 

15

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increase in cash, cash equivalents andshort-term investments and an increase in the interest rates applicable to suchinvestments.

 

*Income taxes*

 

For the year ended September 30, 2007,income taxes amounted to $35.5 million compared to $18.3 million forthe preceding fiscal year. The effective tax rates were 33.2% for the yearended September 30, 2007, compared to 31.8% for the year ended September 30,2006. The increase in the effective tax rate is mainly due to a charge of$5.5 million to account for capital gains taxes on currency exchange gainsmade upon conversion of the Notes during the third quarter of fiscal 2007. Thischarge was partly offset by capital losses tax savings of $3.6 million oncurrency exchange losses made during the third and fourth quarters on cash heldin foreign currency.

 

The Company has been audited by Canada RevenueAgency, mainly on transfer pricing issues, for fiscal years 2002 to 2004. As aresult of this audit, which was completed in the second quarter of fiscal 2007,the Company received new assessments from Canada Revenue Agency, which allowedmanagement to confirm that the current estimate of the Company’s tax provisionis reasonable.

 

*Net income*

 

Net income was $71.5 million or $1.47 ofbasic income per share and $1.33 of diluted income per share, for the yearended September 30, 2007, compared to $39.1 million or $0.86 of basicincome per share and $0.79 of diluted income per share for the preceding year.The change in net income for the year ended September 30, 2007, resultedmainly from an increase in revenue of $56.6 million, an increase ininterest income of $5.9 million and a decrease in financial expenses of$2.2 million, which were partly offset by an increase in operatingexpenses of $11.6 million and an increase in income taxes of$17.2 million. The operating expenses for the year ended September 30,2006, included a $5.8 million expense of partial write-down of intangibleassets.

 

The weighted average number of common sharesoutstanding used to establish the basic per share amounts increased from 45.7 millionfor the year ended September 30, 2006, to 48.5 million for theyear ended September 30, 2007, following the exercise of optionspreviously granted pursuant to Axcan’s stock incentive plans, as well as theconversion of the Company’s Notes to equity, which occurred on June 28,2007. The weighted average number of common shares used to establish thediluted per share amounts increased from 55.1 million for the year ended September 30,2006, to 55.7 million for the year ended September 30, 2007. As at November 29,2007, there were 55.4****million commonshares issued and outstanding, including the 8,924,080 common shares issued on June 28,2007, upon conversion of all outstanding Notes.

 

*Cash flows*

 

The Company’s cash flows from operating,investing and financing activities, as reflected in the consolidated statementsof cash flows, are summarized in the following table:

 
| ** **                                        | ** ** | **For the years********ended September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|
| (in millions of U.S. dollars) | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **$**                                             | ** ** | **$** | ** ** | **$** | ** ** |
| Cash  provided by operating activities            |       | 136.1                                             |       | 84.3 |   | 51.8 |   |
| Cash  used by investing activities                |       | (19.4                                             | )          | (108.1 | ) | 88.7 |   |
| Cash  provided (used) by financing activities     |       | 6.6                                               |       | (0.6 | ) | 7.2 |   |

 

16

----

 

Cash flows provided by operating activitiesincreased $51.8 million from $84.3 million for the year ended September 30,2006, to $136.1 million for the year ended September 30, 2007, mainlydue to the increase in net income, a decrease in inventories and increases incurrent liabilities. Cash flows used by investing activities for the year endedSeptember 30, 2007, were $19.4 million, mainly due to the netacquisition of short-term investments of $12.8 million, plus the net cashused for the acquisition, net of the disposal, of property, plant and equipmentfor $6.6 million. Cash flows used by investing activities for the yearended September 30, 2006, were $108.1 million, mainly due to the netacquisition of short-term investments of $99.5 million, and the cash usedfor the acquisition of property, plant and equipment for $4.0 million andintangible assets for $4.6 million. Cash flows provided by financingactivities were $6.6 million for the year ended September 30, 2007,mainly due to the issue of common shares for cash consideration of$7.3 million as a result of the exercise of stock options during the year.

 

**Year ended September 30,2006 compared to year ended September 30, 2005**

 

*Overview of Results ofoperations*

 
| ** **                                                                                       | ** ** | **For the years ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| (in millions of U.S. dollars, except share related data) | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                                                                       | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                                                                          |       | 292.3                                       |       | 251.3 |   | 41.0 |   | 16.3 |   |
| Cost  of goods sold (a)                                                                          |       | 72.8                                        |       | 71.5 |   | 1.3 |   | 1.8 |   |
| Selling  and administrative expenses (a)                                                         |       | 93.3                                        |       | 86.0 |   | 7.3 |   | 8.5 |   |
| Research  and development expenses (a)                                                           |       | 39.8                                        |       | 31.9 |   | 7.9 |   | 24.8 |   |
| Depreciation  and amortization                                                                   |       | 22.8                                        |       | 21.5 |   | 1.3 |   | 6.0 |   |
| Partial  write-down of intangible assets                                                         |       | 5.8                                         |       | — |   | 5.8 |   | — |   |
|                                                                                             |       | 234.5                                       |       | 210.9 |   | 23.6 |   | 11.2 |   |
| Operating  income                                                                                |       | 57.8                                        |       | 40.4 |   | 17.4 |   | 43.1 |   |
| Financial  expenses                                                                              |       | 7.0                                         |       | 7.1 |   | (0.1 | ) | (1.4 | ) |
| Interest  income                                                                                 |       | (5.5                                        | )          | (1.3 | ) | (4.2 | ) | (323.1 | ) |
| Gain  on foreign currency                                                                        |       | (1.1                                        | )          | (0.2 | ) | (0.9 | ) | (450.0 | ) |
|                                                                                             |       | 0.4                                         |       | 5.6 |   | (5.2 | ) | — |   |
| Income  before income taxes                                                                      |       | 57.4                                        |       | 34.8 |   | 22.6 |   | 64.9 |   |
| Income  taxes                                                                                    |       | 18.3                                        |       | 8.4 |   | 9.9 |   | 117.9 |   |
| Net  income                                                                                      |       | 39.1                                        |       | 26.4 |   | 12.7 |   | 48.1 |   |

 

----

(a)          Exclusiveof depreciation and amortization

 
| Income  per common share |   |   |   |   |   |   |   |   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Basic                    |   | 0.86   |   | 0.58   |   | 0.28   |   | 48.3   |   |
| Diluted                  |   | 0.79   |   | 0.56   |   | 0.23   |   | 41.1   |   |

 

17

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*Revenue*

 

For the year ended September 30, 2006,revenue was $292.3 million compared to $251.3 million for thepreceding fiscal year, an increase of 16.3%.

 

This increase in revenue primarily resultedfrom higher sales in the United States, which amounted to $201.8 million forthe year ended September 30, 2006 compared to $159.7 million for thepreceding fiscal year, an increase of 26.4%. The end-customer prescriptiondemand resulted in positive growth for most of our products sold in the UnitedStates, which was reflected in sales to our major wholesalers as they worktowards reaching their targeted inventory levels. Although sales haveincreased, major wholesalers in the United States reduced their averageinventory levels in fiscal 2005 to a range of between 8 to 12 weeks. Duringfiscal 2006, wholesalers maintained inventory at the lower end of thisestimated range. For URSO and CANASA, the Company has seen an increase in theprescription size that contributed to higher dollar sales in fiscal 2006compared to fiscal 2005 following the launch in November 2004 of URSOForte and in February 2005 of the CANASA 1,000 mg suppository.

 

Sales in Europe decreased 8.4% from $57.1million to $52.1 million for the year ended September 30, 2006, mainly dueto the delisting in March 2006 by the French government of a number ofpharmaceutical products from government formularies, including LACTEOL, andre-pricing of other pharmaceuticals, including TAGAMET.

 

Revenue is stated net of deductions for productreturns, chargebacks, contract rebates, discounts, DSA fees and other allowancesof $58.6 million (16.7% of gross revenue) for the year ended September 30,2006, and $39.4 million (13.6% of gross revenue) for the year ended September 30,2005. This increase of total deductions as a percentage of gross revenue isprimarily due to an increase in chargebacks, contract rebates reserves and DSAfees. During the second quarter of fiscal 2006, the reserve for chargebacks andcontract rebates was increased as a result of a refinement in the method usedin the calculation for such reserves. The refinement was implemented based onbest industry practices as well as additional information that was notavailable to the Company in prior periods. The increase is also due to the DSAfees resulting from the change of some wholesalers to a fee-for-servicebusiness model for the year ended September 30, 2006.

 

*Product sales*

 

Key sales figures forfiscal 2006 are as follows:

 

·                  Salesof pancreatic enzymes (ULTRASE, PANZYTRAT and VIOKASE) amounted to$58.8 million, an increase of 0.2% over fiscal 2005 sales of pancreaticenzymes.

 

·                  Salesof ursodiol (URSO/URSO 250, URSO FORTE/URSO DS and DELURSAN) increased 25.2% to$75.4 million. This increase is mainly due to the impact of instability ofwholesaler inventory levels in 2005.

 

·                  Salesof mesalamine (CANASA and SALOFALK) amounted to $69.6 million, a 61.1%increase from the prior year. This increase is also mainly due to the impact ofinstability of wholesaler inventory levels in 2005.

 

·                  Salesof sucralfate (CARAFATE and SULCRATE) amounted to $43.9 million, anincrease of 18.9% over the previous fiscal year.

 

18

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·                  Sales of other products amounted to$44.6 million, a 12.7% decrease over the prior year.

 

*Cost of goods sold*

 

For the year ended September 30, 2006,cost of goods sold increased $1.3 million (1.8%) to $72.8 millionfrom $71.5 million for the preceding fiscal year. As a percentage ofrevenue, cost of goods sold for the year ended September 30, 2006,decreased as compared to the preceding fiscal year from 28.5% to 24.9%. Thisdecrease in the cost of goods sold as a percentage of revenue was due mainly tothe increase in sales of products with a higher margin and the fact that costof goods sold for the year ended September 30, 2005 included$4.7 million related to the write-down of inventory of finished goods forone product line sold in the United States.

 

*Selling and administrativeexpenses*

 

For the year ended September 30, 2006,selling and administrative expenses increased $7.3 million (8.5%) to$93.3 million from $86.0 million for the preceding fiscal year.

 

The increase for the year ended September 30,2006 is net of a reduction in expenses of $2.9 million following the reversalof a pending legal settlements accrual during the second quarter of fiscal2006. The Company’s subsidiary Axcan Scandipharm, Inc. (“Axcan Scandipharm”),had been named, along with other third parties, as a defendant in several legalproceedings related to the product line it markets under the name ULTRASE. Inaddition, the product line’s manufacturer and other defendant companies hadclaimed a right to recover amounts paid defending and settling these claims.The parties agreed to settle their dispute through binding arbitration. TheCompany accrued $2.9 million to cover any future settlements in connectionwith the indemnification claim and the lawsuits discussed above. Following aseries of decisions rendered by the arbitrator in favour of Axcan Scandipharm,the Company reassessed its exposure, and the accrual for these claims wasreversed in the three-month period ended March 31, 2006, thus reducing theselling and administrative expenses by $2.9 million for the year ended September 30,2006.

 

The adoption of the new accounting rule concerningthe compensation cost for share based awards resulted in an increase in sellingand administrative expenses of $3.0 million (3.5%) for the year ended September 30,2006. The increase is also due to consulting fees for regulatory compliancerelated to Sarbanes-Oxley, incremental marketing expenses in preparation of newproducts launches, additional marketing efforts on our current products and theCompany’s French subsidiary’s restructuring charge of $1.7 million in thethird quarter.

 

*Research and developmentexpenses*

 

Research and development expenses increased$7.9 million (24.8%) to $39.8 million for the year ended September 30,2006, from $31.9 million for the preceding fiscal year. This increase wasmainly due to the termination of the development of ITAX for the treatment ofFunctional Dyspepsia, which generated additional research and developmentexpenses of $4.3 million. These expenses were incurred to terminatecertain supply agreements related to the manufacturing of the product’s activepharmaceutical ingredient.  Additionalcosts associated with the close out of ongoing clinical trials are recorded inthe financial statements as they are incurred. In addition, in the fourthquarter of fiscal 2006, the Company incurred during the fourth quarter $1.5million in up-front licensing fees associated with a co-development agreementsigned with AGI Therapeutics Ltd., for the development of AGI-010, 

 

19

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a compound for the treatment ofgastro-esophageal reflux disease and nocturnal acid breakthrough.

 

*Depreciation andamortization*

 

Depreciation and amortization increased$1.3 million (6.0%) to $22.8 million for the year ended September 30,2006, from $21.5 million for the preceding fiscal year. This increase is mainlydue to the amortization of LACTEOL and ADEKs which were reclassified fromintangible assets with an indefinite life to intangible assets with a finite lifeon October 1, 2005.

 

*Partial write-down ofintangible assets*

 

As a result of budgetary initiativesimplemented by the French government, which resulted in the delisting of anumber of pharmaceutical products from government formularies and the re-pricingof other pharmaceutical products, the Company reviewed the appropriate carryingvalue and useful life of its French subsidiary’s intangible assets. During thethree-month period ended March 31, 2006, a partial write-down of $5.8million was recognized on a French line of products including TAGAMET andTRANSULOSE, as the carrying value of the intangible assets associated withthese products, totalling $18.7 million prior to the write-down, exceeded theirestimated fair value as management expects a negative effect on TAGAMET andTRANSULOSE future sales.

 

*Financial expenses*

 

Financial expenses decreased $0.1 million(1.4%) to $7.0 million for the year ended September 30, 2006, from$7.1 million for the preceding fiscal year.

 

*Income taxes*

 

For the year ended September 30, 2006,income taxes amounted to $18.3 million compared to $8.4 million forthe preceding fiscal year. The effective tax rates were 31.8% for the yearended September 30, 2006, and 24.1% for the year ended September 30,2005. This increase in the effective tax rate is due in part to the researchand development tax credits, deducted from the income taxes expense, in theamount of $2.5 million or 4.4 percentage points of the effective tax ratefor the year ended September 30, 2006, compared to $2.6 million or7.6 percentage points of the effective tax rate for the preceding fiscal year.This increase in effective tax rate before the deduction of research anddevelopment tax credits is mainly due to the fact that a greater part of ourtaxable income came from the United States, where the income tax rate ishigher.

 

*Net income*

 

Net income was $39.1 million or $0.86 ofbasic income per share and $0.79 of diluted income per share, for the yearended September 30, 2006, compared to $26.4 million or $0.58 of basicincome per share and $0.56 of diluted income per share for the preceding year.Net income for the year ended September 30, 2006, takes into account theexpensing of stock-based compensation which amounted to $3.6 million. Hadstock-based compensation been recorded in the prior year, the impact on netincome for the year ended September 30, 2005, would have been$4.3 million or $0.09 of basic income per share and $0.08 of dilutedincome per share, thus reducing net income to $22.2 million or $0.49 ofbasic income per share and $0.48 of diluted income per share. The changein net income for the year ended September 30, 2006, resulted mainly froman increase in revenue of $41.0 million and an increase in interest incomeof $4.2 million, which were offset partly by a $23.6 million increasein operating expenses and an increase in income taxes of $9.9 million. Theweighted average number of common shares outstanding used to establish thebasic per share amounts increased from 45.6 million for the year ended September 30, 2005,to 

 

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45.7 million for the year ended September 30,2006, following the exercise of options previously granted pursuant to Axcan’sstock incentive plans. The weighted average number of common shares used toestablish the diluted per share amounts decreased from 55.2 million for theyear ended September 30, 2005, to 55.1 million for the year ended September 30,2006.

 

*Cash Flows*

 

The Company’s cash flows from operating,investing and financing activities, as reflected in the consolidated statementsof cash flows, are summarized in the following table:

* *
| ** **                                        | ** ** | **For the years********ended September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|
| (in millions of U.S. dollars) | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **$**                                             | ** ** | **$** | ** ** | **$** | ** ** |
| Cash  provided by operating activities            |       | 84.3                                              |       | 67.7 |   | 16.6 |   |
| Cash  used by investing activities                |       | (108.1                                            | )          | (8.1 | ) | (100.0 | ) |
| Cash  used by financing activities                |       | (0.6                                              | )          | (1.4 | ) | 0.8 |   |

 

Cash flows provided by operating activitiesincreased $16.6 million from $67.7 million for the year ended September 30,2005, to $84.3 million for the year ended September 30, 2006. Thisincrease is mainly due to the increase in net income of $18.5 millionbefore the partial write-down of intangible assets. Cash flows used byfinancing activities were $0.6 million for the year ended September 30,2006. Cash flows used by investing activities for the year ended September 30,2006 were $108.1 million, mainly due to the net acquisition of short-terminvestments of $99.5 million and the cash used for the acquisition ofproperty, plant and equipment and intangible assets for $8.6 million. Cashflows used by investing activities for the year ended September 30, 2005,were $8.1 million mainly due to the net acquisition of short-term investmentsof $1.7 million plus the cash used for the acquisition of property, plantand equipment for $6.3 million.

 

**Balance sheet**

 

The following table summarizes balance sheetinformation as at September 30, 2007, compared to September 30, 2006:

 
| ** **                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| (in millions of U.S. dollars) | ** ** | **2007**               | ** ** | **2006**               | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$**      | ** ** | **%**      | ** ** |
| Cash,  cash equivalents andshort-term investments |       | 309.6                  |       | 173.0                  |       | 136.6      |       | 79.0       |       |
| Current  assets                                   |       | 402.1                  |       | 262.4                  |       | 139.7      |       | 53.2       |       |
| Total  assets                                     |       | 832.6                  |       | 695.8                  |       | 136.8      |       | 19.7       |       |
| Current  liabilities                              |       | 104.7                  |       | 64.6                   |       | 40.1       |       | 62.1       |       |
| Long-term  debt                                   |       | 0.1                    |       | 125.6                  |       | (125.5     | )          | (99.9      | )          |
| Total  liabilities                                |       | 142.4                  |       | 228.4                  |       | (86.0      | )          | (37.7      | )          |
| Shareholders’  equity                        |       | 690.2                  |       | 467.4                  |       | 222.8      |       | 47.7       |       |
|                                              |       |                   |       |                   |       |       |       |       |       |
| Working  capital                                  |       | 297.4                  |       | 197.8                  |       | 99.6       |       | 50.4       |       |

 

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Axcan’s cash, cash equivalents and short-terminvestments increased by $136.6 million (79.0%) to $309.6 million asat September 30, 2007, from $173.0 million at September 30, 2006. Asat September 30, 2007, Axcan does not hold any asset backed commercial paper.As at September 30, 2007, working capital was $297.4 million,compared to $197.8 million at September 30, 2006, an increase of$99.6 million (50.4%). Total assets increased $136.8 million (19.7%)to $832.6 million as at September 30, 2007, from $695.8 millionas at September 30, 2006. These increases were mainly due to the cashflows from operating activities of $136.1 million for the year ended September 30,2007.

 

Shareholders’ equity increased$222.8 million (47.7%) to $690.2 million as at September 30,2007, from $467.4 million as at September 30, 2006. The increase inshareholders’ equity is mainly due to the conversion of the Notes, amounting to$125.0 million, into capital stock and the net income of the year ended September 30,2007, of $71.5 million. Long-term debt decreased $125.5 million(99.9%) to $0.1 million as at September 30, 2007, from $125.6 millionas at September 30, 2006. This decrease is mainly due to the conversion ofthe Notes, amounting to $125.0 million, into capital stock.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

***CashRequirements***

 

Historically, Axcan has financed research anddevelopment, operations, acquisitions, milestone payments and investments outof the proceeds of public and private sales of its equity and convertible debt,cash flows from operating activities, and loans from joint venture partners andfinancial institutions. Since it went public in Canada in December 1995,Axcan has raised approximately $243.0 million from sales of its equity and$125.0 million from sales of convertible notes, which have since been convertedinto equity. Furthermore, Axcan has borrowed and since repaid funds fromfinancial institutions to finance the acquisition of Axcan Scandipharm, Inc.and from Schwarz Pharma, Inc., a former joint venture partner, to financethe acquisition of URSO.

 

Axcan’s research and development expensestotalled $39.8 million for fiscal 2006 and $28.6 million for fiscal 2007.Axcan believes that its cash, cash equivalents and short-term investments,together with funds provided by operations, will be sufficient to meet itsoperating cash requirements, including the development of products throughresearch and development activities, capital expenditures and repayment of itsdebt. Axcan regularly reviews product and other acquisition opportunities andmay therefore require additional debt or equity financing. Axcan cannot becertain that such additional financing, if required, will be available onacceptable terms, or at all.

 

*ContractualObligations and Other Commitments*

 

The following table summarizes Axcan’ssignificant contractual obligations as at September 30, 2007, and theeffect such obligations are expected to have on its liquidity and cash flows infuture years. This table excludes amounts already recorded on the balance sheetas current liabilities at September 30, 2007, and certain other purchaseobligations as discussed below:

 

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| ** **                                        | ** ** | **For the years ending September 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| (in millions of U.S. dollars) | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and   thereafter** | ** ** |
|                                              | ** ** | **$**                                                           | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| Long-term debt                                    |       | 0.5                                                             |       | 0.1 |   | — |   | — |   | — |   |
| Operating leases                                  |       | 2.4                                                             |       | 1.0 |   | 0.2 |   | 0.1 |   | 0.1 |   |
| Other commitments                                 |       | 1.6                                                             |       | 1.0 |   | 0.6 |   | 0.3 |   | — |   |
|                                              |       | 4.5                                                             |       | 2.1 |   | 0.8 |   | 0.4 |   | 0.1 |   |

 

Purchase orders for raw materials, finishedgoods and other goods and services are not included in the above table.Management is not able to determine the aggregate amount of such purchaseorders that represent contractual obligations, as purchase orders may representauthorizations to purchase rather than binding agreements. For the purpose ofthis table, contractual obligations for purchase of goods or services aredefined as agreements that are enforceable and legally binding on the Companyand that specify all significant terms, including: fixed or minimum quantitiesto be purchased; fixed, minimum or variable price provisions; and theapproximate timing of the transaction. Axcan’s purchase orders are based oncurrent needs and are fulfilled by its vendors within relatively short timetables.The Company does not have significant agreements for the purchase of rawmaterials or finished goods specifying minimum quantities or set prices thatexceed its short-term expected requirements. Axcan also enters into contractsfor outsourced services; however, the obligations under these contracts are notsignificant and the contracts generally contain clauses allowing forcancellation without significant penalty. As milestone payments are primarilycontingent on receiving regulatory approval for products under development,they do not have defined maturities and therefore are not included in the abovetable.

 

The expected timing of payment of theobligations discussed above is estimated based on current information. Thetiming of payments and actual amounts paid may differ depending on the timingof receipt of goods or services, or, for some obligations, changes toagreed-upon amounts.

 

*Long-termdebt*

 

Long-term debt, including instalments duewithin one year, totalled $0.6 million as at September 30, 2007,compared to $126.2 million as at September 30, 2006. As at September 30,2006, the long-term debt included $1.2 million of obligations undercapital leases and the $125.0 million Notes.

 

During the third quarter of fiscal 2007, theCompany called for redemption all of its Notes and the holders of all of theNotes exercised their right to convert their Notes, in lieu of redemption, by June 28,2007. The Company completed the conversion of the Notes by issuing the holdersan aggregate of 8,924,080 shares of its common stock.

 

*Operatingleases*

 

The Company has various long-term operatinglease agreements for office space, automotive equipment and otherequipment.  The latest expiry date forthese agreements is in 2013.

 

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*Other commitments*

 

Other operating commitments consist primarily of amounts relating toadministrative services, clinical studies and other research and developmentservices.

 

***Line of Credit***

 

Since September 28, 2007, the Company has had an amended creditagreement with a banking syndicate relative to a $125.0 million 5-yearfinancing, maturing on April 30, 2012 (September 20, 2009 in 2006).Under certain conditions, the amount of the credit can now be increased up toan additional $100.0 million and the maturity date extended.

 

The credit facility is secured by a first priority security interest onall present and future acquired assets of the Company and its materialsubsidiaries, and provides for the maintenance of certain financial ratios.Among the restrictions imposed by the credit facility is a covenant limitingcash dividends, share repurchases (other than redeemable shares issued inconnection with a permitted acquisition) and similar distributions toshareholders to 50% (10% in 2006) of the Company’s net income for the precedingfiscal year.

 

The interest rate varies, depending on the Company’s leverage, between5 and 75 (25 and 100 in 2006) basis points over the Canadian primerate or U.S. base rate and between 90 and 175 (125 and 200 in 2006) basispoints over the LIBOR rate or bankers’ acceptances. The line of credit alsoprovides for a stand-by fee of between 20 and 32.5 (25 and 37.5 in 2006) basispoints. The credit facility may be drawn in U.S. dollars, in Canadian dollars orin euro equivalent. As at September 30, 2007, there was no amountoutstanding under the line of credit.

 

Including cash, cash equivalents and short terminvestments, as well as the line of credit described above, as at September 30,2007, Axcan had up to $534.6 million of available cash resources.

 

***Off-BalanceSheet Arrangements***

 

Axcan does not have any transactions,arrangements and other relationships with unconsolidated entities that arelikely to affect its operating results, its liquidity or capital resources.Axcan has no special purpose or limited purpose entities that provideoff-balance sheet financing, liquidity or market or credit risk support, anddoes not engage in leasing, hedging, research and development services, orother relationships that expose the Company to liability that is not reflectedon the face of the consolidated financial statements.

 

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**QUARTERLY FINANCIAL HIGHLIGHTS**

(in millions of U.S. dollars 

except share related data) (unaudited)

 
| ** **               | ** ** | **For the three-month  periods ended** | ** ** |
|--------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **September ****30,   2007** | ** ** | **June ****30,   2007** | ** ** | **March 31,   2007** | ** ** | **December ****31,   2006** | ** ** |
| ** **               | ** ** | **$**                                  | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                     |       |                                   |       |   |   |   |   |   |   |
| Revenue                  |       | 92.5                                   |       | 92.3 |   | 85.3 |   | 78.8 |   |
| Net  income              |       | 16.8                                   |       | 19.4 |   | 17.8 |   | 17.5 |   |
| Income per common share: |       |                                   |       |   |   |   |   |   |   |
| Basic                    |       | 0.30                                   |       | 0.42 |   | 0.39 |   | 0.38 |   |
| Diluted                  |       | 0.30                                   |       | 0.36 |   | 0.34 |   | 0.34 |   |

 
| ** **               | ** ** | **September ****30,   2006** | ** ** | **June ****30,   2006** | ** ** | **March 31,   2006** | ** ** | **December ****31,   2005** | ** ** |
|--------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **$**                                  | ** ** | **$**                             | ** ** | **$**                          | ** ** | **$**                                 | ** ** |
|                     |       |                                   |       |                              |       |                           |       |                                  |       |
| Revenue                  |       | 72.3                                   |       | 76.7                              |       | 72.8                           |       | 70.6                                  |       |
| Net  income              |       | 8.3                                    |       | 13.3                              |       | 8.3                            |       | 9.2                                   |       |
| Income per common share: |       |                                   |       |                              |       |                           |       |                                  |       |
| Basic                    |       | 0.18                                   |       | 0.29                              |       | 0.18                           |       | 0.20                                  |       |
| Diluted                  |       | 0.17                                   |       | 0.26                              |       | 0.17                           |       | 0.19                                  |       |

 

Net income per share for each quarter has beencomputed based on the weighted average number of shares issued and outstandingduring the respective quarter; therefore, quarterly amounts may not add up tothe annual total.

 

**CRITICAL ACCOUNTING POLICIES**

** **

Axcan’s consolidated financial statements areprepared in accordance with U.S. GAAP, applied on a consistent basis. Some ofAxcan’s critical accounting policies require the use of judgment in theirapplication or require estimates of inherently uncertain matters. Therefore, achange in the facts and circumstances of an underlying transaction couldsignificantly change the application of Axcan’s accounting policies to thattransaction, which could have an effect on the Company’s financial statements.The policies that management believes are critical and require the use ofcomplex judgment in their application are discussed below.

 

***Use of Estimates***

 

Thepreparation of financial statements in accordance with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the recorded amounts of assets and liabilities and the disclosureof contingent assets and liabilities as at the date of the financial statementsand also affect the recognized amounts of revenues and expenses during theyear. Significant estimates and assumptions made by management includeallowances for accounts receivable and inventories, reserves for productreturns, rebates, chargebacks and DSA fees, the classification of intangibleassets between finite life and indefinite life, the useful lives of long-livedassets, the expected cash flows used in

 

25

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evaluatinglong-lived assets, goodwill and investments for impairment, stock-basedcompensation costs, pending legal settlements, the establishment of provisionsfor income taxes including the realizability of deferred tax assets and theallocation of the purchase price of acquired assets and businesses. Theestimates are made using the historical information and various other relevantfactors available to management. The Company reviews all significant estimatesaffecting the financial statements on a recurring basis and records the effectof any adjustments when necessary. Actual results could differ from thoseestimates based upon future events, which could include, among other risks,changes in regulations governing the manner in which the Company sells itsproducts, changes in the health care environment, foreign exchange and managedcare consumption patterns.

 

***Revenue Recognition***

 

Revenueis recognized when the product is shipped to the Company’s customers, providedthe Company has not retained any significant risks of ownership or futureobligations with respect to the product shipped. Provisions for sales discountsand estimates for chargebacks, managed care and Medicaid rebates, productsreturns and distribution service agreement fees are established as a reductionof product sales revenues at the time such revenues are recognized. Theserevenue reductions are established by the Company at the time of sale, based onhistorical experience adjusted to reflect known changes in the factors thatimpact such reserves. In certain circumstances, returns of products are allowedunder the Company’s policy and provisions are maintained accordingly. Theserevenue reductions are generally reflected as an addition to accrued expenses.Amounts received from customers as prepayments for products to be shipped inthe future are reported as deferred revenue.

 

The following table summarizes the activity inthe accounts related to revenue reductions:

 
| ** **                                              | ** ** | **Product** | ** ** | **Contract** | ** ** | ** **      | ** ** | **DSA**  | ** ** | **Discounts**      | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|--------------|------------|-----------------|------------|----------|------------|--------------------|------------|------------|------------|
| (in millions of U.S.  dollars) | ** ** | **returns** | ** ** | **rebates**  | ** ** | **Chargebacks** | ** ** | **fees** | ** ** | **and other** | ** ** | **Total**  | ** ** |
|                                                    | ** ** | **$**       | ** ** | **$**        | ** ** | **$**           | ** ** | **$**    | ** ** | **$**              | ** ** | **$**      | ** ** |
| Balance as at  September 30, 2006        |       | 7.8         |       | 7.2          |       | 4.8             |       | 0.9      |       | 0.3                |       | 21.0       |       |
| Provisions                                              |       | 13.1        |       | 22.7         |       | 14.2            |       | 3.6      |       | 7.2                |       | 60.8       |       |
| Settlements                                             |       | (8.4        | )          | (20.5        | )          | (13.1           | )          | (2.9     | )          | (7.1               | )          | (52.0      | )          |
| Balance as at  September 30, 2007        |       | 12.5        |       | 9.4          |       | 5.9             |       | 1.6      |       | 0.4                |       | 29.8       |       |

 

Axcan does not provide any form of priceprotection to its wholesale customers and permits product returns only if theproduct is returned in the 12 months following its expiration date. Credit forreturns is issued to the original purchaser at current wholesale acquisitioncost less 10%. Accrued liabilities include reserves of $12.5 million and$7.8 million as at September 30, 2007, and September 30, 2006,respectively, for estimated product returns.

 

In the United States, the Company establishesand maintains reserves for amounts payable to managed care organizations andstate Medicaid programs for the reimbursement of portions of the retail priceof prescriptions filled that are covered by these programs. Axcan establishesand maintains reserves for amounts payable to wholesale distributors for thedifference between their regular sale price and the contract price for theproducts sold to its contract customers. The amounts are recognized as revenuereductions at the time of sale based on the Company’s best estimate of theproduct’s utilization by these managed care and state Medicaid patients andsales to its contract customers, using historical experience adjusted toreflect known changes in the factors that impact such reserves. Accruedliabilities include reserves of $9.4 million and $5.9 million as at September 30,2007, and $7.2 million

 

26

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and $4.8 million as at September 30, 2006,respectively, for estimated contract rebates and chargebacks. 

 

If the levels of chargebacks, fees pursuant toDSAs, managed care and Medicaid rebates, product returns and discountsfluctuate significantly and/or if Axcan’s estimates do not adequately reservefor these reductions of net product revenues, the Company’s reported revenuecould be negatively affected.

 

***Intangible Assets and Goodwill***

 

In the past, the Company has acquiredproducts and businesses that included goodwill, trademarks, license agreementsand other identifiable intangible assets. Axcan’s goodwill and intangibleassets are stated at cost, less accumulated amortization. Since October 1,2001, goodwill and intangible assets with indefinite life are not amortized.The value of goodwill and intangible assets with indefinite life are subject toan annual impairment test and the intangible assets with definite life aresubject to an impairment test whenever events or changes in circumstancesindicate that the carrying amounts of these assets may not be recoverable. TheCompany compares the carrying value of the unamortized portion of intangibleassets with definite life to the future benefits of the Company’s activities orexpected sales of pharmaceutical products. For goodwill and intangible assetswith indefinite life, the test is based on the comparison of the fair value ofthe asset with its carrying amount. Should there be a permanent impairment invalue, a write-down will be recognized for the current year to reflect theassets at fair value.  Todate, Axcan has not recognized any significant impairment in value on goodwilland intangible assets with an indefinite life.

 

Intangibleassets with a finite life are amortized over their estimated useful livesaccording to the straight-line method over periods varying from 7 to 25 years.The straight-line method of amortization is used because it reflects, in theopinion of management, the pattern in which the intangible assets with a finitelife are used. In determining the useful life of intangible assets, the Companyconsiders many factors including the intention of management to support theasset on a long-term basis by maintaining the level of expenditure necessary tosupport the asset, the use of the asset, the existence and expiration date of apatent, the existence of a generic version of, or competitor to, the productand any legal or regulatory provisions that could limit the use of the asset.Axcan had not recognized any significant impairment in value of intangibleassets with a finite life prior to the three-month period ended March 31,2006, during which Axcan recognized a write-down of $5.8 million on a Frenchproduct line including TAGAMET and TRANSULOSE, following budgetary initiativesimplemented by the French government that adversely affected the estimatedfuture sales of these products.

 

As a result of acquisitions of product rightsand other identifiable intangible assets, the Company carries$367.2 million and $375.7 million as net intangible assets on itsconsolidated balance sheets as at September 30, 2007, and September 30,2006, respectively. The estimated annual amortization expense for intangibleassets with a finite life, which have a remaining weighted average amortizationperiod of approximately 17 years, for the next five fiscal years, isapproximately $17.4 million.

 

Also as a result of these acquisitions, theCompany carries $27.5 million of goodwill on its consolidated balance sheets asat September 30, 2007, and September 30, 2006.

 

***Research and Development Expenses***

 

Researchand development expenses are charged to operations in the year they areincurred. Acquired in-process research and development having no alternativefuture use is

 

27

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expensedat the time of acquisition. The cost of intangibles that are purchased fromothers for a particular research and development project that have noalternative future use are expensed at the time of acquisition.

 

***Stock-based compensation***

 

TheCompany maintains stock-based compensation plans under which stock options,deferred share units and restricted shares units may be granted to employeesand non-employee directors. Option awards made under the plans are granted at thestock market price on the last trading date prior to the date of grant and vestover periods ranging from 1 to 5 years.

 

EffectiveOctober 1, 2005, the Company adopted Statement ofFinancial Accounting Standard (“SFAS”) No. 123(R), *“Share-Based Payment”.*SFASNo. 123(R) requires all stock-based payments to employees to beexpensed over the requisite service based on the grant-date fair value of theawards and requires that the unvested portion of all outstanding awards uponadoption be recognized using the same fair value and attribution methodologiespreviously determined under SFAS No. 123, *“Accounting forStock-Based Compensation”*. The Company measures stock-basedcompensation cost at grant date, based on the estimated fair value of theaward, and recognizes the cost as an expense on a straight-line basis (net ofestimated forfeitures) over the employee requisite service period. The Companycontinues to use the Black-Scholes valuation method and applied therequirements of SFAS No. 123(R) using the modified prospectivetransition approach. Prior to adoption of SFASNo. 123(R), the Company accounted for stock-based employee compensationincluding stock options, using the method prescribed in APB No. 25 *“Accounting for Stock Issued to Employees”* and SFAS No. 123*“Accounting for Stock-Based Compensation”*.Under the provision of Accounting Principles Board Opinion (“APB”) No. 25and SFAS No. 123 the compensation cost was recognized using the intrinsicvalue and pro-forma disclosure of net income and income per share had to be presentedin the financial statements as if the fair value method had been applied. Theintrinsic value method measures stock-based compensation expense as the amountby which the stock price at the date of grant exceeds the exercise price.

 

***Income taxes***

 

Incometaxes are calculated using the liability method. Under this method, deferredincome tax assets and liabilities are recognized to account for the estimatedtaxes that will result from the recovery or settlement of assets andliabilities recorded at their financial statement carrying amounts. Deferredincome tax assets and liabilities are measured based on enacted tax rates andlaws at the date of the financial statements for the years in which thetemporary differences are expected to reverse. A valuation allowance isprovided for the portion of deferred tax assets that is more likely than not toremain unrealized. Adjustments to the deferred income tax asset and liabilitybalances are recognized in net income as they occur.

 

The Company conducts business in variouscountries throughout the world and is subject to tax in numerous jurisdictions.As a result of its business activities, the Company files a significant numberof tax returns that are subject to examination by various federal, state, andlocal tax authorities. Tax examinations are often complex as tax authoritiesmay disagree with the treatment of items reported by the Company and this mayrequire several years to resolve.

 

***Changes in accounting policies***

 

In June 2007, the Emerging Issues Task Force(“EITF”)  reached a consensus on Issue No. 07-3,“*Accounting for Non-refundable Advance Payments for Goods or Services*

 

28

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*Received for Use in FutureResearch and Development Activities.”* As a result of this consensus, non-refundable advance payments forgoods or services that will be used or rendered for future research anddevelopment activities should be deferred and capitalized. Such amounts shouldbe recognized as an expense as the related goods are delivered or the servicesare performed, or when the goods or services are no longer expected to beprovided. This Issue is effective for financial statements issued for fiscalyears beginning after December 15, 2007, and earlier application is notpermitted. This consensus is to be applied prospectively for new contractsentered into on or after the effective date. The Company is currentlyevaluating the impact of adoption of this consensus on its consolidatedfinancial statements.

 

In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, *“The Fair Value Option for Financial Assets and Financial Liabilities”*,which permits an entity to measure certain financial assets and financialliabilities at fair value. The objective of SFAS No. 159 is to improvefinancial reporting by allowing entities to mitigate volatility in reportedearnings caused by the measurement of related assets and liabilities usingdifferent attributes, without having to apply complex hedge accounting provisions.Under SFAS No. 159, entities that elect the fair value option (byinstrument) will report unrealized gains and losses in earnings at eachsubsequent reporting date. The fair value option election is irrevocable,unless a new election date occurs. SFAS No. 159 establishes presentationand disclosure requirements to help financial statement users understand theeffect of the entity’s election on its earnings, but does not eliminatedisclosure requirements of other accounting standards. Assets and liabilitiesthat are measured at fair value must be displayed on the face of the balancesheet. This statement is effective for fiscal years beginning after November 15,2007. The Company is currently evaluating the impact of the adoption of theprovisions of SFAS No. 159 on its consolidated financial statements.

 

In September 2006, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108,*“Considering the Effects of Prior YearMisstatements when Quantifying the Misstatements in Current Year FinancialStatements”* that expresses the Staff’s views regarding the processof quantifying financial statement misstatements. This bulletin is effectivefor any interim period of the first fiscal year ending after November 15,2006. SAB No. 108 requires that companies utilize a “dual approach” toassess the quantitative effects of financial statement misstatements. The dualapproach includes both an income statement focus and balance sheet focusassessment. SAB No. 108 permits companies to record the cumulative effectof initially applying the dual approach in the first year ending after November 15,2006 by recording any necessary correcting adjustments to the carrying valuesof assets and liabilities as of the beginning of that year with the offsettingadjustment recorded to the opening balance of retained earnings. The adoptionof this bulletin did not have a material effect on the Company’s consolidatedfinancial statements.

 

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements”*, whichdefines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. SFAS No. 157 replacesthe different definitions of fair value in the accounting literature with asingle definition. It defines fair value as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. SFAS No. 157 is effective forfair-value measurements already required or permitted by other standards forfinancial statements issued for fiscal years beginning after November 15,2008 and interim periods within those fiscal years. The Company is currentlyevaluating the impact of the adoption of the provisions of SFAS No. 157 onthe consolidated financial statements.

 

In July 2006, the FASB issued FASBInterpretation (“FIN”) No. 48, *“Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”*.FIN No. 48

 

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prescribes a recognition threshold andmeasurement attribute for the financial statements recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN No. 48is effective for fiscal years beginning after December 15, 2006 and iseffective for the Company in the first quarter of the year beginning October 1,2007. The Interpretation also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. Differences between tax positions taken in a taxreturn and amounts recognized in the financial statements are recorded asadjustments to income taxes payable or receivable, or adjustments to deferredtaxes, or both. FIN No. 48 also requires expanded disclosure at the end ofeach annual reporting period including a tabular reconciliation of unrecognizedtax benefits. In accordance with FIN No. 48, the Company will report thedifference between the net amount of assets and liabilities recognized in thebalance sheet prior to and after the application of FIN No. 48 as acumulative effect adjustment to the opening balance of retained earnings. TheCompany is currently evaluating the impact of the adoption of FIN No. 48on the consolidated financial statements. In May 2007, the FASB issuedFASB Staff Position (“FSP”) FIN 48-1, *“Definitionof Settlement in FASB Interpretation No. 48”*, which iseffective upon the initial adoption of Interpretation 48. FSP FIN 48-1 providesguidance on how to determine whether a tax position is effectively settled forthe purpose of recognizing previously unrecognized tax benefits. The Companywill apply the principles set forth in this FSP upon its adoption of FIN No. 48.

 

During the June 2006 meeting of the EITF,a consensus was reached on EITF Issue No. 06-3, *“How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).”* The EITF reached a consensus that this Issueapplies to any tax assessed by a governmental authority that is both imposed onand concurrent with a specific revenue producing transaction between a sellerand customer. Accordingly, taxes such as sales, use, value added, and someexcise taxes may be within the scope of this Issue. The EITF reached aconsensus that the income statement presentation (gross or net) of such taxesis an accounting policy decision that should be disclosed. In addition, acompany should disclose in interim and annual financial statements the amountof such taxes reported on a gross basis, if significant. This Issue becameeffective for interim and annual reporting periods beginning after December 15,2006. The Company elected to present on a net basis taxes collected fromcustomers and remitted to governmental authorities; that is, they are excludedfrom revenues. The adoption of this consensus did not have an effect on theCompany’s consolidated financial statements presentation.

 

During the June 2006 meeting of the EITF,a consensus was reached on EITF Issue No. 05-1, *“Accountingfor the Conversion of an Instrument that Became Convertible upon the Issuer’sExercise of a Call Option”*, that the issuance of equity securitiesto settle a debt instrument (pursuant to the instrument’s original conversionterms) that became convertible upon the issuer’s exercise of a call optionshould be accounted for as a conversion if the debt instrument contained asubstantive conversion feature as of its issuance date. That is, no gain orloss should be recognized related to the equity securities issued to settle theinstrument. The issuance of equity securities to settle a debt instrument thatbecame convertible upon the issuer’s exercise of a call option should beaccounted for as a debt extinguishment if the debt instrument did not contain asubstantive conversion feature as of its issuance date. That is, the fair valueof the equity securities issued should be considered a component of thereacquisition price of the debt. This Issue applies to all conversions withinthe scope of this Issue that result from the exercise of call options andbecame effective for interim or annual reporting periods beginning after June 28,2006, irrespective of whether the instrument was entered into prior orsubsequent to Board ratification of this Issue. The adoption of this accountingpronouncement did not have an impact on the Company’s consolidated financialstatements.

 

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In November 2005, the FASB issued FSP No. 115-1and No. 124-1, *“The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”*(“FSP No. 115-1”), which provides guidance on determining when investmentsin certain debt and equity securities are considered impaired, whether thatimpairment is other-than-temporary, and on measuring such impairment loss. FSP No. 115-1also includes accounting considerations subsequent to the recognition ofother-than-temporary impairment and requires certain disclosures about unrealizedlosses that have not been recognized as other-than-temporary impairments. FSP No. 115-1is required to be applied to reporting periods beginning after December 15,2005 and was required to be adopted by the Company in the second quarter of2006. The Company adopted FSP No. 115-1 beginning on January 1, 2006,and the adoption of FSP No. 115-1 did not have a material impact on theCompany’s consolidated financial statements.

 

In May 2005, the FASB issued SFAS No. 154,*“Accounting Changes and Error Corrections”* which providesguidance on the accounting for and reporting of accounting changes andcorrection of errors. This statement changes the requirements for theaccounting for and reporting of a change in accounting principle and applies toall voluntary changes in accounting principle. It also applies to changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions. This statementis effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The adoption of this statementdid not have an effect on the Company’s consolidated financial statements.

 

In November 2004, the FASB issued SFAS No. 151,*“Inventory Costs, an Amendment of ARB No. 43,Chapter 4”*.  SFAS No. 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material and requires that such items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal”. In addition, SFAS No. 151 requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after June 15,2005. The adoption of this statement did not have an effect on the Company’sconsolidated financial statements.

 

During the September 2004 meeting of the EITF, a consensus wasreached on EITF Issue 04-8, “*The Effect of ContingentlyConvertible Instruments on Diluted Earnings per Share*”. The EITF04-8 requires companies to include certain convertible instruments, that werepreviously excluded, in their calculations of diluted earnings per share. TheEITF concluded that Issue 04-8 is effective for periods ending after December 15,2004, and must be applied by restating all periods during which time theapplicable convertible instruments were outstanding. The common shares issuable under the 4.25% convertiblesubordinated notes issued in 2003, are therefore included in the Company’sdiluted income per share calculation.

 

**CONTROLS AND PROCEDURES**

 

Axcan’sChief Executive Officer and its Chief Financial Officer have designeddisclosure controls and procedures, or have caused them to be designed undertheir supervision, to provide reasonable assurance that material informationrelating to the Corporation has been made known to them and has been properlydisclosed in the annual regulatory filings.

 

An evaluation was carried out, under the supervision ofthe Chief Executive Officer and its Chief Financial Officer, of theeffectiveness of the Corporation’s disclosure controls and procedures, as of September 30,2007, as defined in Exchange Act Rules 13a-15(e) and 15d-

 

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15(e).Based on this evaluation, the Chief Executive Officer and the Chief FinancialOfficer have concluded that the design and operation of these disclosurecontrols and procedures were effective.

 

The Chief Executive Officer and Chief FinancialOfficer have also designed internal controls over financial reporting, or havecaused them to be designed under their supervision, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with GAAP.

 

An evaluation was carried out, under thesupervision of the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our internal control over financial reporting, as of September 30,2007, using the framework and criteria established in *InternalControl – Integrated Framework*, issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this evaluation,management has concluded that internal control over financial reporting waseffective as of September 30, 2007.

 

There were no changes in Axcan’s internalcontrols over financial reporting during fiscal year 2007 that have materiallyaffected, or are reasonably likely to materially affect, its internal controlsover financial reporting.

 

**RISK FACTORS**

 

Axcan is exposed to financial market risks,including changes in foreign currency exchange rates and interest rates. Axcandoes not use derivative financial instruments for speculative or tradingpurposes. Axcan does not use off-balance sheet financing or similar specialpurpose entities. Inflation has not had a significant impact on Axcan’s resultsof operations. Risks other than those described below can be found in “Part III- Business of Axcan” of the Company’s Annual Information Form.

 

***Foreign Currency Risk***

 

Axcan operates internationally; however, asubstantial portion of revenue and expense activities as well as capitalexpenditures are transacted in U.S. dollars. Axcan’s results of operations arealso affected by fluctuations of currencies other than the U.S. dollar, inparticular euros and Canadian dollars. Axcan’s exposure to exchange ratefluctuations in these currencies is reduced because, in general, Axcan’s revenuesdenominated in currencies other than the U.S. dollar are partially offset by acorresponding amount of costs denominated in the same currency. However,significant long-term fluctuations in relative currency values could have anadverse effect on future profitability.

 

***Interest Rate Risk***

 

The primary objective of Axcan’sinvestment policy is the protection of capital. Accordingly, investments aremade in high-grade government and corporate securities with varying maturities,but typically, less than 180 days. Therefore, Axcan does not have a materialexposure to interest rate risk, and a 100 basis-point adverse change ininterest rates would not have a material effect on Axcan’s consolidated resultsof operations, financial position or cash flows. Axcan is exposed to interestrate risk on borrowings under the credit facility. The credit facility bearsinterest based on LIBOR, U.S. dollar base rate, Canadian dollar prime rate, orCanadian dollar bankers’ acceptances. Based on projected advances under the creditfacility, a 100 basis-point adverse change in interest rates would not have amaterial effect on Axcan’s consolidated results of operations, financialposition, or cash flows.

 

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***Supply and Manufacture***

 

Axcan depends on third parties for the supply of active ingredients andfor the manufacture of the majority of its products. Although Axcan looks tosecure alternative suppliers, Axcan may not be able to obtain the activeingredients or products from such third parties, the active ingredients orproducts may not comply with specifications, or the prices at which Axcanpurchases them may increase and Axcan may not be able to locate alternativesources of supply in a reasonable time period, or at all. If any of theseevents occur, Axcan may not be able to continue to market certain of itsproducts, and its sales and profitability would be adversely affected.

 

***Volatility of Share Prices***

 

The market price of Axcan’s shares is subjectto volatility. Deviations in actual financial or scientific results, ascompared to expectations of securities analysts who follow our activities, canhave a significant effect on the trading price of Axcan’s shares.

 

***Transaction Risks***

 

As previously indicated, on November 29,2007, Axcan announced that it had entered into an agreement for Axcan to beacquired by TPG Capital and its affiliates. The completion of the proposedtransaction is subject to a number of terms and conditions, including, withoutlimitation: (i) approval of applicable governmental authorities; (ii) requiredAxcan shareholder approval; (iii) necessary court approvals; and (iv) certaintermination rights available to the parties under the agreement. There can beno assurance that these approvals will be obtained, the other conditions to thetransaction will be satisfied in accordance with their terms, and/or theparties to the agreement will not exercise their termination rights. In suchcases the proposed transaction could be modified, restructured or terminated,as applicable. Failure to complete the proposed transaction could have amaterial adverse impact on the market price of Axcan’s shares. In addition,depending on the circumstances in which the proposed transaction is notcompleted, Axcan could have to pay to TPG Capital significant fees and costs.

 

***Other***

 

The Company does not believe that unfavourabledecisions in possible proceedings related to any future tax assessment or anyamount it might be required to pay will have a material adverse effect on theCompany’s financial position, cash flows or overall trends in results ofoperations. There is the possibility of a material adverse impact on theresults of operations of the period in which the matter is ultimately resolved,if it is resolved unfavourably, or in the period in which an unfavourableoutcome becomes probable and reasonably estimable.

 

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** **

**FORWARD LOOKING STATEMENTS**

 

This document contains forward-looking statements, which reflect theCompany’s current expectations regarding future events. To the extent anystatements made in this release contain information that is not historical,these statements are essentially forward-looking, and are generally identifiedby words such as “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan”and “believe.” Forward-looking statements are subject to risks anduncertainties and undue reliance should not be placed on these statements.Certain material assumptions are applied in making forward-looking statements,and actual results may differ materially from those expressed or implied insuch statements. Important factors that could cause actual results to differmaterially from these expectations are outlined in the body of this document,and also include the difficulty of predicting FDA and other regulatoryapprovals, acceptance and demand for new pharmaceutical products, the impact ofcompetitive products and pricing, new product development and launch, relianceon key strategic alliances, availability of raw materials, the regulatoryenvironment, fluctuations in operating results, the protection of ourintellectual property and other risks detailed from time to time in the Company’sfilings with the Securities and Exchange Commission and the Canadian securitiesregulators. The Company cautions that the foregoing list of factors that mayaffect future results is not exhaustive. Axcan undertakes no obligation toupdate or revise any forward-looking statement, unless obligated to do sopursuant to applicable securities laws and regulations.

 

This MD&A has been prepared as at November 29, 2007.Additional information on the Company is available through regular filing ofpress releases, quarterly financial statements and the Annual Information Form onthe SEDAR website and the 40-F on the EDGAR website.

 

On behalf of Management,

(signed)

****

**Steve Gannon**

Senior Vice President and Chief FinancialOfficer

 

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Thenames AXCAN, AXCAN PHARMA, CANASA, CARAFATE, DELURSAN, ITAX, LACTEOL,PANZYTRAT, PYLERA, PHOTOFRIN/PHOTOBARR, SALOFALK, SULCRATE, TAGAMET,TRANSULOSE, ULTRASE, URSO/URSO 250, URSO FORTE, URSO DS and VIOKASE appearingin this document are trademarks or registered trademarks of Axcan Pharma Inc.and its subsidiaries; the name ADEKs is a registered trademark ofCarlsson-Rensselaer Corporation.

 

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