**Exhibit 99.4**

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**ANNUAL INFORMATION FORM**

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**FOR FISCAL YEAR ENDED SEPTEMBER 30, 2007**

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**DECEMBER 28, 2007**

 

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**TABLE OF CONTENTS**

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| INTERPRETATION                                                                                          | 3                                            |
|---------------------------------------------------------------------------------------------------------|----------------------------------------------|
| DOCUMENTS  INCORPORATED BY REFERENCE                                                                    | 3                                            |
| CAUTION  REGARDING FORWARD-LOOKING INFORMATION                                                          | 3                                            |
| PART I –  CORPORATE STRUCTURE                                                                 | 5                                            |
| 1.                                                                                                      | Jurisdiction  of Incorporation and Articles  | 5 |
| 2.                                                                                                      | Current  Organization                        | 5 |
| PART II –  DESCRIPTION OF THE BUSINESS                                                        | 6                                            |
| 1.                                                                                                      | Overview                                     | 6 |
| 2.                                                                                                      | Growth  Strategy                             | 6 |
| 3.                                                                                                      | Customers                                    | 7 |
| 4.                                                                                                      | Significant  Customers                       | 7 |
| PART III  - GENERAL DEVELOPMENT OF THE BUSINESS                                                    | 8                                            |
| 1.                                                                                                      | Recent  Industry Developments                | 8 |
| 2.                                                                                                      | Change in  Wholesaler’s Business Models | 8 |
| 3.                                                                                                      | Financial  Developments                      | 9 |
| 4.                                                                                                      | License and  Development Agreement           | 9 |
| PART IV -  BUSINESS OF AXCAN                                                                       | 10                                           |
| 1.                                                                                                      | Main Marketed  Products                      | 10 |
| 2.                                                                                                      | Products in  Development                     | 16 |
| 3.                                                                                                      | Regulatory  Affairs and Quality Assurance    | 19 |
| 4.                                                                                                      | Regulation                                   | 19 |
| 5.                                                                                                      | Patents and  Proprietary Rights              | 21 |
| 6.                                                                                                      | Employees                                    | 24 |
| 7.                                                                                                      | Environmental  Protection, Health and Safety | 25 |
| 8.                                                                                                      | Facilities                                   | 25 |
| PART V -  RISK FACTORS                                                                             | 26                                           |
| PART VI -  SELECTED CONSOLIDATED FINANCIAL INFORMATION                                             | 42                                           |
| PART VII - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND OPERATING RESULTS | 43                                           |
| PART VIII  - DIVIDEND POLICY                                                                       | 43                                           |
| PART IX –  DESCRIPTION OF CAPITAL STRUCTURE                                                   | 44                                           |
| 1.                                                                                                      | Common Shares                                | 44 |
| 2.                                                                                                      | Preferred  Shares                            | 44 |
| PART X -  MARKET FOR SECURITIES                                                                    | 45                                           |
| 1.                                                                                                      | Market for  Securities                       | 45 |

 

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| 2.                                                                          | Trading  History | 45 |
|-----------------------------------------------------------------------------|------------------|----|
| PART XI -  DIRECTORS AND OFFICERS                                      | 46               |
| 1.                                                                          | Directors        | 46 |
| 2.                                                                          | Senior  Officers | 46 |
| PART XII  - ADDITIONAL DISCLOSURE FOR DIRECTORS AND EXECUTIVE OFFICERS | 46               |
| PART XIII  - LEGAL PROCEEDINGS                                         | 48               |
| PART XIV  – TRANSFER AGENTS AND REGISTRARS                        | 48               |
| PART XV -  MATERIAL CONTRACTS                                          | 49               |
| PART XVI  - INTERESTS OF EXPERTS                                       | 49               |
| PART XVII  - ADDITIONAL INFORMATION                                    | 49               |
| SCHEDULE A -  GLOSSARY OF TECHNICAL TERMS                                   | 50               |

 

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# **INTERPRETATION**

# ** **

In this Annual Information Form (“**AIF**”), “we”, “us”, “our”, “Axcan”, and “the Company” areused to refer to Axcan Pharma Inc., its predecessors and its direct andindirect subsidiaries and their predecessors, collectively, unless the contextotherwise requires.

 

In this AIF, all references to specific years arereferences to the fiscal year ended September 30. Unless otherwise stated,all dollar amounts appearing in this AIF are stated in U.S. dollars, and allfinancial data included in this AIF has been prepared in accordance with U.S.generally accepted accounting principles.

 

Unless otherwise stated, all market size informationappearing in this AIF has been provided by IMS Health Ltd., a widely acceptedprovider of information services specializing in medical research information.

 

Certain terms and abbreviations used in this AIF aredefined in “Schedule A – Glossary of Technical Terms”.

 

# **DOCUMENTS INCORPORATEDBY REFERENCE**

# ** **

The following documents are incorporated by referenceinto this AIF:

 

1.             Theaudited consolidated financial statements of Axcan Pharma Inc. for the yearsended September 30, 2007, September 30, 2006, and September 30,2005, reported on by Raymond Chabot Grant Thornton Chartered Accountants (the “**2007 Financial Statements**”); and

 

2.             TheManagement’s Discussion and Analysis of financial condition and results ofoperations of Axcan Pharma Inc. (the “**2007 MD&A**”).

 

Please note that both of these documents are availableon SEDAR on www.sedar.com.

 

# **CAUTION REGARDINGFORWARD-LOOKING INFORMATION**

# ** **

From time to time, we make written or oralforward-looking statements, as defined under applicable securities laws. We maymake such statements in this document, in other filings with Canadianregulators or the United States Securities and Exchange Commission, in reportsto shareholders or in other communications. These forward-looking statementsinclude, among others, statements with respect to our objectives for 2008, ourmedium-term goals, and strategies to achieve those objectives and goals, as wellas statements with respect to our beliefs, plans, objectives, expectations,anticipations, estimates and intentions. The words “may”, “could”, “should”, “would”,“suspect”, “outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”,“forecast”, “objective”, and words and expressions of similar import areintended to identify forward-looking statements.

 

By their very nature, forward-looking statementsinvolve inherent risks and uncertainties, both general and specific, which giverise to the possibility that predictions, forecasts, projections, and otherforward-looking statements will not be achieved. You should not place unduereliance on forward-looking statements since they involve known and unknownrisks, uncertainties and other factors which are, in some cases, beyond ourcontrol and which could materially affect actual results, levels of activity,performance or achievements. Factors that may cause actual results to differmaterially from current expectations include, but are not limited to: (i) ourability to obtain and maintain United States Food and Drug Administration (“**FDA**”) and other regulatory approvals for our products for the indicationsand on the timetables specified herein, (ii) our ability to obtain andprotect our intellectual property, including market exclusivity (whereapplicable) related to our products and product candidates; (iii) ourpotential for future growth and the development of our product pipeline,including our ability to identify and acquire, on commercially attractiveterms, additional products, (iv) our ability to form and maintaincollaborative relationships to develop and commercialize our productcandidates; and (v) general economic and business conditions.

 

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Other factors that may cause actual results to differmaterially from current expectations include, but are not limited to,management of credit, market, liquidity and funding and operational risks; thestrength of the Canadian and United States economies and the economies of othercountries in which we conduct business; the impact of the movement of theCanadian dollar relative to other currencies, particularly the US dollar andthe Euro; the effects of changes in monetary policy, including changes ininterest rate policies of the Bank of Canada and the Board of Governors of theFederal Reserve System in the United States; the effects of competition in themarkets in which we operate; the impact of changes in the laws and regulationsand enforcement thereof; judicial judgments and legal proceedings; our abilityto obtain accurate and complete information from or on behalf of our customersand counterparties; our ability to successfully realign our organization,resources and processes; our ability to complete strategic acquisitions and tointegrate our acquisitions successfully; changes in accounting policies andmethods we use to report our financial condition, including uncertaintiesassociated with critical accounting assumptions and estimates; operational andinfrastructure risks; other factors that may affect future results includingchanges in trade policies, timely development and introduction of new products,changes in our estimates relating to reserves and allowances, changes in taxlaws, natural disasters such as hurricanes, the possible impact on ourbusinesses from public health emergencies, international conflicts and otherdevelopments including those relating to the war on terrorism; and our successin anticipating and managing the foregoing risks.

 

We caution that the foregoing list of importantfactors that may affect future results is not exhaustive. Axcan undertakes noobligation to update or revise any forward-looking statement, unless obligatedto do so pursuant to applicable securities laws and regulations. When relyingon our forward-looking statements to make decisions with respect to theCompany, investors and others should carefully consider the foregoing factorsand other uncertainties and potential events. We do not undertake to update anyforward-looking statement, whether written or oral, that may be made from timeto time by us or on our behalf.

 

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# **PART I – CORPORATESTRUCTURE**

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## **1.**              JURISDICTIONOF INCORPORATION AND ARTICLES

## ** **

Axcan was incorporated under the *CanadaBusiness Corporations Act* on May 6, 1982 under the name 115391Canada Inc. On February 14, 1983, Axcan changed its name to InterfalkCanada Inc. and on October 1, 1993, it amalgamated with Axcan HoldingsLtd., its parent corporation, under the name Interfalk Canada Inc., which waschanged to Axcan Pharma Inc. on July 12, 1994. On October 30, 1995,the Company’s Articles were amended to delete the private company restrictions,re-designate the existing Class “A” shares and Class “B” shares ascommon shares and preferred shares, respectively, and consolidate the commonshares on a 0.44 for one basis. On June 6, 2000, the Company’s Articleswere amended again to create 14,175,000 Series A preferred shares and12,000,000 Series B preferred shares.

 

The head office of Axcan, and its principal place ofbusiness is located at 597, Laurier Boulevard, Mont-Saint-Hilaire, Quebec, J3H6C4, Canada.

 

## **2.**              CURRENTORGANIZATION

## ** **

Significant operating subsidiaries are defined asthose companies that contribute 10% or more of the consolidated revenues orconsolidated operating income of the Company or account for 10% or more of theconsolidated total assets of the Company. The following chart shows thejurisdictions of incorporation of Axcan and those principal operatingsubsidiaries. All of the outstanding shares of such operating subsidiaries orassociated corporations are owned directly or indirectly by Axcan.

 

 

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# **PART II –DESCRIPTION OF THE BUSINESS**

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## **1.**              OVERVIEW

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Axcan is a leading specialtypharmaceutical company concentrating in the field of gastroenterology, withoperations in North America and Europe. Axcan markets and sells pharmaceuticalproducts used in the treatment of a variety of gastrointestinal diseases anddisorders. The Company’s main products include pancreatic enzymes (ULTRASE,PANZYTRAT and VIOKASE) for the treatment of pancreatic insufficiency; bile acid(URSO/URSO 250, URSO FORTE/URSO DS and DELURSAN) for the treatment of certaincholestatic liver diseases; mesalamine (SALOFALK and CANASA) for the treatmentof certain inflammatory bowel diseases; a *Helicobacter pylori*eradication drug (PYLERA) for the eradication of the cause of gastric andduodenal ulcers; and sucralfate (CARAFATE and SULCRATE) for the treatment ofgastric and duodenal ulcers. Axcan also has a number of projects in all phasesof clinical development, further described in the section “Products inDevelopment” of this AIF.

 

In addition to its marketing activities, Axcan carriesout research and development activities on products at various stages ofdevelopment. These activities are carried out primarily with respect to productcandidates, which are acquired or licensed from third parties. By combining itsmarketing expertise with its research and development experience, Axcandistinguishes itself from specialty pharmaceutical companies that focus solelyon distribution of products and offers licensors the prospect of rapidlyexpanding the potential market for their products. As a result, Axcan ispresented with opportunities to acquire or in-license products that have beenadvanced to the later stages of development by other companies. This focus onproducts in late-stage development enables Axcan to reduce risks and expensesassociated with new drug development.

 

## **2.**              GROWTHSTRATEGY

## ** **

Giventhe highly competitive industry in which the Company operates, Axcan ispursuing a number of strategic options to drive sustainable growth, including 1) growing its base business; 2)launching new products; 3) making strategic acquisitions; 4) advancing itsresearch and development portfolio; and 5) expanding internationally.

 
| **Base Business and New  Products**: |   | Axcan’s intention is to grow  sales by building on its solid base business and introducing new products on  to the market. The Company’s strategy brings together its focus on product  differentiation and a competitive time-to-market for its products, combined  with astute portfolio management and a heightened sales focus.                                          |
|--------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| **Strategic Acquisitions**:          |   | Axcan’s goal is to build on  its proven acquisition strategy and continue to aggressively seek products  and/or companies to fuel future growth. By capitalizing on its current  business model, the Company seeks to leverage its strengths and capabilities  in order to develop and acquire products that have significant market  potential and complement its area of focus. |
|                                 |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| **Research and Development**:        |   | Axcan’s products continue to  provide great benefit to patients. The Company will sustain investment into  research and development, in order to develop the next generation of products  to address unmet needs in gastroenterology.                                                                                                                                             |
|                                 |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| **International Expansion**:         |   | Axcan’s current  infrastructure, both in North America and Europe, will form the basis of the  Company’s international expansion, as management believes that it will serve  as a springboard to increase Axcan’s multinational sales and marketing  footprint.                                                                                                         |

 

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## **3.**              CUSTOMERS

## ** **

Axcan’s revenue has historically been and continues tobe principally derived from sales of pharmaceutical products to largepharmaceutical wholesalers. Axcan utilizes a “pull-through” marketing approachthat is typical of pharmaceutical companies. Under this approach, Axcan’s salesrepresentatives demonstrate the features and benefits of its products tophysicians, in particular, gastroenterologists who may write their patientsprescriptions for Axcan’s products. The patients, in turn, take theprescriptions to pharmacies to be filled. The pharmacies then place orders withthe wholesalers, to whom Axcan sells its products.

 

## **4.**              SIGNIFICANTCUSTOMERS

## ** **

The following table identifies externalcustomers that accounted for 10% or more of the Company’s total revenue:

 
| ** **           | ** ** | **Percentage  of Total Revenue** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **           | ** ** | **%**                                      | ** ** | **%** | ** ** | **%** | ** ** |
| McKesson Corporation |       | 41.2                                       |       | 39.0 |   | 30.2 |   |
| Cardinal Health      |       | 25.0                                       |       | 24.4 |   | 20.9 |   |
| Amerisource Bergen   |       | 11.1                                       |       | 11.4 |   | 11.0 |   |
| TOTAL                |       | 77.3                                       |       | 74.8 |   | 62.1 |   |

 

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# **PART III - GENERALDEVELOPMENT OF THE BUSINESS**

# ** **

## **1.**              RECENTINDUSTRY DEVELOPMENTS

## ** **

The pharmaceutical industry is highly competitive andsubject to rapid and significant changes.

 

These changes include:

 

1.              risinghealthcare costs;

 

2.             intensifyingcost containment pressures;

 

3.             rapidgrowth in demand for services due to aging population bases;

 

4.             rapidinnovation in technology, increasing the availability of sophisticatedtreatment options;

 

5.             growingconsumer awareness of healthcare choices; and

 

6.             growingawareness within emerging and developing countries of the benefits of adequatehealthcare systems and the improving ability to pay for improved healthcaresolutions.

 

Our products face competition from both branded andgeneric products, sold by other pharmaceutical companies. Many of thesecompetitors have greater financial resources and marketing capabilities thanAxcan. Our competitors in the United States and abroad are numerous and includemajor pharmaceutical companies, and some of the manufacturers of our products.We believe that our focus on gastroenterology, combined with our strategy offunding and controlling all or most aspects of our business, will provide thecost savings, efficiencies in product development and acceleration ofregulatory filings necessary for us to compete effectively with such companies.

 

Our competitors, however, may succeed in developingproducts that are as, or more, clinically or cost-effective than any that arebeing developed or licensed by Axcan, or that would render our productsobsolete or uncompetitive. In addition, certain of our competitors have greaterexperience than our Company in clinical testing and human clinical trials ofpharmaceutical products and in obtaining FDA and other regulatory approvals.

** **

## **2.**              CHANGEIN WHOLESALER’S BUSINESS MODELS

## ** **

Historically, wholesalers’ business models in theUnited States were dependent on drug price inflation. Their profitability andgross margins were directly tied to the speculative purchasing ofpharmaceutical products at pre-increase prices, and the selling of theirproduct inventory to their customers at the increased price. This inventoryprice arbitrage accounted for a predominant portion of wholesalers’compensation for their distribution services and had a dramatic effect onwholesaler buying patterns, as they invested in inventories in anticipation ofgenerating higher gross margins from manufacturer price increases. Morerecently, pharmaceutical manufacturers have not been increasing drug prices asfrequently, and the percentage increases have been lower. For these and otherreasons, some wholesalers have changed their business model to afee-for-service arrangement, whereby manufacturers pay wholesalers a fee forinventory management and other services. These fees typically are a percentageof the wholesaler’s purchases from the manufacturer or a fixed charge per itemor per unit. The fee-for-service approach results in wholesalers’ compensationbeing more stable and volume-based as opposed to price-increase based.

 

As a result of the move to a fee-for-service businessmodel, 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 

 

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provide, on a fee-for-service basis. This change inwholesalers’ business models negatively affected Axcan’s revenue since fiscal2005, as the resulting distribution services agreement (“**DSA**”)fees are deducted from gross sales and as wholesale distributors reduceinventory levels.

 

We entered into a DSAwith Cardinal Health in 2005, one of our pharmaceutical wholesale distributors.We anticipate that we will enter into DSA’s with McKesson Corporation andAmerisource Bergen, our two other main pharmaceutical wholesale distributors.Once our DSA’s are put in place, it is possible that such pharmaceuticalwholesale distributors could reduce their inventory levels (as DSA’s normallyprovide for lower targeted inventory levels). Such a reduction in inventory levels by a pharmaceutical wholesaledistributor could result in a one-time reduction in our sales to such wholesaledistributor for the period during which the reduction occurs, and could have anegative effect on our results of operations for this period.

 

## **3.**              FINANCIAL DEVELOPMENTS

## ** **

On March 5,2003, Axcan completed a $125.0 million 4.25% Notes (the “**Notes**”)financing due 2008. During the third quarter of fiscal 2007, the Company calledfor redemption all of its Notes and the holders of all of the Notes exercisedtheir right to convert their Notes, in lieu of redemption, by June 28,2007. The Company completed the conversion of the Notes by issuing an aggregateof 8,924,080 common shares. Long-term debt was consequently reduced by $125.0million and capital stock increased by the same amount.

 

TheCompany has a standby 5 year credit facility with a syndicate of lenders led bythe National Bank of Canada for anamount of up to $125.0 million. The amount of this facility may be drawn-downby the Company, subject to fulfilment of certain conditions specified in thecredit agreement with its syndicate of lenders, until 2012. The availability offunding may be extended annually with the consent of a specified majority ofLenders and the facility matures on April 30, 2012. Under certainconditions, the amount of the credit can be increased up to an additional$100.0 million and the maturity date extended.

 

## **4.**              LICENSE AND DEVELOPMENTAGREEMENT

## ** **

On September 302007, Axcan entered into an exclusive license and development agreement withCellerix SL (“**Cellerix**”) of Spain, for the NorthAmerican (United States, Canada and Mexico) rights to Cx401, an innovativebiological product in development for the treatment of perianal fistulas. Cx401uses non-embryonic stem-cells to treat perianal fistulas in Crohn’s andnon-Crohn’s diseased patients. A Phase II clinical trial has demonstrated theefficacy and confirmed the safety of Cx401 in the treatment of perianalfistulas. Patent applications have been submitted, which, if granted, couldprovide protection until 2025. Under the terms of the agreement, Axcan made a$10.0 million upfront payment to Cellerix (which was charged to expense in thefourth quarter of 2007), and will make regulatory milestone payments that couldtotal up to $30.0 million. Furthermore, Axcan will pay scaled royalties basedon the net sales of Cx401. Axcan has also agreed to make an equity investmentof up to $5.0 million in Cellerix, should Cellerix complete its initial publicoffering by September 30, 2010.

 

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# **PART IV - BUSINESSOF AXCAN**

# ** **

Axcan’s focusis in the field of gastroenterology. Our current portfolio of commercial productsincludes a number of gastrointestinal products, for the treatment of a range ofgastrointestinal diseases and disorders such as inflammatory bowel disease,irritable bowel syndrome, cholestatic liver diseases and complications relatedto pancreatic insufficiency.

 

Accordingto IMS Health Ltd., a widely accepted provider of information servicesspecializing in medical research information, the U.S. market forgastrointestinal products was valued at approximately $20 billion in 2006, ofwhich approximately $14 billion was represented by proton-pump inhibitors.

 

While our business focus is to sell products inthe United States, Canada and Europe, several of our products have beencommercialized globally through licensing agreements with strategic marketingpartners with expertise in their local markets.

 

We alsohave various products in development, both in North America and Europe. Adiscussion on these projects and on the regulatory process follows under the headings “Products in Development” and “RegulatoryEnvironment”.

 

## **1.**              MAIN MARKETED PRODUCTS

## ** **

The majority of the productsthat Axcan markets do not benefit from extensive patent protection. The Companybelieves however that certain of its products benefit from other barriers tothe entry of competitors or generics. The Company’s products neverthelessremain subject to competition and generic product entries into their respectivemarkets, which could significantly and negatively affect Axcan’s revenues including, in the case 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 inthe formulation of this drug from a 500mg formulation to a 1,000mg suppositoryformulation, hasexpired (November 5, 2007).

 

Axcan’s main marketedproducts, their sales, prescriptions and patent/regulatory protection arediscussed below.

 

**PANCREATICENZYMES**

 

***ULTRASE***

*** ***

Axcan marketsunder the trademark ULTRASE certain pancreatic enzyme microsphere (ULTRASE MS)and mini-tablet (ULTRASE MT) formulations designed to help patients withexocrine pancreatic insufficiency, (including pancreatic insufficiencyassociated with Cystic Fibrosis) better digest food. ULTRASE is marketed in theUnited States, Canada and a few export markets but this product is activelypromoted by Axcan solely in the United States.

 

For the year ended September 30,2007, Axcan reported sales of $47.9 million ($39.1 million in 2006and $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.

 

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ULTRASE islicensed exclusively from Eurand International S.p.A (“**Eurand**”)under an exclusive license and supply agreement. This agreement,which was entered into in 2000, initially was for a period of ten years withautomatic renewals for subsequent periods of two years. This agreement wasamended in 2007 and extended to 2015. Axcan has paid Eurand licensing feestotalling $3.5 million, and Axcan agreed to pay to Eurand royalties of 6% on annualnet sales.

 

In April 2004,the FDA formally notified manufacturers of pancreatic insufficiency productsthat these drugs, which include ULTRASE, must receive regulatory approval undera New Drug Application (“**NDA**”),before April 2008, in order to remain on the market. The FDA recentlyextended this deadline to April 2010. Axcan completed the submission ofits NDA for ULTRASE MT in the fourth quarter of fiscal 2007, which filing wasaccepted by the FDA in December 2007.

 

ULTRASE MT was also granteda priority review or accelerated approval (as defined by the FDA) designationby the FDA. Under the Prescription Drug User Fee Act, the file must be reviewedby the FDA by a target date of April 2008.

 

ULTRASE does not currentlybenefit from patent protection. The Company believes that it will be entitledto receive New Product Exclusivity pursuant to the Hatch-Waxman Act uponapproval of its NDA. This exclusivity is expected to prohibit the FDA fromapproving abbreviated new drug applications for products containing the sameactive moiety, for a period of five years. Further in its guidelines (“*Guidance for Industry -Exocrine Pancreatic Insufficiency Drug Products - Submitting NDAs”; April 2006*), the FDA has stated that becauseof their complexity, pancreatic enzyme extract products are not likely to beappropriate for Abbreviated NDA filings (“**ANDAs**”).

 

Other manufacturerscurrently pursuing approval for porcine derived pancreatic enzyme products areEurand 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 was granted priority review. Solvay Pharmaceuticals submitted an NDA forits CREON® Product Line in 2003.  Solvayreported that it received a letter from the FDA in August 2007 citingcertain chemistry, manufacturing and control data work and clinicalconcerns.  Solvay has not reportedfurther on its application.

 

Of the other pancreaticenzyme products currently on the market PANCRECARB® (Digestive Care, Inc.)and PANCREASE® (Ortho-McNeil Pharmaceutical), we are not aware that any NDAfilings were made for these products. Digestive Care Inc. has initiated a PhaseIII clinical trial for PANCRECARB® (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.

 

***VIOKASE***

*** ***

Axcan markets under the brandname VIOKASE non-enteric coated pancreatic replacement enzymes for thetreatment of exocrine pancreatic insufficiency. VIOKASE, although not activelypromoted, is sold in the United States and Canada.

 

For the year ended September 30,2007, Axcan reported sales of $11.2 million ($7.6 million in 2006 and $7.8million in 2005) for VIOKASE. VIOKASE is the only branded non-enteric coatedreplacement enzyme and competes with a number of generic products.

 

In April 2004, the FDAformally notified manufacturers of pancreatic insufficiency products that thesedrugs, which include VIOKASE, must receive regulatoryapproval under a New Drug Application (“**NDA**”),before April 2008, in order to remain on the market. The FDA recently extended thisdeadline to April 2010. Axcan iscurrently advancing the completion of its NDA for VIOKASE.

 

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VIOKASE does not currentlybenefit from patent protection. The Company believes that it will be entitledto receive New Product Exclusivity pursuant to the Hatch-Waxman Act uponapproval of its NDA. This exclusivity prohibits the FDA from approvingabbreviated new drug applications for products containing the same activemoiety, for a period of five years. Further in its guidelines, entitled “Guidancefor Industry - Exocrine Pancreatic Insufficiency Drug Products - SubmittingNDAs” dated April 2006, the FDA stated that because of their complexity, pancreatic enzymeextract products are not likely to be appropriate for ANDA filings.

 

The Company believes thatVIOKASE is currently the only branded uncoated pancreatic enzyme formulationcommercially available in the United States.

 

***PANZYTRAT***

*** ***

PANZYTRAT consists ofenteric coated microtablets for use in the treatment of exocrine pancreatic insufficiencyand pancreatic 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 benefitfrom any patent protection, nor any other form of regulatory exclusivity in themain countries in which it is marketed, namely Germany and the Netherlands.

 

**URSODIOL**

 

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

*** ***

In the United States, Axcanhas been marketing URSO 250, a 250-milligram ursodiol tablet for the treatmentof PBC, since May 1998. URSO FORTE, a 500-milligram ursodiol tablet, waslaunched in November 2004.

 

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

 

In the United States, thereis currently no therapy specifically approved to be marketed for the treatmentof PBC other than URSO 250/URSO FORTE. However, other ursodiol products,approved and prescribed for gallstone dissolution as associated with activeweight loss, are sometimes used for the treatment of various liver diseases,including PBC. These products include ACTIGALLTM (*WatsonPharmaceuticals*) and generic versions of ACTIGALLTM.

 

In addition, on November 19,2007 the FDA Orange book listed patent covering the use of URSO 250/USO FORTE,expired. URSO 250/URSO FORTE does not benefit from any other patent protectionor other form of regulatory exclusivity in the United States.  As a result, if a generic ursodiol tablet were to be launched, it could havea significant negative impact on sales of URSO 250/ URSO FORTE in the UnitedStates.

 

In order to minimize theimpact of any potential generic competition for URSO in the United States, theCompany has undertaken, and plans to continue to undertake, certain strategicand tactical measures, including the sequential modification and improvements toURSO’s attributes and specifications. For example in July 2007, theCompany introduced a scored tablet version of URSO FORTE (which differentiatesURSO from its competitors by giving physicians more flexible dosing options).

 

The Company believes thatthese sequential modifications and improvements coupled with URSO’s recognizedbrand name, its specific approval for the treatment of PBC, its similar pricingcompared to 

 

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comparable generics of ACTIGALLTM, and its targeted marketing approach aimed at hepatology specialists,provide a competitive advantage to URSO 250 and URSO FORTE in the UnitedStates.

 

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

*** ***

In Canada, Axcan marketsURSO (250 mg) and URSO DS (500 mg) for the treatment of cholestatic liverdiseases, which include PBC and Primary Sclerosing Cholangitis (“**PSC**”). URSO/URSO DS were covered by a patent relating to theuse ursodiol for the treatment of PBC in Canada, which was to expire in 2010.However, in 2006, the generic product manufacturer, Pharmascience Inc.successfully challenged the validity of this patent under the Notice ofCompliance Regulation procedures of Health Canada. In May 2006, genericversions of URSO and URSO DS received approval for sale in Canada and werelaunched in fiscal 2007. The launch of these generic products has had anegative impact on sales of URSO/URSO DS in the second half of fiscal 2007 andis expected to continue to negatively impact sales going forward.

 

URSO/URSO DS does notbenefit from any other patent protection or other form of regulatoryexclusivity in Canada.

 

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

 

***DELURSAN***

*** ***

DELURSAN is an ursodiolpreparation marketed in France and indicated for the treatment of cholestaticliver diseases, including PBC, PSC and liver disorders related to CysticFibrosis.

 

DELURSAN does not have anypatent 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 havea significant negative impact on sales of DELURSAN in France.

 

In France, DELURSANcurrently competes mainly with URSOLVAN® (*Sanofi-Aventis S.A.*).

 

**MESALAMINE**

 

***CANASA***

*** ***

CANASA is a mesalaminesuppository sold by Axcan in the United States for the treatment of distalulcerative proctitis (UP). The Company believes that CANASA currently is theonly commercially available mesalamine suppository in the United States.

 

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

 

CANASA competes with topicalcorticosteroid enemas and suppositories, as well as mesalamine enemas.

 

CANASA does not have anypatent protection in the United States. On November 5, 2007 the previouslygranted clinical investigation exclusivity pursuant to the Hatch-Waxman Act, covering a change inthe formulation of this drug from a 500mg formulation to a 1,000mg suppositoryformulation,expired.  As a result, if a genericmesalamine suppository were to be launched, it could have a significantnegative impact on sales of CANASA in the United States.

 

However, in June 2007,the FDA published draft guidance on the requirements it expects manufacturersseeking approval of a mesalamine suppository to meet, in order to obtainapproval for such a product. The guidance specifies, among other things, that arequest of approval must be supported by placebo 

 

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andreference-drug controlled clinical studies demonstrating efficacy in patientswith UP.

 

The Companybelieves that it is unlikely that generic competitors will be able to meet therequirements of this FDA guidance, since ethical review boards in the UnitedStates may not allow companies to conduct the FDA required placebo-controlledstudies 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 Company filed a Citizen’s Petition asking the FDA to requiremanufacturers seeking approval of mesalamine rectal suppositories to perform anadequate and well-controlled clinical safety and efficacy trial that providessubstantial evidence that the generic product demonstrates therapeuticequivalence to CANASA in patients with UP, and to perform a pharmacokineticstudy to evaluate the systemic exposure in patients with UP. This petition hasnot yet been heard. The Company believes this request to be consistent with thestandards the FDA has previously applied to other topically acting ornon-systemically absorbed drugs and with the above referenced draft guidancepublished in June, 2007; but cannot provide assurances that its request will begranted.

 

***SALOFALK***

*** ***

SALOFALK is amesalamine-based product line (tablets, suspensions and suppositories) sold byAxcan in Canada, for the treatment of certain inflammatory bowel diseases, suchas ulcerative colitis, ulcerative proctitis and Crohn’s Disease. In Canada,SALOFALK does not have any patent protection, or any regulatory exclusivity.

 

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

 

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

 

**SUCRALFATE**

 

***CARAFATE /SULCRATE***

*** ***

CARAFATE / SULCRATE line ofproducts is indicated for the treatment of gastric and duodenal ulcers.CARAFATE is sold in the United States as oral tablets and an oral suspensionand SULCRATE oral suspensions in Canada, where it is not actively promoted.

 

For the yearended September 30, 2007, Axcan reported combined sales of$52.2 million ($43.1 million in 2006 and $37.7 million in 2005) forCARAFATE / SULCRATE.  CARAFATE / SULCRATEdo not have any patent protection or any regulatory exclusivity in theirrespective markets. Patent protection for CARAFATE in fact lapsed in 2001. Currently,no generic versions of CARAFATE / SULCRATE oral suspension are available in theUnited States or Canada. If a generic version of these drugs were to belaunched, it could have a significant negative impact on sales of CARAFATE /SULCRATE oral suspension in the United States and Canada.

 

The Company believes, butcannot provide assurances, that due to the mode of absorption of CARAFATE oralsuspension, the FDA will require manufacturers seeking an ANDA approval for ageneric version of CARAFATE oral suspension to conduct clinical trials in orderto demonstrate therapeutic equivalence, which would likely be a barrier to theintroduction of a competing generic product in the United States.

 

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***HELICOBACTER PYLORI*****ERADICATION**

 

***PYLERA***

*** ***

Since May 7, 2007,Axcan has been marketing under the trademark PYLERA a 3-in-1 capsule therapyfor the eradication of *Helicobacter pylori*,a bacterium recognized as being the main cause of gastric and duodenal ulcers.PYLERA is protected by patent claims covering triple and quadruple therapiesfor *Helicobacter pylori*eradication. These claims cover the treatment of duodenal ulcer disease (and insome countries reflux esophagitis and gastric ulcer) through the eradication of*Helicobacter pylori* using abismuth compound together with two or more antibiotics. The expiry dates ofthese patents vary depending on the jurisdiction. In the United States, theyexpire in March 2010. The double capsule formulation of this product andits use in multiple therapies is also covered by patent in a number ofcountries. The US patent expires in December 2018.

 

Since its launch in May 2007,sales of PYLERA in the United States have amounted to $1.8 million for theyear ended September 30, 2007**.**

 

However, asPYLERA is considered by the FDA as pre-1997 antibiotic, the U.S. patent claimscovering triple and quadruple therapies for *Helicobacterpylori* eradication and claims covering the capsule formulation, arenot listable in the FDA’s Orange Book and may thus not be eligible to benefitfrom the automatic stay provisions, nor market exclusivities pursuant to theHatch-Waxman Act.

 

PYLERA competes with PREVPAC®(*TAP Pharmaceutical Products Inc.*), themarket leader and HELIDAC® (*Prometheus, Inc.*)

 

**OTHERPRODUCTS**

 

***LACTEOL***

*** ***

LACTEOL is a productcontaining a specific proprietary strain of *LactobacillusAcidophilus*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 2006and $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.****Sales significantlydecreased in the last two years since, as part of new measures designed to reducehealthcare cost associated with the reimbursement of prescription drugs, theFrench government decided to stop the reimbursement of approximately 200 drugs,including LACTEOL.

 

LACTEOLcompetes with a number of generic products on most markets. As LACTEOL has beenmarketed for several decades, the brand name LACTEOL constitutes a definitemarketing advantage wherever the product is sold.

 

***PHOTOFRIN /PHOTOBARR***

*** ***

Axcan markets (directly or through distributors)PHOTOFRIN / PHOTOBARR in North America, Europe, and other selected markets, forthe treatment of High-Grade Dysplasia associated with Barrett’s Esophagus,obstructing esophageal cancer and non small cell lung cancer, as well ascertain types of gastric cancers and cervical dysplasia. PHOTOFRIN / PHOTOBARRis a photo-sensitizer approved for use in photodynamic therapy, an innovativemedical therapy based on the use of light-activated drugs. PHOTOFRIN /PHOTOBARR is covered by a number of patents claiming compositions (includingproduct by process claims), methods of use in approved indications, methods ofmanufacture, as well as patents 

 

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for certain devices used in connection withtreatment with these products. In the United States, this product’s mainmarket, 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 currently no other photo-sensitizers approved as drugs in Canada, theUnited States and Europe for the treatment of High-Grade Dysplasia associatedwith Barrett’s Esophagus, obstructing esophageal cancer and lung cancer,gastric cancer or cervical dysplasia.

 

## **2.**              PRODUCTSIN DEVELOPMENT

## ** **

Our Scientific Affairs team leverages its expertise inthe field of gastroenterology to develop high-value products as well asenhancements and modifications to new and existing products, consistent withour research and development growth strategy. We mainly consider thedevelopment of late-stage (Phase II and beyond) novel molecules and innovativeproduct candidates that provide an acceptable risk/return ratio.

 

We also seek to enhance and extend exclusivity throughthe staged introduction of product enhancements. These may include improvementsin the frequency of administration of drug products, improvements in theconvenience of administration, reduction in dose, reduction in side effects(improved tolerability), or improved therapeutic effect/benefit.

 

Our staff of research scientists has expertise in allaspects of the drug-development process, from pre-formulation studies andformulation development, to scale-up and manufacturing. In fiscal 2007, ourdevelopment efforts resulted in the approval of PYLERA in the United States,for the eradication of the *Helicobacter pylori*bacterium.

 

As part of our business strategy, we enter intolicensing agreements with companies that are developing compounds andinnovative products in the field of gastroenterology. These compounds andproducts are typically in-licensed with some combination of upfront payments,development milestone payments and/or royalty payments. In some cases, we havean option to acquire an ownership position in the company.

 

We currently have development efforts ongoing for 8products that we believe may, upon regulatory approval, provide clinicallymeaningful benefits to patients.

 

Our pipeline products are in various stages ofdevelopment. Despite the reduced risk profile of our pipeline programs(relative to New Chemical Entities), they do carry  development risk, and as such, we do notanticipate the commercialization of all of these products. In addition, weroutinely review and prioritize our pipeline as new product candidates  are added, which can result in thediscontinuation or delay in other ongoing development programs which offer, inour estimation, a less attractive risk/return profile. This is normal practicein the pharmaceutical industry.

 

Given that the successful development of any pipelineprogram is dependent on a number of variables, it is difficult to accuratelypredict timelines for regulatory approval and accordingly clinical developmentexpenses.  In fiscal 2007 ourresearch-and-development expenses were approximately $28.6 million or 8.2% ofour total revenues (excluding acquired research-and-development expenses fromthe Cellerix acquisition).

 

The following is a description of our active anddisclosed pipeline projects. Intellectual Property around each of this projectis discussed in section “Licensing and Intellectual Property Protection”.

 

**PANCREATIC ENZYMES**

 

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***ULTRASE and VIOKASE***

*** ***

In April 2004, the FDA formally notifiedmanufacturers of pancreatic insufficiency products that these drugs, whichinclude ULTRASE and VIOKASE, must receive NDA approval before April 2008,in order to remain on the market. This deadline was recently extended to April 2010.The FDA has also published final guidelines aimed at assisting manufacturers ofexocrine pancreatic insufficiency drug products in preparing and submittingthese New Drug Applications.Axcan completed all the clinical trial and the chemistry, manufacturing andcontrol data work required for the submission of its NDA for ULTRASE MT in thefourth quarter of fiscal 2007, which filing was accepted by the FDA in thefirst quarter of fiscal 2008.****Thework required to submit VIOKASE is currently ongoing.

 

We believe that some of the manufacturers of pancreaticenzyme insufficiency products that are currently on the market in the UnitedStates may not be able to satisfy the FDA’s requirements for NDAs for theseproducts, which could create a significant growth opportunity for Axcan.

 

***NMK 150***

*** ***

Axcan is developing NMK 150, a new high proteasepancrelipase preparation developed for the relief of pain in small duct chronicpancreatitis, which represents an unmet medical need. A dose-ranging, animalstudy assessing the toxicity of NMK 150, which paid special attention toduodenal irritation, confirmed the safety profile of this compound. A Phase I,ascending, multiple-dose clinical study was also completed and confirmed thesafety and tolerability of this compound alone and in combination with a PPI.Results of the pharmacodynamics part of the studies are currently beinganalyzed.

 

**URSODIOL**

 

***SUDCA (Ursodiol Disulfate)***

*** ***

Axcan is currently studying the use of SUDCA, a newursodiol derivative, in the prevention of the recurrence of colorectaladenomateous polyps, considered to be a pre-cancerous stage of colorectalcancer.

 

The Company had previously completed a Phase II studyof the effectiveness of URSO 250 in preventing the recurrence of colorectaladenomateous polyps in the United States and Canada, for which 792 patientswere randomized. The final analysis confirmed a trend in the sub-group ofpatients suffering from early stage colorectal cancer at baseline: a 26%reduction of polyp recurrence rate occurred in the URSO 250 group when comparedto placebo, both in terms of mean number of recurring polyps at one year (0.67vs. 0.90) and the average size of the polyps (0.23 vs. 0.31). However, in theoverall study population, no statistically significant difference between thetwo groups was observed in terms of mean number of recurring polyps (0.97 vs.1.04) and average polyp size (0.30 vs. 0.28).

 

Preliminary results of studies conducted with SUDCAshowed that ursodiol disulfate reduces the number of aberrant crypts in a ratmodel of colon cancer. Aberrant crypts are considered to be early abnormalchanges in the intestinal lining that are precursors to colon cancer. In asmall pilot study, where rats were injected with the carcinogen azoxymethane, a56% reduction in the total number of aberrant crypts in the colon was observedafter four weeks in those animals treated with this new ursodiol formulationcompared to control models. Ursodiol disulfate alone fed to rats had no adverseeffects on the appearance of the lining of the colon. Long-term animal studiesare ongoing to determine the effect of ursodiol disulfate on the timing of appearance, the number, and the sizeof colonic tumours in the azoxymethane rat model of chemically-induced coloncancer.

 

In addition to these animal studies, a single,ascending-dose Phase I clinical study was completed in early 2006, and amultiple, ascending-dose Phase I study was completed in September 2006, toevaluate the safety, tolerability and preliminary pharmacokinetics of SUDCA.Both studies confirmed the safety and tolerability of this compound. Results ofthe pharmacokinetics part of the studies are currently being analyzed.

 

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**MESALAMINE**

 

***CANASA Max-002***

*** ***

Axcan has initiated the CANASA MAX-002 program, aPhase III clinical trial to evaluate the efficacy and safety of a novel,high-concentration, 1-gram mesalamine suppository for the treatment ofulcerative proctitis.

 

Ulcerative proctitis is a subgroup of ulcerativecolitis, one of the most common inflammatory bowel diseases. For approximately30% of patients with ulcerative colitis, the illness begins as ulcerativeproctitis where bowel inflammation is limited to the rectum. Currently, it isestimated that there are 1 million cases of inflammatory bowel disease in theU.S., with approximately 400,000 new cases every year.

 

In June 2007, the FDA issued draft guidance onthe type of clinical program required for the approval of mesalaminesuppositories. Based on this guidance, Axcan temporarily suspended therecruitment of this trial and expects to resume it in the first half ofcalendar 2008, upon completion of ongoing discussions with the FDA.

 

***HELICOBACTER PYLORI*****ERADICATION**

 

***PYLERA***

*** ***

Axcan intends to initiate a Phase III clinical programwith PYLERA in Europe to obtain approval to market this therapy for theeradication of *Helicobacter pylori*. This PhaseIII clinical trial in Europe is expected to be conducted on approximately 400****patients and is intended to compare Axcan’s PYLERA regimengiven in combination with omeprazole, to the widely used OAC triple therapy (20mg of omeprazole, 1 g of amoxicillin and 500 mg of clarithromycin, all giventwice a day). The trial is expected to be completed in the second half ofcalendar 2009. PYLERA was successfully launched in the United States in fiscal2007.

 

**OTHERS**

 

***AGI-010***

*** ***

Axcan and AGI Therapeutics, plc (“**AGI**”)are co-developing AGI-010, a delayed/controlled release formulation of theProton Pump Inhibitor (“**PPI**”) drugomeprazole, which is being developed for the treatment of gastro-esophagealreflux disease (“**GERD**”), and in particular toaddress the control of night-time gastric acidity, known as Nocturnal AcidBreakthrough (“**NAB**”). NAB remains a significantunmet medical need, and is estimated to occur in more than 50% of GERD patientson a PPI therapy.

 

Development of the final formulation for this compoundis ongoing and once completed, will allow both companies to make a decision onthe most appropriate development and filing strategy for this product.

 

***CX401***

*** ***

On September 30, 2007,Axcan entered into an exclusive license and development agreement with Cellerixof Spain, for the North American (United States, Canada and Mexico) rights toCx401, an innovative biological product in development for the treatment ofperianal fistulas.

 

A Phase II trial conducted in 50 patients in Europedemonstrated the efficacy and safety of Cx401. This randomized, open-label,parallel assignment study evaluated the safety and efficacy of Cx401 in thetreatment of perianal fistulas in Crohn’s and non-Crohn’s Disease patients. Theprimary endpoint for this study was photographically assessed complete closureand healing, and showed a 71% response rate in the acute phase, both in Crohn’sand non-Crohn’s Disease patients. Results of this study were presented at *Digestive Disease Week* in May 2007 (Garci-Olmo D. etal., “Expanded Adipose-Derived Stem Cells (Cx401) for the Treatment of ComplexPerianal Fistula. A Phase II Clinical Trial” (*DigestiveDisease Week* 2007; Abstract: 492)) and are pending publication.

 

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Axcan will be responsiblefor the development of this product in North America. The Company expects toinitiate a Phase IIb study in North America in fiscal 2008, and details of thisstudy are expected to be communicated to the market upon its initiation.Depending on the outcome of further discussions with the FDA, filing couldoccur as early as 2011.

 

## **3.**              REGULATORYAFFAIRS AND QUALITY ASSURANCE

## ** **

Our Regulatory Affairs Department is involved in thedevelopment and registration of all products and has prepared productsubmissions for regulatory agencies in the United States, Canada and Europe.This group also coordinates all data and document management for submissions,including amendments, supplements and adverse events reporting. Our QualityAssurance Departments seek to ensure that all stages of product development andmanufacturing fully comply with applicable good clinical, laboratory andmanufacturing practices.

 

## **4.**              REGULATION

## ** **

The research and development, manufacture, andmarketing of pharmaceutical products are subject to regulation by U.S.,Canadian and foreign governmental authorities and agencies. Such nationalagencies and other federal, state, provincial and local entities regulate thetesting, manufacturing, safety and promotion of our products. The regulationsapplicable to our products may be subject to change as regulators acquireadditional experience in the specific area.

 

**UNITEDSTATES REGULATIONS**

 

***New Drug Application***

*** ***

With theexception of the pancreatic enzyme products which require an NDA approvalbefore April 2010, we are required by the FDA to comply with NDAprocedures for our branded products prior to commencement of marketing. Newdrug compounds and new formulations for existing drug compounds which cannot befiled as ANDAs are subject to NDA procedures. These procedures include: (1) preclinicallaboratory and animal toxicology tests; (2) submission of anInvestigational New Drug Application (‘‘**IND**’’), and itsrequired acceptance by FDA before any human clinical trials can commence; (3) adequateand well-controlled replicate human clinical trials to establish the safety andefficacy of a drug for its intended indication; (4) the submission of anNDA to the FDA; and (5) FDA approval of an NDA prior to any commercialsale or shipment of the product, including pre-approval and post-approvalinspections of its manufacturing and testing facilities. When all data in aproduct application are owned by the applicant, the FDA will issue its approval.

 

***Abbreviated New Drug Application***

*** ***

In certain cases, where the objective is to develop ageneric version of an approved product already on the market, an ANDA may befiled in lieu of filing an NDA. Under the ANDA procedure, the FDA waives therequirement to submit complete reports of preclinical and clinical studies ofsafety and efficacy, and instead, requires the submission of bioequivalencydata, that is, demonstration that the generic drug produces the same bloodlevels of drug in the body as its brand-name counterpart. It is mandatory thatit have a comparable pharmacokinetic profile, or change in blood concentrationover time.

 

In certain cases, pharmaceutical companies may alsosubmit a 505(b)(2) NDA application for marketing approval of a drug. Thismechanism essentially relies upon the same FDA conclusions that would supportthe approval of an ANDA available to an applicant who develops a modificationof a drug that is not supported by a suitability petition. Relative to normalregulatory requirements for a 505(b)(1) NDA, regulation may permit a505(b)(2) applicant to forego costly and time-consuming drug developmentstudies by relying on the FDA’s finding of safety and efficacy for a previouslyapproved drug product. 

 

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Under some circumstances the extent of this relianceapproaches that permitted under the generic drug approval provisions. Thisapproach is intended to encourage innovation in drug development withoutrequiring duplicative studies to demonstrate what is already known about adrug, while protecting the patent and exclusivity rights for the approved drug.

 

**CANADIANREGULATIONS**

 

The requirements for selling pharmaceutical drugs inCanada are substantially similar to those of the U.S. described above, with theexception of the 505(b)(2) route, and marketing exclusivity under theHatch-Waxman provisions of the FDA in the U.S.

** **

**EUROPEANECONOMIC AREA (“EEA”)**

 

A medicinal product may only be placed on the marketin the EEA, composed of the 27 EU member states, plus Norway, Iceland andLichtenstein, when a marketing authorization has been issued by the competentauthority of a member state. There are essentially three community procedurescreated under prevailing European pharmaceutical legislation that, ifsuccessfully completed, allow an applicant to place a medicinal product on themarket in the EEA.

 

***Centralized Procedure***

*** ***

Centralized procedure exists when a marketingauthorization is granted by the European Commission, acting in its capacity asthe European Licensing Authority on the advice of The European MedicinesAgency. That authorization is valid throughout the entire community anddirectly or indirectly (Norway, Iceland and Liechtenstein) allows the applicantto place the product on the market in all member states of the EEA. TheEuropean Medicines Agency is the administrative body responsible forcoordinating the existing scientific resources available in the member statesfor evaluation, supervision and pharmacovigilance of medicinal products.

 

***Mutual Recognition and Decentralized Procedures***

*** ***

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

 

***Mutual Recognition***

** **

Mutual recognition is used if the medicinal producthas already been authorized in one member state. In this case, the holder ofthis marketing authorization requests the member state where the authorizationhas been granted to act as reference member state by preparing an updatedassessment report that is then used to facilitate mutual recognition of theexisting authorization in the other member states in which approval is sought(the so-called concerned member state(s)). The reference member state mustprepare an updated assessment report which, together with the approved Summaryof Product Characteristics, or SmPC (which sets out the conditions of use ofthe product), and a labelling and package leaflet are sent to the concernedmember states for their consideration. The concerned member states are requiredto approve the assessment report, the SmPC and the labelling and packageleaflet within 90 days of receipt of these documents.

 

***The decentralized procedure***

*** ***

This procedure is used in cases where the medicinalproduct has not received a marketing authorization in the EU at the time ofapplication. The applicant sends its application simultaneously to allconcerned member states and requests a member state of its choice to act asreference member state to prepare an assessment report that is then used tofacilitate agreement with the concerned member states and the 

 

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grant of a national marketing authorization in all ofthese member states. In this procedure, the reference member state mustprepare, for consideration by the concerned member states, the draft assessmentreport, a draft SmPC and a draft of the labelling and package leaflet within120 days after receipt of a valid application. As in the case of mutualrecognition, the concerned member states are required to approve thesedocuments within 90 days of their receipt.

 

**INTERNATIONAL REGULATIONS**

 

Sales of our products outside the United States,Canada and Europe are subject to local regulatory requirements governing thetesting, registration and marketing of pharmaceuticals, which vary widely fromcountry to country.

 

In addition to the regulatory approval process,pharmaceutical companies are subject to regulations under provincial, state andfederal laws, including requirements regarding occupational safety, laboratorypractices, environmental protection and hazardous substance control, and may besubject to other present and future local, provincial, state, federal andforeign regulations, including possible future regulations of thepharmaceutical industry. We believe that we are in compliance in all materialrespects with such regulations as are currently in effect.

 

## **5.**              PATENTSAND PROPRIETARY RIGHTS

## ** **

We believe that trademark protection is an importantpart of establishing product and brand recognition. We own a number ofregistered trademarks and trademark applications and have acquired the rightsto several trademarks by license. Axcan maintains trademarks registrations in anumber of jurisdictions where it sells its products. In the United States,trademark registrations remain in force for ten years and may be renewed everyten years after issuance, provided the mark is still being used in commerce.

 

A patent is a statutory private right that grants tothe patentee exclusive rights to exclude others from using the patentedinvention during the term of the patent. A patent is territorial and may besought in many jurisdictions. In the United States, as in most other countries,the term of patent protection is 20 years from the date the patent applicationwas filed. An invention may be patentable if it meets the criteria of being “new,”“useful” and “non-obvious.” Depending upon whether a particular drug ispatentable and the relative cost associated with obtaining its issuance in agiven jurisdiction, an inventor will either apply for a patent in order toprotect the invention or maintain the confidentiality of the information torely on the common law protection afforded to trade secrets.

 

A company may also enter into licensing agreementswith third-party licensors in order to obtain the right to make, use and sellcertain products, thereby gaining access to know-how, secret formulas andpatented technology. The value of a license is generally enhanced by theexistence of one or more patents. A license gives the licensee access todeveloped and, in many cases, tested technology and provides the licenseefaster and often less expensive entry into the market. Licensing alsoestablishes relationships, which may provide access to additional products ortechnology or may lead to joint ventures or alliances affording the licensorand the licensee an opportunity to evaluate each other’s products andtechnology. This is also true, to a lesser extent, for distributionrelationships.

 

Pursuant to license agreements with third parties, wehave acquired rights to manufacture, use or market certain of our existingproducts, as well as many of our development products and technologies. Suchagreements typically contain provisions requiring us to use commerciallyreasonable efforts or otherwise exercise diligence in pursuing marketdevelopment for such products in order to maintain the rights granted under theagreements, and may be cancelled upon our failure to perform our payment orother obligations.

 

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We further rely and expect to continue to rely uponunpatented proprietary know-how and technological innovation in the developmentand manufacture of many of our principal products. Our policy is to require allour employees, consultants and advisors to enter into confidentialityagreements with us.

 

Axcan has entered into several of these types ofcollaborative agreements with licensors, licensees and other third parties andwill continue to do so. The following agreements have been entered into inconnection with products marketed by Axcan or under development.

 

**ULTRASE**

 

Axcan isthe owner of the trademark ULTRASE and markets certain pancreatic enzyme basedmicrospheres and mini-tablets under the ULTRASE brand in North and LatinAmerica, under an exclusive development, license and supply agreement withEurand International S.p.A. This agreement was entered into in 2000, and wasinitially for a period of ten years with automatic renewals for subsequentperiods of two years. This agreement was recently amended  in 2007, including to provide for anextension of its term to 2015. Axcan has paid Eurand licensing fees totalling$3.5 million, and Axcan agreed to pay to Eurand royalties of 6% on its annualnet sales of ULTRASE.

 

**URSODIOL**

 

Axcan developed URSO for the Canadian market incollaboration with Falk Pharma GmbH (“**Falk**”) andacquired the rights to manufacture, use and market URSO in the United States onMarch 23, 1993 through the acquisition of the shares of Axcan Pharma U.S., Inc.that it did not already own. In April 1999, Axcan entered into twoagreements with Sanofi-Synthélabo S.A. of France (now, Sanofi-Aventis) thatsecured Axcan’s right to manufacture, use and market URSO for the treatment ofPBC in Canada and the United States. For the United States, Axcan licensed therights to the treatment of PBC under a patent, which expired on November 19,2007. For Canada, Axcan acquired full ownership of the patent relating to theuse of ursodiol for the treatment of PBC, which expires in 2010. However, in May 2006,the Canadian PBC patent was held to be invalid for the purposes of opposing theissuance of a Notice of Compliance for a generic version of URSO 250mg, underproceedings pursuant to the Canadian PatentedMedicines (Notice of Compliance) Regulations.

 

In October 2000, Axcan entered into a licensingagreement with the Children’s Hospital Research Foundation, an operatingdivision of Children’s Hospital Medical Centre of Cincinnati, Ohio, for aseries of patented sulfated derivatives of ursodeoxycholic acid compounds (“**SUDCA**” or “**ursodiol disulfate**”).According to the terms of this agreement, Axcan has exclusive worldwide rightsto commercially exploit formulations of SUDCA under the licensed patents andknow-how developed by Children’s Hospital Research Foundation.

** **

**PHOTOFRIN**

 

In May 2000, Axcan purchased from QLT Inc. (“**QLT**”) the trademark “PHOTOFRIN” for the United States,Canada and all other countries where it has been registered as a trademark orused in marketing. Axcan also purchased, licensed or sublicensed from QLT, asthe case may be, the worldwide rights of other assets and intellectual propertyrelated to PHOTOFRIN. As part of the transaction, Axcan acquired a Europeansubsidiary of QLT, which holds the European regulatory approvals for PHOTOFRIN.The last of the patents, which form part of the acquired assets, expires in April 2013.As part of the acquisition, Axcan agreed to assume QLT’s obligation to payroyalties of up to 5% on net sales of PHOTOFRIN to Health Research Inc. (“**Health Research**”), pursuant to arrangements under whichAxcan is a sub-licensee of the technology that QLT licensed from HealthResearch. Pursuant to the terms of the transaction between Axcan and QLT, Axcanhas paid to QLT milestone cash payments of CAN $20.0 million (representing themaximum potential aggregate amount of milestone cash payments under the termsof the transaction).

 

**PANZYTRAT**

 

In December 2002, Axcan acquired from anaffiliate of Abbott Laboratories (‘‘Abbott’’) certain assetsrelated to the distribution, marketing and sale of a line of pancreatic enzymeproducts used to enhance the digestion of fats. This pancreatic enzyme productline is commonly marketed under the trademark 

 

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PANZYTRAT. The product line is subject to patentsassigned to Axcan directly from Abbott, the last of which expires in 2008. Theknow-how and trade secrets associated with these products and their manufactureare the object of a perpetual unrestricted license from Abbott. The PANZYTRATand related trademark portfolio, was assigned directly from Abbott to Axcan’sFrench subsidiary, Axcan Pharma S.A. This portfoliocontains trademarks associated with the product line for a number of countriesthroughout the world.

 

**PYLERA**

 

In January 2000, Axcan entered into a worldwide(excluding Australia and New Zealand) licensing agreement (which was amended inNovember 2000 and August 2001) with Exomed Australia PTY Limited,Gastro Services PTY Limited, Ostapat PTY Limited, and Capability Services PTYLtd. This agreement, as amended, provides Axcan with exclusive rights in anumber of countries, including Canada and the United States, to a series ofpatents covering triple and quadruple therapies for*Helicobacter pylori* eradication. These patents cover the treatmentof duodenal ulcer disease (and in some countries reflux esophagitis and gastriculcer) through the eradication of *Helicobacter pylori*using a bismuth compound together with two (2) or more antibiotics. Axcanpaid approximately $1.64 million cash for the license and will pay a 5.5%royalty based on sales. The expiry dates of these patents vary depending on thejurisdiction and expire in March  2010 in the United States.

 

In May 1999, Axcan acquired the rights to adouble capsule delivery technology to be used for PYLERA from Gephar S.A. (“**Gephar**”), in an asset swap transaction, whereby Axcan soldto Gephar its interest in Axcan Ltd., a manufacturer and distributor of thePROTECTAIDTM contraceptive sponge. This patent expires in December 2018in the United States.

 

**LACTEOL andLACTEOL FORT**

 

In April 2002, Axcanacquired all of the shares of Laboratoire du Lactéol du Docteur Boucard whichis the owner of all of the intellectual property rights to the antibacterialcomposition marketed by Le Laboratoire du Lactéol under different trademarks,including the trademark LACTEOL. The antibacterial composition is also subjectto a patent in France and to an international patent application. These patentsrights are owned by Axcan and a French research institute.

 

**AGI-010**

 

On September 25,2006, the Company entered into a license and co-development agreement with AGI.Pursuant to this agreement, AGI and the Company will co-develop a controlled releaseomeprazole product (“**AGI-010**”) forthe treatment of Gastro-esophagealReflux Disease and a better control of Nocturnal AcidBreakthrough. Under the agreement, the Company has licensed exclusive rights topatent applications and know-how related to AGI-010 and will retain rights toany improvements to the product for North America and, if extended by Axcan, toother territories. However, the Company cannot provide assurances that suchpatent will be granted.  The Company andAGI have further agreed to share certain development expenses, and the Companypaid a $1.5 million upfront fee (which was charged to expense in fiscal 2006)and may be required to make specified milestone payments that could total up to$17.5 million at various stages of development, up to and including regulatoryapprovals. The Company also agreed to pay royalties on net sales.

 

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**Cx401**

 

Under theterms of the agreement signed with Cellerix on September 30, 2007, Axcanmade a $10.0 million upfront payment to Cellerix (which was charged to expense inthe fourth quarter of 2007), and will make regulatorymilestone payments that could total up to $30.0 million. In addition, patentapplications were submitted, which, if granted, could provide protection until2025. However, the Company cannot provide assurances that such patent will begranted.

 

In addition,under the terms of the agreement with Cellerix, Axcan will pay scaled royaltiesbased on the net sales of Cx401. Axcan has also agreed to make an equityinvestment of up to $5.0 million in Cellerix, should Cellerix complete itsinitial public offering by September 30, 2010.

 

## **6.**              EMPLOYEES

## ** **

As at September 30, 2007, the end of Axcan’s mostrecently completed fiscal year, Axcan employed 480 persons. Of these employees,154 are located in the United States, 169 are located in Canada and 157 arelocated in Europe. In Canada, Axcan is a party to a collective bargainingagreement, which was recently renewed and expires March 24, 2011. Thisagreement covers 60 employees, all of whom are non-management employees. InFrance, Axcan’s employees are subject to the *ConventionCollective Nationale de l’Industrie Pharmaceutique*, a collectivebargaining agreement which applies to the entire pharmaceutical industry. Axcanbelieves that relations with both its unionized and non-unionized employees aregood.

 

In the United States, Axcan sells its products to mostmajor wholesale drug companies and distributors, which in turn distribute Axcan’sproducts to chain and independent pharmacies, hospitals and mail orderorganizations. Our 83 sales representatives, 10 regional sales managers(managed by 2 zone directors)  and 5 national accountmanagers in our managed care group, all located in the United States, call onhigh-volume prescribing gastroenterology physicians, cystic fibrosis centres,hepatologists and transplant centres, potential and current PHOTOFRIN centresas well as third-party payors, clinical pharmacists and formulariesadministrators. Since the launch of PYLERA, in May 2007, salesrepresentatives also visit general practitioners known to be high-prescribersof *Helicobacter pylori*eradication therapies.

 

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

 

In Canada, Axcan sells its products to hospitals andwholesale drug companies, which in turn distribute Axcan’s products topharmacies. Axcan’s major products are included in most provincial drug benefitformularies and are promoted by Axcan’s 10 sales representatives, under thesupervision of the regional sales manager, to gastroenterologists and internalmedicine specialists with a particular interest in gastrointestinal diseases,as well as to colorectal surgeons.

 

In France, Axcan sells its products to distributors,which in turn distribute them to wholesale drug companies, which in turndistribute them to pharmacies. The 43 sales representatives under thesupervision of 5 regional sales directors regularly visit high-prescribingphysicians to promote Axcan’s other products.

 

This international sales structure is complemented byAxcan’s sponsorship of high-level international medical meetings on topicsrelated to Axcan’s products and research activities. These events arerecognized by leading institutions, and continuing medical education creditsare awarded to attendees. As a consequence, Axcan is recognized not only as asupplier of quality products, but also as an important link in the continuousmedical education process.

 

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## **7.**              ENVIRONMENTALPROTECTION, HEALTH AND SAFETY

## ** **

Axcan is committed to environmental protection and thepromotion of environmental issues. This includes a safe, healthy and secureenvironment for its employees, subcontractors and customers and the communityin which the Company operates.

 

The Company has established a series of policies tofacilitate compliance with applicable environmental laws and regulations. Thesepolicies require that business units conduct regular environmental assessmentsof Company activities, establish remedial and contingency plans to deal withany incidents, and establish regular processes to review and report to seniorcorporate management on the environmental status of the Company and itssubsidiaries.

 

Axcan generates a small amount of hazardous waste thatis disposed of by certified third-party carriers. Axcan believes its approachto environmental compliance meets applicable regulatory requirements and it isnot expected that its policies or practices will have a significant impact oncapital expenditures, consolidated earnings or our competitive position.

 

## **8.**              FACILITIES

## ** **

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

 

Axcan owns 107,000 square feet of office space,manufacturing facilities and warehousing in Mont-Saint-Hilaire, Quebec, thelocation of its corporate headquarters. The building houses administrative,marketing and pharmaceutical manufacturing operations as well as the researchand development activities of Axcan. Axcan further owns property next to itscorporate headquarters, which could be used to expand. The building and realestate owned by Axcan is subject to security granted in favour of its lenders,pursuant to the credit facilities described under “Selected ConsolidatedFinancial Information - Liquidity and Capital Resources”.

 

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

 

Axcan leases approximately 20,000 square feet ofoffice space in Birmingham, Alabama under a lease expiring in December 2008.

 

Axcan leases approximately 3,650 square feet of officespace in Bridgewater, New Jersey, under a lease expiring in August, 2009.

 

We believe that we have sufficient facilities toconduct our operations during fiscal 2008 and that our facilities are insatisfactory condition and are suitable for their intended use, althoughinvestments to improve and expand our manufacturing and other relatedfacilities are contemplated, as our business requires.

 

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# **PART V - RISKFACTORS**

# ** **

*This AIF contains forward-lookingstatements that involve risks and uncertainties. Our actual results coulddiffer materially from those discussed in this form. Factors that could causeor contribute to these differences include, but are not limited to, thosediscussed below and elsewhere in this form and in any documents incorporated inthis form by reference.*

* *

*If any of the following risks, orother risks not presently known to us or that we currently believe to not besignificant, develop into actual events, then our business, financialcondition, results of operations or prospects could be materially adverselyaffected. If that happens, the market price of our common stock could decline,and stockholders may lose all or part of their investment.*

 

**We currently depend on fourgroups of products for a large portion of our revenues; any material decline inthe sales of any of them would have an adverse impact on our business.**

** **

Any factor thatadversely affects the sale or price of our key products could significantlydecrease our sales and profits. Pancreatic enzymes (ULTRASE, VIOKASE andPANZYTRAT), ursodiol (URSO 250/URSO DS/URSO FORTE and DELURSAN), mesalamine(CANASA and SALOFALK) and sucralfate (CARAFATE and SULCRATE) accounted for21.2%, 26.7%, 24% and 17% respectively, of our total revenues for the yearended September 30, 2007. We believe that sales of these products willcontinue to constitute a significant portion of our total revenues until welaunch additional products. Any significant setback with respect to any one ofthese products, including shipping, manufacturing, product safety, marketing,government licenses and approvals, intellectual property rights problems, orgeneric or other forms of competition, couldhave a material adverse effect on our financial position, cash flows or overalltrends in results of operations.

 

**If we are unable to obtain FDAapproval for ULTRASE before April 2010, we would no longer be able to sellsuch product in the United States; this could have a material adverse effect onour revenues, results of operations and liquidity.**

** **

In April 2004,the FDA formally notified manufacturers of pancreatic enzyme products (“**PEPs**”) that these drugs had to be approvedby the FDA in order to remain on the market. Under the new requirements, manufacturers are required to file an INDfor their PEPs by April 2008, to file an NDA by April 2009 and toobtain FDA approval by April 2010. The FDA decided to require these approvals for all pancreatic extractdrug products after reviewing data that showed substantial variation amongcurrently marketed PEPs.

 

ULTRASE, our entericcoated pancreatic enzyme formulation, accounted for approximately 13.7 %, or$47.9 million, of our revenues in fiscal 2007. If we are unable to obtain FDAapproval to market ULTRASE prior to April 2010, we would no longer be ableto sell ULTRASE in the United States, which would impair our results ofoperations and liquidity.

 

We recently filed an NDA for the mini-tabletformulation of ULTRASEin the fourth quarter of fiscal 2007, which filing was accepted for review in the first quarterof fiscal 2007 by the FDA. However, there is noguarantee that we will succeed in obtaining approval for such product from theFDA prior to April 2010 or at all.

 

Despite the FDA’sannouncement of its intention to remove from the market those PEPs that havenot filed an IND by April 2008, filed an NDA by April 2009 and/orobtained approval by April 2010, its position is non-binding.  As a result, the agency may not pursueregulatory action against companies that fail to meet these deadlines.

 

If we are successfulin obtaining FDA approval for ULTRASE and the FDA does not enforce its statedposition, the level of competition that our drug ULTRASE currently faces in themarket may not decline and could increase in the future.

 

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**We no longer have patentprotection for our URSO drug in the United States and Canada. This could resultin competition from generic products leading to a significant reduction insales of this drug.**

** **

On November 19,2007 our U.S. patent covering URSO 250/ URSO FORTE’s use in the treatment ofPBC expired. In addition, the validity of our Canadian patent for the similaruse of URSO and URSO DS in Canada was successfully challenged recently by PharmascienceInc., a generic product manufacturer, under the Notice of Compliance Regulationprocedures of Health Canada. Therefore, these products no longer benefit fromany patent protection or other form of regulatory protection or exclusivity inthe United States or Canada.

 

As a result,competition from generic products that treat the same conditions may increase.For example, sales of generic products in Canada have already had a negativesales impact on our Canadian sales of URSO / URSO DS; this trend is expected tocontinue going forward.

 

The loss ofintellectual property protection in the United States for our URSO 250 / URSOFORTE, which made up 19.5% of our total revenues in fiscal 2007, could have amaterial adverse effect on our results of operations and financial condition.

 

In order to minimizethe impact of any potential generic competition in the United States, we haveundertaken,and plan to continue to undertake, certain strategic measures,including the sequential modification of and improvements to URSO’s attributesand specifications. *See* “Part IV– Business of Axcan—Main Marketed Products—Ursodiol—URSO 250 and URSO FORTE.”  There is no assurance that any of thesemeasures will minimize the generic competition we face with respect to URSO andgeneric sales could have a significant negative impact on our sales of URSO.

 

**We no longer have clinicalinvestigation exclusivity in the United States for our CANASA drug. This couldresult in competition from generic products leading to a significant reductionin sales of this drug.**

** **

Although our CANASAdrug does not have any patent protection in the United States, we previouslyhad clinical investigation exclusivity from the FDA covering a change in theformulation of this drug from a 500mg formulation to a 1,000mg formulation.This clinical investigation exclusivity effectively precluded the FDA fromapproving a competitor’s ANDA relating to the protected formulation change fora period of three years. However, pursuant to the Hatch-Waxman Act, the clinicalinvestigation exclusivity that we previously had covering the change offormulation of this product to a 1,000mg formulation, recently expired.

 

The lack of patentprotection and the loss of this clinical investigation exclusivity for thisproduct in the United States, could give rise to competition from genericproducts or therapeutically substitutable products. A significant reduction inthe sales for this product, which along with SALOFALK made up 24% of ourrevenues for the year ended September 30, 2007 (a substantial majority ofwhich were derived from sales of CANASA in the United States), could have amaterial adverse effect on our results of operations and financial condition.

 

Although we believethat recently published FDA draft guidance make it more difficult for potentialcompetitors to obtain the FDA approval required to sell competing mesalaminesuppository in the United States, there can be no assurance that a generic ortherapeutically substitutable mesalamine suppository will not be approved bythe FDA, which could significantly negatively impact our sales of CANASA in thefuture. The Company believes that generic competitors mayhave difficulty meeting the requirements of this FDA guidance, since ethicalreview boards in the United States may not allow companies to conduct such FDArequired placebo-controlled studies on their UP patients.  However, the Company cannot provideassurances that any potential generic competitor will not be able to meet suchrequirements.

 

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**Some of our key products facegeneric competition.**

 

Some of our keyproducts, such as ULTRASE, URSO and CANASA, currently face competition fromproducts which are subject to being therapeutically substituted for our products(such as ACTIGALL and its generics in the case of URSO, other branded andunbranded PEP’s in the case of ULTRASE and other rectal dosage forms ofmesalamine in the case of CANASA), and from their respective generic versions.Third-party payors and pharmacists can substitute generics for our productseven if physicians prescribe our products by name. Particularly in the UnitedStates, government agencies and third-party payors often put pressure onpatients to purchase generic products instead of brand-name products as a wayto reduce healthcare costs.

 

Products which are nolonger protected by a marketing exclusivity or a patent are subject to genericcompetition. Generic competition against any of our products would lower pricesand unit sales and could therefore have a material adverse effect on ourresults of operations and financial condition.

 

**The concentration of ourproduct sales to only a few wholesale distributors increases the risk that wewill not be able to effectively distribute our products if we need to replaceany of these customers, which would cause our sales to decline.**

** **

The majority of oursales are to a small number of pharmaceutical wholesale distributors, which inturn sell our products primarily to retail pharmacies, which ultimately dispenseour product to the end consumers.  Infiscal 2007, sales to McKesson Corporation accounted for 41.2 % of our total revenue, sales to CardinalHealth accounted for 25.0% of our total revenue, and sales to AmerisourceBergen accounted for 11.1 % of our total revenue.

** **

If any of thesecustomers cease doing business with us or materially reduce the amount ofproduct they purchase from us and we cannot conclude agreements withreplacement wholesale distributors on commercially reasonable terms, we mightnot be able to effectively distribute our products through retailpharmacies.  The possibility of thisoccurring is exacerbated by the recent significant consolidation in thewholesale drug distribution industry, including through mergers andacquisitions among wholesale distributors and the growth of large retaildrugstore chains.  As a result, a smallnumber of large wholesale distributors control a significant share of themarket.

 

**Wholesaler buying patterns maychange, and this could have a detrimental effect on our future revenue andfinancial condition.**

** **

Wholesalers, on whichwe largely depend for revenue generation, have historically practiced inventoryprice arbitrage. For example, in the past prior to any routine increase inprices for drugs by manufacturers, many of our wholesalers have purchasedexcess inventory at lower prices and resold the inventory after the priceincrease, thereby profiting. This inventory price arbitrage was predominantlyhow wholesalers were previously compensated for the distribution services theyprovided and had a dramatic effect on wholesaler buying patterns as wholesalersinvested in inventories in anticipation of generating higher gross margins fromprice increases from manufacturers.

 

Recently,pharmaceutical manufacturers have not been able to increase drug prices asfrequently as they used to, and the percentage of any such increases has beenlower. The reduction in the size and frequency of price increases hascontributed to wholesalers turning to fee-for-service arrangements under whichtheir fees are expressed as a percentage of the wholesaler’s purchases from themanufacturer or as an amount per unit. As a result, wholesalers’ buyingpatterns have shifted from large pre-price-increase purchases to more periodicpurchasing based on volume activity. Overall, wholesalers that have enteredinto these fee-for-service arrangements carry lower levels of inventory. Thischange in wholesaler’s business model has and may in the future negativelyimpact our revenues..

 

We enteredinto a DSA with Cardinal Health in 2005, one of our pharmaceutical wholesaledistributors. We anticipate that we will enter into DSA’s with McKessonCorporation and Amerisource Bergen, our two other main pharmaceutical wholesaledistributors. Once our DSA’s are put in place, it is possible that suchpharmaceutical wholesale distributors could reduce their inventory levels (asDSA’s normally provide 

 

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forlower targeted inventory levels).  Such areduction in inventory levels by a pharmaceutical wholesale distributor couldresult in a one-time reduction in our sales to such wholesale distributor forthe period during which the reduction occurs, and could have a negative effecton our results of operations for this period.

 

We have recentlybegun to deduct these DSA fees, which totaled approximately $2.7 million and$3.6 million for the years ended September 30, 2006 and 2007,respectively, from our total revenues. For example, in the quarter ended September 30,2006, we chose to adopt the classification of these fees as a deduction fromsales. Previously, these fees were included in selling and administrativeexpenses. As a result, our sales were reduced by approximately $1.9 million inthe fourth quarter of fiscal 2006. Fees associated with these agreementsincurred in 2005 were not material. It is possible that changes in wholesalerbuying patterns may occur in the future, and these changes could result in areduction in our revenues and could have a detrimental effect on our overallfinancial condition or results of operations.

 

**Our quarterly results mayfluctuate.**

** **

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

 

**Our business depends on keyscientific, sales and managerial personnel for continued success.**

** **

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

 

**We use third parties tomanufacture and perform analytical testing for almost all of our products andproduct candidates.  This may increasethe risk that we will not have sufficient quantities of our products or productcandidates or such quantities at an acceptable cost, which could result inclinical development and commercialization of our product candidates beingdelayed, prevented or impaired.**

** **

We currently rely,and expect to continue to rely, on third parties for (i) the supply andtesting of the active pharmaceutical ingredients in our products and productcandidates, and (ii) the manufacture and testing of the finished forms ofthese drugs and their packaging.  Thecurrent manufacturers of our products and product candidates are, and anyfuture third party manufacturers that we enter into agreements with will likelybe, our sole suppliers of our product candidates for a significant period oftime.  These manufacturers are commonlyreferred to as single source suppliers. As a result of these exclusive arrangements, some of our contractsprohibit us from using alternative manufacturers or suppliers for the productssupplied under these contracts, which prevents us from diversifyingmanufacturing and supply sources.  Inaddition, we currently purchase clinical supplies for many of our productcandidates from third party manufacturers on a purchase order basis undershort-term supply agreements. If any of these manufacturers should becomeunavailable to us for any reason, we may be unable to conclude agreements withreplacements on favorable terms, if at all, and may be delayed in identifyingand qualifying such replacements.  In anyevent, identifying and qualifying a new third party manufacturer could involvesignificant costs associated with the transfer of the active pharmaceuticalingredient or finished product manufacturing process.  A change in manufacturer requires formalapproval by the FDA before the new manufacturer may produce commercial suppliesof our products. This approval process typically takes a minimum of 12 to 18months and, during that time we may face a shortage of supply of our products.

 

Reliance on thirdparty manufacturers entails risks, to which we would not be subject if wemanufactured products or product candidates ourselves, including:

 

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·             reliance on the third partyfor regulatory compliance and quality assurance;

 

·             thepossible breach of the manufacturing agreement by the third party because offactors beyond our control; and

 

·             thepossible termination or non-renewal of the agreement by the third party, basedon its own business priorities, at a time that is costly or inconvenient forus.

 

Ourproducts and product candidates may compete with other products and productcandidates for access to manufacturing facilities.  There are a limited number of manufacturersthat operate under current good manufacturing practice regulations and that areboth capable of manufacturing for us and willing to do so.  If the third parties that we engage tomanufacture and/or test a product for commercial sale or for our clinicaltrials should cease to continue to do so for any reason, we likely wouldexperience delays in obtaining sufficient quantities of our products for us tomeet commercial demand or in advancing our clinical trials while we identify andqualify replacement suppliers.  If forany reason we are not able to obtain adequate supplies of our productcandidates or the drug substances used to manufacture them, it will be moredifficult for us to develop our product candidates and compete effectively.

 

Ourcurrent and anticipated future dependence upon others for the manufacture ofour products and product candidates may adversely affect our profit margins andour ability to develop product candidates and commercialize any additionalproducts that receive regulatory approval on a timely and competitive basis.

 

**We rely onour third party manufacturers for compliance with applicable regulatoryrequirements.  This may increase the riskof sanctions being imposed on us or on a manufacturer of our products orproduct candidates, which could result in our inability to obtain sufficientquantities of these products or product candidates.**

 

Ourmanufacturers may not be able to comply with current good manufacturingpractice regulations or other regulatory requirements or similar regulatoryrequirements outside the United States. Our manufacturers are subject to unannounced inspections by the FDA,state regulators and similar regulators outside the United States.  Our failure, or the failure of our third partymanufacturers, to comply with applicable regulations could result in sanctionsbeing imposed on us, including:

 

·             fines;

 

·             injunctions;

 

·             civilpenalties;

 

·             failureof regulatory authorities to grant marketing approval of our productcandidates;

 

·             delays,suspension or withdrawal of approvals;

 

·             suspensionof manufacturing operations;

 

·             licenserevocation;

 

·             seizuresor recalls of products or product candidates;

 

·             operatingrestrictions; and

 

·             criminalprosecutions.

 

Anyof these sanctions could significantly and adversely affect supplies of ourproducts and product candidates and may adversely affect our profit margins andour ability to develop product candidates and commercialize any additionalproducts that receive regulatory approval on a timely and competitive basis.

 

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**We rely onthird parties to conduct, supervise and monitor our clinical trials, and thosethird parties may perform *in* anunsatisfactory manner, such as by failing to meet established deadlines for thecompletion of such trials.**

 

Werely on third parties such as contract research organizations, or CROs, medicalinstitutions and clinical investigators to enroll qualified patients andconduct, supervise and monitor our clinical trials. Our reliance on these thirdparties for clinical development activities reduces our control over theseactivities. Our reliance on these third parties, however, does not relieve usof our regulatory responsibilities, including ensuring that our clinical trialsare conducted in accordance with good clinical practice regulations, and theinvestigational plan and protocols contained in the relevant regulatoryapplication, such as the investigational new drug application. In addition,such third parties may not complete activities on schedule, or may not conductour preclinical studies or clinical trials in accordance with regulatoryrequirements or our trial design. If these third parties do not successfullycarry out their contractual duties or meet expected deadlines, our efforts toobtain regulatory approvals for, and to commercialize, our product candidatesmay be delayed or prevented.

 

**We may not beable to acquire or successfully integrate new products or businesses.**

 

Ourproducts are maturing and therefore a significant component of our strategy isgrowth through acquisitions of products or businesses. However, we cannot becertain that we will be able to identify appropriate acquisition candidates.And even if an acquisition candidate is identified, there can be no assurancewe will be able to successfully negotiate the terms of any such acquisition onfavorable terms or at all, finance such acquisition or integrate such acquiredproduct or business into our existing business. We face significant competitionfrom other pharmaceutical companies for acquisition candidates, which makes itmore difficult to find attractive transaction opportunities for products orcompanies on acceptable terms. Furthermore, the negotiation of potentialacquisitions and the integration of such acquired products or businesses coulddivert management’s time and resources and require significant financialresources to consummate. Failure to acquire new products may diminish our rateof growth and adversely affect our competitive position.

 

**Acquisitionsthat we may undertake will involve a number of inherent risks, any of whichcould cause us not to realize the anticipated benefits.**

 

Acquisitiontransactions involve various inherent risks, such as assessing the value, strengths,weaknesses, contingent and other liabilities and potential profitability of theacquisition; the potential loss of key personnel of an acquired business; theability to achieve identified operating and financial synergies anticipated toresult from an acquisition and unanticipated changes in business, industry orgeneral economic conditions that affect the assumptions underlying theacquisition. Any one or more of these factors could cause us not to realize theanticipated benefits from the acquisition of businesses or products.

 

**If ourproducts fail in clinical studies or if we fail, or encounter difficulties, inobtaining regulatory approval for our new products or new indications ofexisting products, we will have expended significant resources for no return.**

 

Ifour products are not successful in clinical trials or if we do not obtain suchregulatory approvals, we will have expended significant resources for noreturn. For example in 2005 our clinical trials of itopride hydrochloride (“**ITAX**”), a proposed treatment for functionaldyspepsia, were not successful and we terminated the program. Our ongoingclinical studies might be delayed or halted or additional studies might berequired, for various reasons, including if:

 

·             ourproducts are shown not to be effective;

 

·             wedo not comply with requirements concerning the investigational NDAs or New DrugSubmissions (‘‘NDSs’’) for the protection of the rights and welfare of humansubjects;

 

·             patientsexperience unacceptable side effects or die during clinical trials;

 

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·             patientsdo not enroll in the studies at the rate we expect;

 

·             adrug is modified during testing; or

 

·             productsupplies are delayed or are not sufficient to treat the patients participatingin the studies.

 

Ifwe cannot obtain regulatory approvals for the products we are developing or mayseek to develop in the future, our rate of sales growth and competitiveposition will suffer. This risk is most acute for products that are currentlyin the development of the final formulation, such as the AGI-010 compound.

 

Approvalmight entail ongoing requirements for post-marketing studies. Even ifregulatory approval is obtained, labeling and promotional activities aresubject to continual scrutiny by the regulatory agencies, in particular theFDA, and, in some circumstances, the Federal Trade Commission. FDA enforcementpolicy prohibits the marketing of approved products for unapproved, oroff-label, uses. These regulations and the FDA’s interpretation of them mightimpair our ability to effectively market our products.

 

Weand our third-party manufacturers are also required to comply with theapplicable FDA current Good Manufacturing Practices regulations, which includerequirements relating to quality control and quality assurance, as well as thecorresponding maintenance of records and documentation. Furthermore, 

 

manufacturingfacilities must be approved by regulatory authorities before they can be usedto manufacture our products, and they are subject to additional inspections. Ifwe or any of our manufacturers or suppliers fails to comply with any of the FDA’sor other relevant foreign counterparts continuing regulations, we could besubject to sanctions, including:

 

·             delays,warning letters and fines;

 

·             productrecalls or seizures and injunctions on sales;

 

·             refusalto review pending applications;

 

·             totalor partial suspension of production;

 

·             withdrawalsof previously approved marketing applications, and

 

·             civilpenalties and criminal prosecutions.

 

Inaddition, identification of side effects after a drug is on the market or theoccurrence of manufacturing problems could cause subsequent withdrawal of theproduct from the market, reformulation of the drug, additional testing orchanges in labeling of the product.

 

**Our approvedproducts and pipeline products remain subject to ongoing regulatoryrequirements. If we fail to comply with *these*requirements, we could lose these approvals, and the sales of any such approvedcommercial products could be suspended.**

 

Afterreceipt of initial regulatory approval, each product remains subject toextensive regulatory requirements, including requirements relating tomanufacturing, labeling, packaging, adverse event reporting, storage,advertising, promotion, distribution and recordkeeping. Furthermore, even if wereceive regulatory approval to market a particular product, such product willremain subject to the same extensive regulatory requirements. Even ifregulatory approval of a product is granted, the approval may be subject tolimitations on the uses for which the product may be marketed or the conditionsof approval, or contain requirements for costly post-marketing testing andsurveillance to monitor the safety or efficacy of the product, which couldreduce our revenues, increase our expenses and render the approved product notcommercially viable. In addition, as clinical experience with a drug expandsafter approval because it is typically used by a greater number and morediverse group of patients after approval than during clinical trials, sideeffects and other problems may be observed after approval that were not seen oranticipated during pre-approval clinical trials or other studies.

 

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**Our businesscould suffer *as* a result of adverse drugreactions to the products we market.**

 

Unexpectedadverse drug reactions by patients to any of our products could negativelyimpact utilization or market availability of our product.

 

Absenceof long-term safety data may also limit the approved uses of our products, ifany. If we fail to comply with the regulatory requirements of the FDA and otherapplicable regulatory authorities, or if 

 

previouslyunknown problems with any approved commercial products, manufacturers ormanufacturing processes are discovered, we could be subject to administrativeor judicially imposed sanctions or other setbacks, including:

 

·             restrictionson the products, manufacturers or manufacturing processes;

 

·             warningletters and untitled letters;

 

·             civilpenalties and criminal prosecutions and penalties;

 

·             fines;

 

·             injunctions;

 

·             productseizures or detentions;

 

·             importor export bans or restrictions;

 

·             voluntaryor mandatory product recalls and related publicity requirements;

 

·             suspensionor withdrawal of regulatory approvals;

 

·             totalor partial suspension of production; and

 

·             refusalto approve pending applications for marketing approval of new products or ofsupplements to approved applications.

 

**We may findit difficult to achieve market acceptance of products in our product pipeline.**

 

Thecommercial success of any of our product candidates for which we obtainmarketing approval from the FDA, Health Canada’s Therapeutic ProductsDirectorate (“TPD”) or other regulatory authorities will depend upon theacceptance of these products by the medical community, including physicians,patients and healthcare payors. The degree of market acceptance of any of ourapproved products will depend on a number of factors, including:

 

·             demonstrationof clinical safety and efficacy compared to other products;

 

·             therelative convenience and ease of administration;

 

·             theprevalence and severity of any adverse side effects;

 

·             limitationsor warnings contained in a product’s FDA or TPD approved labeling;

 

·             availabilityof alternative treatments for the indications we target;

 

·             pricingand cost effectiveness compared to competing products, particularly genericproducts;

 

·             theeffectiveness of our or any future collaborators’ sales and marketingstrategies;

 

·             theeffectiveness of our manufacturing and distribution plans;

 

·             ourability to obtain sufficient third-party coverage or reimbursement; and

 

·             thewillingness of patients to pay out-of-pocket in the absence of third-partycoverage.

 

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Ifany of our product candidates are approved but do not achieve an adequate levelof acceptance by physicians, healthcare payors and patients, we may notgenerate sufficient revenue from these products, and we may not become orremain profitable. In addition, our efforts to educate the medical communityand third-party payors on the benefits of our product candidates may requiresignificant resources and may never be successful.

 

**Thepublication of negative results of studies or clinical trials may adverselyimpact our sales revenue.**

 

Fromtime to time, studies or clinical trials on various aspects of pharmaceuticalproducts are conducted by academics or others, including government agencies.The results of these studies or trials, when published, may have a dramaticeffect on the market for the pharmaceutical product that is the subject of thestudy. The publication of negative results of studies - or clinical trialsrelated to our products or the therapeutic areas in which our products compete- could adversely affect our sales, the prescription trends for our productsand the reputation of our products. In the event of the publication of negativeresults of studies or clinical trials related to our products or thetherapeutic areas in which our products compete, our business, financialcondition, results of operation and cash flows could be materially adverselyaffected.

 

**There is noassurance that we will continue to be successful in our licensing and marketingoperations.**

 

Certainof our products are marketed by third parties. Such third-party arrangementsmay not be successfully negotiated in the future. Any such arrangements may notbe available on commercially reasonable terms. Even if acceptable and timelymarketing arrangements are available, the products we develop may not beaccepted in the marketplace, and even if such products are initially accepted,sales 

 

maythereafter decline. Additionally, our clients or marketing partners may makeimportant marketing and other commercialization decisions with respect toproducts we develop that are not within our control. As a result, many of thevariables that may affect our revenues, cash flows and net income are notexclusively within our control.

 

**The successof our strategic investments, partnerships or development alliances (like ourco-development of AGI-010 or Cx401) depends upon the performance of the companiesin which we invest, or with which we partner or co-develop products.**

 

Economic, governmental,industry and internal company factors outside our control affect each of thecompanies in which we may invest or with which we may partner or co-develop products,like AGI Therapeutics Research Ltd. or CellerixS.L.  Some of the material risks relatingto such companies include:

 

·             theability of these companies to successfully develop, manufacture and obtainnecessary governmental approvals for the products which serve as the basis forour investments in, or relationship with, such companies;

 

·             theability of competitors of these companies to develop similar or more effectiveproducts, making the drugs developed by these companies difficult or impossibleto market;

 

·             theability of these companies to adequately secure patents for their products andprotect their proprietary information;

 

·             theability of these companies to enter the marketplace without infringing uponcompetitors’ patents;

 

·             theability of these companies to remain technologically competitive; and

 

·             thedependence of these companies upon key scientific and managerial personnel.

 

We may have limited or nocontrol over the resources that any such company may devote to develop theproducts for which we collaborate with them. Any such company may not performas expected. These 

 

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companies may breach or terminate their agreements with us or otherwisefail to conduct product discovery and development activities successfully, orin a timely manner. If any of these events occurs, it could have a materialadverse effect on our business and our financial results.

 

**Thepharmaceutical industry is highly competitive and is subject to rapid andsignificant change, which could render our products obsolete or uncompetitive.**

 

Our products face competition from otherpharmaceutical and generic companies. We compete with companies in NorthAmerica and internationally, including major pharmaceutical and genericcompanies. Many of our competitors have greater financial resources and sellingand marketing capabilities, have greater experience in clinical testing andhuman clinical trials of pharmaceutical products, and have greater experiencein obtaining approvals from the FDA, the TPD (the Canadian federal authoritythat regulates pharmaceutical drugs and medical devices for human use), orother applicable regulatory approvals. Our competitors may succeed indeveloping products that are more effective or less expensive to use than anythat we may develop or license. These developments could render our productsobsolete or uncompetitive, which would have a material adverse effect on ourbusiness and financial results.

 

**We may not beable to obtain adequate third-party reimbursement for the cost of our productsand related treatment.**

 

Ourability to successfully commercialize our products and product candidates -even if FDA or TPD approval is obtained - depends, in part, on whetherappropriate reimbursement levels for the cost of the products and relatedtreatments are obtained from government authorities and private health insurersand other organizations, such as Health Maintenance Organizations (‘‘**HMOs**’’), Managed-Care Organizations (‘‘**MCOs**’’) and provincial formularies.

 

Third-partypayors increasingly challenge the pricing of pharmaceutical products. Inaddition, the trend toward managed health-care in the U.S., the growth oforganizations such as HMOs and MCOs, and legislative proposals to reformhealth-care and government insurance programs, could significantly influencethe purchase of pharmaceutical products, resulting in lower prices and areduction in product demand. Such cost-containment measures and health-carereform could affect our ability to sell our products and may have a materialadverse effect on our business, financial condition, cash flows and results ofoperations.

 

Uncertaintyalso exists regarding the reimbursement status of certain newly-approvedpharmaceutical products and reimbursement may not be available for some of ourproducts. Any reimbursements granted may not be maintained or limits onreimbursements available from third-party payors may reduce the demand for, ornegatively affect the price of, these products. If our products do not qualifyfor reimbursement, if reimbursement levels diminish, or if reimbursement isdenied, our sales and profitability would be adversely affected.

 

**Ourrelationships with customers and payors are subject to applicable fraud andabuse and other healthcare laws and regulations, which could expose us tocriminal sanctions, civil penalties, contractual damages, reputational harm,and diminished profits and future earnings.**

 

Healthcareproviders, physicians and others play a primary role in the recommendation andprescription of our products.  Ourarrangements with third party payors and customers may expose us to broadlyapplicable fraud and abuse and other healthcare laws and regulations that mayconstrain the business or financial arrangements and relationships throughwhich we market, sell and distribute our products.  Applicable U.S. federal and state healthcarelaws and regulations, include, but are not limited to, the following:

 

·             Thefederal healthcare anti-kickback statute prohibits, among other things, personsfrom knowingly and willfully soliciting, offering, receiving or providingremuneration, directly or indirectly, in cash or in kind, to induce or rewardeither the referral of an individual for, or the purchase, order orrecommendation of, any good or service, for which payment may be made underfederal healthcare programs such as Medicare and Medicaid.

 

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·             Thefederal False Claims Act imposes criminal and civil penalties, including civilwhistleblower or qui tam actions, against individuals or entities for knowinglypresenting, or causing to be presented, to the federal government, claims forpayment that are false or fraudulent or making a false statement to avoid,decrease, or conceal an obligation to pay money to the federal government.

 

·             Thefederal false statements statute prohibits knowingly and willfully falsifying,concealing or covering up a material fact or making any materially falsestatement in connection with the delivery of or payment for healthcarebenefits, items or services.

 

·             Analogousstate laws and regulations, such as state anti-kickback and false claims laws,may apply to sales or marketing arrangements and claims involving healthcareitems or services reimbursed by non-governmental third party payors, includingprivate insurers, and some state laws require pharmaceutical companies tocomply with the pharmaceutical industry’s voluntary compliance guidelines andthe relevant compliance guidance promulgated by the federal government.

 

·             Thereare similar laws in countries outside the United States.

 

Effortsto ensure that our business arrangements with third parties comply withapplicable healthcare laws and regulations could be costly.  It is possible that governmental authoritieswill conclude that our business practices may not comply with current or futurestatutes, regulations or case law involving applicable fraud and abuse or otherhealthcare laws and regulations. If our past or present operations, includingactivities conducted by our sales team or agents, are found to be in violationof any of these laws or any other governmental regulations that may apply tous, we may be subject to significant civil, criminal and administrativepenalties, damages, fines, exclusion from third party payor programs, such asMedicare and Medicaid, and the curtailment or restructuring of ouroperations.  If any of the physicians orother providers or entities with whom we do business are found to be not incompliance with applicable laws, they may be subject to criminal, civil oradministrative sanctions, including exclusions from government fundedhealthcare programs.

 

Manyaspects of these laws have not been definitively interpreted by the regulatoryauthorities or the courts, and their provisions are open to a variety ofsubjective interpretations, which increases the risk of potentialviolations.  In addition, these laws andtheir interpretations are subject to change. Any action against us for violation of these laws, even if wesuccessfully defend against it, could cause us to incur significant legalexpenses, divert our management’s attention from the operation of our businessand damage our reputation.

 

**Recentlyenacted legislation may make it more difficult and costly for us to obtainregulatory approval of our product candidates and to produce, market anddistribute our existing products.**

 

On September 27,2007, President Bush signed the Food and Drug Administration Amendments Act of2007 (the “**FDAAA**”), into law.  The FDAAA grants a variety of new powers tothe FDA, many of which are aimed at improving drug safety and assuring thesafety of drug products after approval. Under the FDAAA, companies that violate the new law are subject tosubstantial civil monetary penalties. While we expect the FDAAA to have a substantial effect on thepharmaceutical industry, the extent of that effect is not yet known.  As the FDA issues regulations, guidance andinterpretations relating to the new legislation, the impact on the industry, aswell as our business, will become clearer. The new requirements and other changes that the FDAAA imposes may makeit more difficult, and likely more costly, to obtain approval of newpharmaceutical products and to produce, market and distribute existingproducts.

 

**Changes inlaws and regulations could affect our results of operations, financial positionor cash flows.**

 

Ourfuture operating results, financial position or cash flows could be adverselyaffected by changes in laws and regulations such as (i) changes in the FDAor TPD (or their foreign equivalents) approval processes that may cause delaysin, or prevent the approval of, new products, (ii) new laws, regulations 

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andjudicial decisions affecting product marketing, promotion or the healthcarefield generally, (iii) new laws or judicial decisions affectingintellectual property rights and (iv) changes in the application of tax principles,including tax rates, new tax laws, or revised interpretations of existing taxlaws and precedents, which result in shift of taxable earnings between taxjurisdictions.

 

**We may besubject to investigations or other inquiries concerning our compliance withreporting obligations under federal healthcare program pharmaceutical pricingrequirements.**

 

Underfederal healthcare programs, some state governments and private payorsinvestigate and have filed civil actions against numerous pharmaceuticalcompanies alleging that the reporting of prices for pharmaceutical products hasresulted in false and overstated Average Wholesale Price, or AWP, which in turnmay be alleged to have improperly inflated the reimbursements paid by Medicare,private insurers, state Medicaid programs, medical plans and others tohealthcare providers who prescribed and administered those products orpharmacies that dispensed those products. These same payors may allege that companies do not properly report their“best prices” to the state under the Medicaid program.  Suppliers of outpatient pharmaceuticals tothe Medicaid program are also subject to price rebate agreements.  Failure to comply with these price rebateagreements may lead to federal or state investigations, criminal or civilliability, exclusion from federal healthcare programs, contractual damages, andotherwise harm our reputation, business and prospects**.**

 

**Pricingpressures from third-party payors, including managed care organizations,government sponsored health systems and regulations relating to Medicare andMedicaid, healthcare reform, pharmaceutical reimbursement and pricing ingeneral could decrease our U.S. revenues.**

 

Ourcommercial success in producing, marketing and selling products in the UnitedStates (which generates a majority of our revenues) depends, in part, on theavailability of adequate reimbursement from third-party healthcare payors, suchas managed care organizations, and government bodies and agencies for the costof the products and related treatment. The market for our products in theUnited States may be limited by actions of third-party payors.

 

Managedcare organizations and other third-party payors in the United States try tonegotiate the pricing of medical services and products to control their costs,including by developing formularies to encourage plan beneficiaries to utilizepreferred products for which the plans have negotiated favorable terms.  Exclusion of a product from a formulary, orplacement of a product on a disfavored formulary tier, can lead to sharplyreduced usage in the managed care organization patient population.  If our products are not included within anadequate number of formularies or if adequate reimbursement levels are notprovided, or if reimbursement policies increasingly favor generic products, ourmarket share and business could be negatively affected.

 

Recentreforms in Medicare added an out-patient prescription drug reimbursementbeginning 2006 for all Medicare beneficiaries. The U.S. federal government and private plans contracting with thegovernment to deliver the benefit, through their purchasing power under theseprograms, are demanding discounts from pharmaceutical companies that mayimplicitly create price controls on prescription drugs.  These reforms may decrease our futurerevenues from products such as CARAFATE,URSO, ULTRASE and CARAFATE that are covered bythe Medicare drug benefit. Further, a number of other legislative andregulatory proposals aimed at changing the healthcare system have beenproposed.  While we cannot predictwhether any such proposals will be adopted or the effect such proposals mayhave on our business, the existence of such proposals, as well as the adoptionof any proposal, may increase industry-wide pricing pressures, therebyadversely affecting our results or operations and cash flows.

 

**Futurelitigation and of the outcome of current litigation may harm our business.**

 

Ingeneral, and subject to the terms of each specific agreement, we have agreed toindemnify our licensors and certain of our contract manufacturers for productliability claims and there is a risk that we will be subject to productliability claims and claims for indemnification from licensors. A substantialportion of our revenues are derived and will continue to be derived fromactivities in the United States, where pharmaceutical companies are exposed toa higher risk of litigation than in other jurisdictions.

 

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Currentlyin the United States, we maintain claims-based product liability insurancecoverage, in respect of all our products marketed in the United States. Wecannot be certain that existing or future insurance coverage available to uswill be adequate to satisfy any or all future product liability claims anddefense costs in the United States.

 

**Exposurerelating to product liability claims may harm our business.**

 

Weface an inherent business risk of exposure to product liability and otherclaims in the event that the use of our products results, or is alleged to haveresulted, in adverse effects. While we have taken, and will continue to take,what we believe are appropriate precautions, there can be no assurance that wewill avoid significant product liability claims. Although we currently carryproduct liability insurance that we believe is appropriate for the risks thatwe face, there can be no assurance that we have sufficient coverage, or can inthe future obtain sufficient coverage at a reasonable cost. An inability toobtain product liability insurance at an acceptable cost or to otherwiseprotect against potential product liability claims could prevent or inhibit thegrowth of our business or the number of products we can successfully market.Our obligation to pay indemnities, the withdrawal of a product followingcomplaints, or a product-liability claim could have a material adverse effecton our business, results of operations, cash flows and financial condition.

 

**Our businessis subject to limitations imposed by government regulations.**

 

Governmentalagencies in the countries in which we conduct business regulate pharmaceuticalproducts intended for human use. These regulations normally require extensiveclinical trials and other testing in addition to governmental review and finalapproval before products can be marketed. Governmental authorities in suchcountries also regulate the research and development, manufacture,distribution, promotion, testing and safety of products, and therefore, thecost of complying with governmental regulations can be substantial.

 

Requirementsfor approval can vary widely from country to country. A product must normallybe approved by regulatory authorities in each country in which we intend tomarket it, prior to the commencement of marketing in such country. There can belong delays in obtaining required clearances from regulatory authorities inmany countries after applications are filed. Therefore, there can be noassurance that we will obtain regulatory approvals in such countries or that wewill not incur significant costs in obtaining or maintaining such regulatoryapprovals. Moreover, the regulations applicable to our existing and futureproducts may change.

 

Governmentregulations require the detailed inspection and control of research andlaboratory procedures, clinical studies, manufacturing procedures and marketingand distribution methods, all of which significantly increase the level ofdifficulty and the costs involved in obtaining and maintaining the regulatoryapproval for marketing new and existing products. Moreover, regulatory measuresadopted by governments provide for the possible withdrawal of products from themarket and in certain cases, suspension or revocation of the required approvalsfor their production and sale.

 

Failureto obtain necessary regulatory approvals; the restriction, suspension orrevocation of existing approvals; or any other failure to comply withregulatory requirements would restrict or impair our ability to market ourproducts and carry on our business.

 

**We rely onthe intellectual property of others and may not be able to protect our ownintellectual property.**

 

Ourcontinued success will depend, in part, on our ability to obtain, protect andmaintain intellectual property rights and licensing arrangements for ourproducts. Proprietary rights in some of our products are held by third parties,which require us to obtain licenses for the use of such products. Despite theselicenses there can be no guarantees that the rights or patents used by us willnot be challenged by third parties. Third party patents may cover the materialsof methods of treatment related to our products and third parties may makeallegations of infringement, regardless of merit.

 

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Toprotect our own intellectual property, we have historically relied on patentsand trade secrets, know-how and other proprietary information, as well asrequiring our employees and other vendors and suppliers to sign confidentialityagreements which prohibit them from taking our proprietary information andtechnology or from using or disclosing proprietary information to third partiesexcept in specified circumstances. However, confidentiality agreements may bebreached despite all precautions taken, and we may not have adequate remediesfor any breach. Some of our employees may have been employed by other pharmaceuticalor biotechnology companies who may allege violations of their trade secrets bythese individuals, irrespective of the steps that we may take. Third partiesmay gain access to our proprietary information or may independently developsubstantially equivalent proprietary information.

 

Ourinability to protect and maintain intellectual property rights in our productsmay impair our competitive position and adversely affect our growth. If alawsuit is commenced with respect to any alleged intellectual propertyinfringement by us, the uncertainties inherent in such litigation make theoutcome difficult to predict and the costs that we may incur as a result mayhave an adverse effect on our profitability. Such litigation would involvesignificant expense and would be a substantial diversion of the efforts of ourscientific and our management team. Any such lawsuit may result in the award ofmonetary damages to the intellectual property holder and payment by us of anysuch damages, or an injunction prohibiting all of our business activities thatinfringe the intellectual property or may require us to obtain licenses fromthird parties on terms that may not be commercially acceptable to us, which wouldin each case adversely affect our profitability and our business. We or ourcollaborators may be restricted or prevented from developing andcommercializing our products if judicial or administrative proceedings againstus or our collaborators results in an adverse determination. If so, we mayattempt to redesign our processes, products or technologies so that they do notinfringe, but that might not be possible.

 

Ifwe need to initiate proceedings to enforce our proprietary rights againstinfringement by third parties, this could involve significant expense anddivert substantial employee resources from our business, with no guarantee ofsuccess. If we fail to effectively enforce our proprietary rights againstothers, our business will be harmed.

 

**Our creditagreement imposes certain restrictions on us and on our operations.**

 

Ourcredit agreement requires us to maintain specified financial ratios. The creditagreement also contains customary covenants relating to our ability to incuradditional indebtedness, make future acquisitions, enter into certain relatedparty transactions, consummate asset dispositions, incur capital expendituresand make restricted payments. All of these restrictions may limit our abilityto expand, pursue our business strategies and obtain additional funds. Ourability to meet these financial ratios and to comply with these covenants maybe affected by changes in business conditions or results of operations, adverseregulatory developments and other events beyond our control. We cannot assurethat we will meet these financial ratios or continue to comply with thesecovenants. Failure to comply with these restrictions may result in theoccurrence of an event of default under the credit agreement. Upon theoccurrence of an event of default, the lenders may terminate the creditagreement and demand immediate payment of all amounts borrowed by us under thatagreement.

 

**Additionalfinancing will cause increased dilution, an increase in debt levels, or both.**

 

Theresearch, development, manufacturing and marketing of products and theacquisition of new products and companies requires the application ofconsiderable financial resources, while the revenues that are generated fromsuch products may not be realized for a number of years. If we requireadditional capital to fund such activities, we may seek additional debt orequity financing or both. If we increase our debt levels, we may be restrictedin our ability to raise additional capital and may be subject to additionalfinancial and restrictive covenants, which may impede our ability to grow orcarry on our business. If we issue additional equity, holders of common shareswill suffer dilution of their ownership interest, which could be substantial.There can be no assurance that we will be successful in securing suchfinancing.

 

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**Our commonshares are subject to market price volatility.**

 

Marketprices for the securities of pharmaceutical companies, including our commonshares, have historically been highly volatile, and from time to time, themarket has experienced significant price and volume fluctuations that areunrelated to the operating performance of particular companies. In addition,factors such as fluctuations in operating results which do not correspond tomarket expectations, future acquisitions, public announcements, concerns as tothe safety of drugs, timing and approvals of product candidates, and generalmarket conditions may have an adverse effect on the market price of our commonshares.

 

**We might beimpacted by unfavorable decisions in any possible procedures related to anyfuture tax assessment.**

 

Weoperate in a number of jurisdictions and are from time to time subject toaudits and reviews by taxation authorities in the relevant jurisdictions withrespect to income, consumption, payroll and other taxes and remittances, forcurrent as well as past filings. Accordingly, we are subject to future taxassessments by relevant authorities. Any future tax assessment or any amount wemight be required to pay in connection with an assessment may have a materialadverse effect on our financial position, cash flows or overall 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 unfavorably, or in the period in which an unfavorable outcomebecomes probable and reasonably estimable.

 

**We may nothave sufficient cash and may be limited in our ability to access financing forfuture capital requirements, which may prevent us from expanding our businessand our portfolio of products.**

 

Wemay in the future need to incur additional debt or issue equity to satisfyworking capital and capital expenditure requirements, as well as to makeacquisitions and other investments. To the extent we are unable to renew ourexisting credit facility or raise new capital, we may be unable to expand ourbusiness. If we raise funds through the issuance of debt or equity, any debtsecurities or preferred shares issued will have rights and preferences andprivileges senior to those of holders of our common shares. The terms of thedebt securities may impose restrictions on our operations that have an adverseimpact on our financial condition. If we raise funds through the issuance ofequity, the proportional ownership interests of our shareholders could bediluted.

 

**We areexposed to risks relating to foreign currencies.**

 

Weoperate internationally, but a majority of our revenue and expense activitiesand capital expenditures are denominated in U.S. dollars. The other currenciesin which we engage in significant transactions are Canadian dollars and Euros.We face foreign currency exposure on the translation of our operations inCanada and Europe from their local currencies to the U.S. dollar. Currently, wedo not utilize forward contracts to hedge against foreign currency risk on anongoing basis. A significant change in foreign currency exchange rates may havea material effect on our consolidated results of operations, financial positionor cash flows.

 

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**We areexposed to risks if we are unable to comply with changes to laws affectingpublic companies, including the Sarbanes-Oxley Act of 2002, and also toincreased costs associated with complying with such laws.**

 

Recentlyenacted and any future changes to the laws and regulations affecting publiccompanies, including the provisions of the Sarbanes-Oxley Act of 2002 in theU.S. and Part XXIII.1 of the Securities Act (Ontario) and related rules,will cause us to incur increased costs as we evaluate the implications of new rules andrespond to new requirements. Delays, or a failure to comply with the new laws, rules andregulations could result in enforcement actions, the assessment of otherpenalties and civil suits. The new laws and regulations make it more expensivefor us under indemnities provided by us to our officers and directors and maymake it more difficult for us to obtain certain types of insurance, includingliability insurance for directors and officers; as such, we may be forced toaccept reduced policy limits and coverage or incur substantially higher coststo obtain the same or similar coverage. The impact of these events could alsomake it more difficult for us to attract and retain qualified persons to serveon our Board of Directors, or as executive officers. We may be required to hireadditional personnel and utilize additional outside legal, accounting andadvisory services — all of which could cause our general and administrativecosts to increase beyond what we currently have planned. We are presentlyevaluating and monitoring developments with respect to these laws, rules andregulations, and we cannot predict or estimate the amount of the additionalcosts we may incur or the timing of such costs.

 

**Risinginsurance costs could adversely impact our business.**

 

Thecost of insurance — including insurance for directors and officers, worker’scompensation, property, product-liability and general liability insurance —rose significantly in the past year and may continue to increase in futureyears. In response, we may increase deductibles and/or decrease certaincoverages to mitigate these costs. These increases, and our increased risk dueto increased deductibles and reduced coverages, could have an adverse impact onour results of operations, financial condition and cash flows.

 

**Ouroperations could be disrupted if our information systems fail or if we areunsuccessful in implementing necessary upgrades.**

 

Ourbusiness depends on the efficient and uninterrupted operation of our computerand communications systems and networks, hardware and software systems and ourother information technology. If our systems were to fail or we are unable tosuccessfully expand the capacity of these systems, or we are unable tointegrate new technologies into our existing systems, our operations andfinancial results could suffer.

 

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# **PART VI - SELECTED CONSOLIDATED FINANCIAL INFORMATION**

# ** **

(in thousands of U.S. dollars, except share related data)

 

**Last three fiscal years (audited)**

 
| ** **                                   | ** ** | **Fiscal Year, Ended  September 30** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **$**                                | ** ** | **$** | ** ** | **$** | ** ** |
| **Statement of Operations  Data: U.S. GAAP** |       |                                 |       |   |   |   |   |
| Revenue                                      |       | 348,947                              |       | 292,317 |   | 251,343 |   |
| Cost of goods sold                           |       | 83,683                               |       | 72,772 |   | 71,534 |   |
| Selling and administrative  expenses         |       | 101,273                              |       | 93,338 |   | 85,997 |   |
| Research and development  expenses           |       | 28,655                               |       | 39,789 |   | 31,855 |   |
| Depreciation and  amortization               |       | 22,494                               |       | 22,823 |   | 21,532 |   |
| Acquired in-process  research                |       | 10,000                               |       | — |   | — |   |
| Partial write-down of  intangible assets     |       | —                               |       | 5,800 |   | — |   |
|                                         |       | 246,105                              |       | 234,522 |   | 210,918 |   |
| **Operating income**                         | ** ** | **102,842**                          | ** ** | **57,795** | ** ** | **40,425** | ** ** |
|                                         |       |                                 |       |   |   |   |   |
| Financial expenses                           |       | 4,825                                |       | 6,988 |   | 7,140 |   |
| Interest income                              |       | (11,367                              | )          | (5,468 | ) | (1,340 | ) |
| Loss (gain) on foreign  currency             |       | 2,352                                |       | (1,110 | ) | (213 | ) |
| ** **                                   | ** ** | **(4,190**                           | **)**      | **410** | ** ** | **5,587** | ** ** |
| Income before income taxes                   |       | 107,032                              |       | 57,385 |   | 34,838 |   |
| Income taxes                                 |       | 35,567                               |       | 18,266 |   | 8,413 |   |
|                                         |       |                                 |       |   |   |   |   |
| **Net income**                               | ** ** | **71,465**                           | ** ** | **39,119** | ** ** | **26,425** | ** ** |

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| ** **                         | ** ** | **Fiscal Year, Ended  September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** |
| **U.S. GAAP**                      |       |                                  |       |   |   |   |   |
| Net income                         |       | 71,465                                |       | 39,119 |   | 26,425 |   |
| Income Per Common Share(1)         |       |                                  |       |   |   |   |   |
| Basic                              |       | 1.47                                  |       | 0.86 |   | 0.58 |   |
| Diluted                            |       | 1.33                                  |       | 0.79 |   | 0.56 |   |
|                               |       |                                  |       |   |   |   |   |
| **Balance Sheet Data: U.S.  GAAP** |       |                                  |       |   |   |   |   |
| Total assets                       |       | 832,611                               |       | 695,817 |   | 641,407 |   |
| Total liabilities                  |       | 142,414                               |       | 228,393 |   | 223,803 |   |
| Total shareholders’ equity    |       | 690,197                               |       | 467,424 |   | 417,604 |   |

 

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(1) Based on the weighted average number ofshares outstanding during the year.

 

# **PART VII - MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND OPERATING RESULTS**

# ** **

Please referto the 2007 MD&A that is incorporated herein by reference*.*

 

# **PART VIII - DIVIDEND POLICY**

# ** **

Axcancurrently intends to retain future earnings to finance the development of itsbusiness and, accordingly, does not anticipate paying dividends on its commonshares in the near future. In addition, the terms of Axcan’s existing creditfacilities restrict its ability to declare and pay dividends to 10% ofconsolidated net earnings for the preceding fiscal year.

# ** **

# **43**

# ****

# ** **

# **PART IX — DESCRIPTION OF CAPITAL STRUCTURE**

# ** **

The authorizedshare capital of the Company consists of an unlimited number of Common Shares,14,175,000 Series A preferred shares and 12,000,000 Series Bpreferred shares. None of such Preferred Shares are issued and outstanding.

 

## **1.**              COMMON SHARES

## ** **

The commonshares are entitled to receive dividends as and when declared by the Board ofDirectors and, unless otherwise provided by legislation, are entitled to onevote per common share on all matters to be voted on at all meetings ofshareholders. Upon the voluntary or involuntary liquidation, dissolution orwinding-up of the Company, the holders of Common Shares are entitled to sharerateably in the remaining assets available for distribution, after payment ofliabilities.

 

## **2.**              PREFERRED SHARES

## ** **

The preferredshares are issuable from time to time in one or more series. The Board ofDirectors is authorized to fix before issue the number of, the considerationper share of, the designation of, and the provisions attaching to, the sharesof each series. The preferred shares of each series rank on a parity with thepreferred shares of every other series and are entitled to preference over thecommon shares and any other shares ranking junior to the preferred shares withrespect to the payment of dividends and distribution of assets in the event ofliquidation, dissolution or winding up of the Company. If any cumulativedividends or amounts payable on a return of capital are not paid in full, thepreferred shares of all series participate rateably in accordance with theamounts that would be payable on such shares on the return of capital if allamounts so payable were paid in full, as the case may be.

# ** **

# **44**

# ****

# ** **

# **PART X - MARKET FOR SECURITIES**

# ** **

## **1.**              MARKET FOR SECURITIES

## ** **

Since December 27,1995, Axcan’s common shares are listed for trading on the Toronto Stock Exchange(“**TSX**”) under the trading symbol “AXP”and, since June 28, 2000, on the NASDAQ Global Select MarketSM(“**NASDAQ**”) under the trading symbol “AXCA”.

 

## **2.**              TRADING HISTORY

## ** **

The followingtable set forth the price ranges and volume of Axcan’s common shares traded onthe TSX and on NASDAQ for each month of fiscal 2007.

 

**TORONTO STOCK EXCHANGE**

 
| **Period**          | ** ** | **High (CAN)** | ** ** | **Low (CAN)** | ** ** | **Close (CAN)** | ** ** | **Volume** | ** ** |
|---------------------|------------|---------------------|------------|--------------------|------------|----------------------|------------|------------|------------|
|                |       |                |       |               |       |                 |       |       |       |
| October 2006   |       | 16.71               |       | 15.14              |       | 16.55                |       | 3,174,555  |       |
| November 2006  |       | 17.49               |       | 16.45              |       | 16.93                |       | 2,071,133  |       |
| December 2006  |       | 17.06               |       | 15.70              |       | 16.58                |       | 2,728,610  |       |
| January 2007   |       | 18.02               |       | 15.88              |       | 17.89                |       | 3,313,388  |       |
| February 2007  |       | 19.58               |       | 17.60              |       | 18.56                |       | 2,309,743  |       |
| March 2007     |       | 16.45               |       | 17.79              |       | 19.13                |       | 2,835,541  |       |
| April 2007     |       | 16.69               |       | 18.80              |       | 19.30                |       | 1,188,152  |       |
| May 2007       |       | 20.26               |       | 18.92              |       | 20.15                |       | 1,264,403  |       |
| June 2007      |       | 21.50               |       | 19.28              |       | 20.65                |       | 1,971,137  |       |
| July 2007      |       | 21.25               |       | 19.50              |       | 19.50                |       | 2,059,603  |       |
| August 2007    |       | 21.00               |       | 15.65              |       | 20.34                |       | 3,517,765  |       |
| September 2007 |       | 21.16               |       | 19.60              |       | 20.55                |       | 2,801,995  |       |

 

**NASDAQ Global Market**

 
| **Period   (Fiscal 2007)** | ** ** | **High****(USD)** | ** ** | **Low****(USD)** | ** ** | **Close****(USD)** | ** ** | **Volume** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|--------------------|------------|------------|------------|
|                                 |       |              |       |             |       |               |       |       |       |
| October 2006                    |       | 14.86             |       | 13.49            |       | 14.72              |       | 3,093,459  |       |
| November 2006                   |       | 15.37             |       | 14.47            |       | 14.85              |       | 3,242,832  |       |
| December 2006                   |       | 14.84             |       | 13.61            |       | 14.24              |       | 2,455,170  |       |
| January 2007                    |       | 15.28             |       | 13.50            |       | 15.19              |       | 2,894,208  |       |
| February 2007                   |       | 16.50             |       | 14.92            |       | 15.92              |       | 6,804,209  |       |
| March 2007                      |       | 16.77             |       | 15.14            |       | 16.51              |       | 6,924,702  |       |
| April 2007                      |       | 17.61             |       | 16.27            |       | 17.41              |       | 4,306,477  |       |
| May 2007                        |       | 18.86             |       | 17.02            |       | 18.79              |       | 6,609,755  |       |
| June 2007                       |       | 20.06             |       | 18.19            |       | 19.33              |       | 5,912,007  |       |
| July 2007                       |       | 20.36             |       | 18.31            |       | 18.31              |       | 4,818,889  |       |
| August 2007                     |       | 19.83             |       | 14.85            |       | 19.08              |       | 11,170,319 |       |
| September 2007                  |       | 20.94             |       | 19.02            |       | 20.77              |       | 4,281,551  |       |

# ** **

# **45**

# ****

# ** **

# **PART XI - DIRECTORS AND OFFICERS**

# ** **

## **1.**              DIRECTORS

## ** **

Each directorof the Company is elected to serve until the next annual meeting of the Companyor until his or her successor is elected or appointed. The disclosure under theheading “Election of Directors” in the Company’s Management Proxy Circulardated January 22, 2007 contains information about each director of theCompany and is incorporated herein by reference.

 

## **2.**              SENIOR OFFICERS

## ** **

The company’sManagement Team currently comprises the following individuals:

 

The followingtables set forth the name, municipality of residence, and principal position ofeach of Axcan’s senior officers:

 
| **Name**             | ** ** | **Position with Axcan**                                     | ** ** | **Province or State and/or  Country of Residence** |
|----------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------|
|                 |       |                                                        |       |                                               |
| Frank A.G.M. Verwiel |       | President and Chief Executive Officer                       |       | Quebec, Canada                                     |
| David W. Mims        |       | Executive Vice President and Chief Operating  Officer       |       | Alabama, USA                                       |
| Nicholas Franco      |       | Senior Vice President, International Commercial  Operations |       | France                                             |
| Steve Gannon         |       | Senior Vice President and Chief Financial  Officer          |       | Quebec, Canada                                     |
| Martha D. Donze      |       | Vice President, Corporate Administration                    |       | Alabama, USA                                       |
| Richard Tarte        |       | Vice President, Corporate Development and  General Counsel  |       | Quebec, Canada                                     |
| Michael E. Thiel     |       | Vice President, North American Marketing  Operations        |       | New Jersey, USA                                    |
| Darcy Toms           |       | Vice President, Business Development                        |       | New Jersey, USA                                    |
| Jean Vézina     |       | Vice President, Finance                                     |       | Quebec, Canada                                     |

 

During the past five years, each of the foregoing directors and officershas held the same or a similar position with the entities indicated above or arelated entity, except for (1) Dr. Frank Verwiel, who prior to July 2005held the position of vice president, Hypertension, Worldwide Human HealthMarketing with Merck & Co., Inc., while concurrently serving as amember of Merck’s Worldwide Hypertension Business Strategy Team. Prior tojoining Merck, from 1988 to 1996, Dr. Verwiel worked with Servier inEurope in various executive positions; (2) Mr. Nicholas Franco who, prior to joining Axcan in June 2007,was Head of Market Access Region Europe for Novartis Pharma AG in Basel,Switzerland, a company where he has held various management positions since1991; (3) Mr. Steve Gannon who,prior to February 2006 held the position of Chief Financial Officer atCryoCath Technologies Inc.; and; (4) Mr. Darcy Toms who, prior to January 2007,was Senior Director, Business Development with Biovail Pharmaceuticals andprior to 2005 held various management positions with Aventis Inc.

 

# **PART XII - ADDITIONAL DISCLOSURE FOR DIRECTORS ANDEXECUTIVE OFFICERS**

# ** **

As at December 1,2007, the directors and senior officers of Axcan beneficially own as a group anaggregate of 3,775,276 common shares, which represents approximately 6.82% ofthe issued and outstanding shares of Axcan.

 

Nodirector or officer of Axcan or shareholder of Axcan holding a sufficientnumber of securities of Axcan to affect materially the control of Axcan (a “**control person**”); is, or has been within the past ten years,a 

 

46

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directoror officer of any other company that, while such person was acting in thatcapacity; was the subject of a cease trade or similar order or an order thatdenied such company access to any exemptions under Canadian securitieslegislation for a period of more than 30 consecutive days; or was declaredbankrupt or made a voluntary assignment in bankruptcy; made a proposal underany legislation relating to bankruptcy or insolvency; or was subject to orinstituted any proceedings, arrangement or compromise with creditors or had a receiver,receiver manager or trustee appointed to hold its assets.

 

Nodirector, officer or control person of Axcan has been subject to any penaltiesor sanctions imposed by a court relating to Canadian securities legislation orby a Canadian securities regulatory authority or has entered into a settlementagreement with a Canadian securities regulatory authority; nor has anydirector, officer or control**personof Axcan been subject to any other penalties or sanctions imposed by a court orregulatory body that would likely be considered important to a reasonableinvestor in making an investment decision.

 

Nodirector, officer or control person of Axcan, nor any personal holding companyof any such person, has within the past ten years, been declared bankrupt ormade a voluntary assignment in bankruptcy; made a proposal under anylegislation relating to bankruptcy or insolvency; been subject to or institutedany proceedings, arrangement or compromise with creditors; or had a receiver,receiver manager or trustee appointed to hold the assets of that individual.

 

Conflictsof interest may arise as a result of the directors and officers of Axcan alsoholding positions as directors and/or officers of other companies. Some of thedirectors and officers have been and will continue to be engaged in theidentification and evaluation of assets and businesses, with a view topotential acquisition of interests in businesses and companies on their ownbehalf and on behalf of other companies, and situations may arise where thedirectors and officers will be in direct competition with Axcan. Conflicts, ifany, will be subject to the procedures and remedies under the *Canada Business Corporations Act*.

# ** **

# **47**

# ****

# ** **

# **PART XIII - LEGAL PROCEEDINGS**

# ** **

One of oursubsidiaries, Axcan Scandipharm, has been a party to several legal proceedingsrelated to the product line it markets under the trademark ULTRASE. Theselawsuits were filed and claims were asserted against Axcan Scandipharm andcertain other companies, including the product’s manufacturer, stemming fromallegations that, among other things, Axcan Scandipharm’s enzyme productscaused colonic strictures. In November 2006, a complaint alleging a claimfor damages related to these products was received in the Supreme Court of theSate of New York. This complaint is in its initial preliminary stage such thatthe Company is not currently able to assess its merit. Of the 12 other previouslawsuits, the last of which was filed in 2001, Axcan Scandipharm was dismissedfrom one, non-suited in another and settled ten. At this time, it is difficultto predict the number of potential cases and because of the young age of thepatients involved, Axcan Scandipharm’s product liability exposure for thisissue in the United States will remain for a number of years. Axcan Scandipharm’sinsurance carriers have defended the lawsuits to date and Axcan expects them tocontinue to defend Axcan Scandipharm (to the extent of its product liabilityinsurance) should other lawsuits be filed in the future.

 

In December 2003and May 2004, Pharmascience Inc. (“**PMS**”) servedthe Company two notices of allegation in accordance with Section 5 of thePatented Medicines (Notice of Compliance) Regulations (‘‘Regulations’’). Thefirst notice of allegation indicated that PMS was seeking a regulatory approvalto market a generic version of URSO 250 in the Canadian market (‘‘PMS Product’’)for use in gallstone dissolution, an indication for which URSO 250 was formerlyapproved for and marketed in Canada. The second notice of allegation dealt withthe validity of Axcan’s Canadian PBC use patent. Axcan opposedboth these notices of allegation by seeking prohibition orders. In September 2005,with respect to the first notice of allegation, the Federal Court of Canadaheld that, for purposes of the Regulations, the PMS Product did not infringethe patent that Axcan owns for the use of URSO in the treatment of PBC. In May 2006,the second application seeking a prohibition order was dismissed as Axcan’sCanadian PBC use patent was held to be invalid for purposes of the Regulations.PMS has more recently filed a claim against Axcan pursuant to section 8 of theRegulations seeking recovery of alleged damages sustained by reason of thedelay to commercialize its product sustained by reason of Axcan’s opposition.

 

In June 2007,the Company initiated litigation against KV Pharmaceutical Company, EthexCorporation (a wholly owned subsidiary of KV), Impax Laboratories, Inc.and Global Pharmaceuticals (the generic marketing division of Impax) related tothe improper substitution of their products (Pangestyme UL and Lipram UL,respectively) for ULTRASE MT. The Company alleges that the defendants falselyadvertised and promoted their products as generic equivalents to andsubstitutes for ULTRASE MT in order to encourage pharmacists to dispense theirproducts to patients as generic substitutes for ULTRASE MT. Axcan seeksinjunctive relief to stop the defendants from continued false advertising andmarketing as well as damages resulting from the defendants’ unlawful conduct.

 

Axcan isinvolved in other routine litigation matters that Axcan believes not to bematerial.

 

# **PART XIV — TRANSFER AGENTS AND REGISTRARS**

# ** **

The transferagent and registrar for Axcan’s common shares on both the TSX and the NASDAQ isComputershare Trust Company of Canada, 1500 University Street, Suite 700,Montreal, Quebec Canada H3A 3S8. The Company’s register is held in Montreal,Quebec, Canada.

 

48

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# **PART XV - MATERIAL CONTRACTS**

# ** **

The followingare the only material contracts, other than contracts entered into in theordinary course of business, which have been entered into by Axcan during thelast financial year or that are still in effect:

 

(a)                                  The exclusive license and development agreement withCellerix;

 

(b)                                 The exclusive license andsupply agreement with Eurand International S.p.A, as amended;

 

(c)                                  The licensing agreement withExomed Australia Limited;

 

(d)                                 The license and co-developmentagreement with AGI Therapeutics Research Ltd; and

 

(e)                                  The amendedand restated credit Agreement with National Bank of Canada dated September 22,2004, as amended.

 

# **PART XVI - INTERESTS OF EXPERTS**

# ** **

The Company’s auditors are Raymond Chabot Grant Thornton LLP located at600, de La Gauchetière Street West, Office 1900, Montreal, Quebec H3B4L8. The auditors have confirmed to the Company thatthey are independent in accordance with the applicable rules ofprofessional conduct of each of the provinces of Canada and that they havecomplied with the rules on auditor independence of the United StatesSecurities and Exchange Commission.

 

# **PART XVII - ADDITIONAL INFORMATION**

# ** **

Additionalinformation about Axcan is available on the Company’s web site at www.axcan.com,on SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com,and on the U.S. Securities and Exchange web site at www.sec.gov.

 

Additionalinformation, including directors’ and executive officers’ remuneration andindebtedness, principal holders of the Company’s securities and securitiesauthorized for issuance under equity compensation plans is contained in theManagement Proxy Circular dated as of January 22, 2007 prepared inconnection with the Company’s Annual Meeting of Shareholders which was held on February 28,2007.

 

Additionalfinancial information is provided in the 2007 Financial Statements and the 2007MD&A for its fiscal year ended September 30, 2007.

 

Copies of thisAIF, as well as copies of the 2007 Financial Statements and the 2007 MD&Aof Axcan for the year ended September 30, 2007 and the Management ProxyCircular dated January 22, 2007 are available on SEDAR at www.sedar.com,and may be obtained from:

 

IsabelleAdjahi

SeniorDirector, Investor Relations and Communications

Axcan PharmaInc.

597, LaurierBlvd.

Mont-Saint-Hilaire,QC J3H 6C4

Canada

Tel: (450)467-2600 or 1 (877) 982-2600 ext. 2000

Fax: (450)464-9979

E-mail: iadjahi@axcan.com

 

*The names AXCAN, AXCANPHARMA, BENTYL, BENTYLOL, CANASA, CARAFATE, DELURSAN, FLUTTER, HELIZIDE,HEPENAX, ITAX, LACTEOL, MODULON, PHOTOBARR, PHOTOFRIN, PANZYTRAT, PROCTOSEDYL,PYLERA, SALOFALK, SCANDICAL, SCANDISHAKE, SULCRATE, TAGAMET, TRANSITOL,TRANSULOSE, ULTRASE, URSO, URSO DS, URSO FORTE, VIATOL and VIOKASE appearing inthis AIF are trademarks of Axcan or one of its subsidiaries.*

* *

*49*

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* *

# **SCHEDULE A - GLOSSARY OF TECHNICAL TERMS**

# ** **

***The text following thetechnical terms reproduced in this glossary is explanatory only and does not inany way modify the meanings of such terms.***

*** ***

**Bile Ducts**: Channels that collect bilefrom the liver and deliver it to the intestine.

 

**Cervical Dysplasia**: Modification of the size,shape and organization of cells in the cervix. Dysplasia is generallyconsidered to be a pre-cancerous condition.

 

**Cholestatic Diseases ofthe Liver**:Conditions in which the bile flow from the liver is impaired.

 

**Cholestasis**: Combined conditions causingthe reduction of bile flow and the retention of bile acids.

 

**Cirrhosis:** Disease of the liver, originatingfrom many causes and characterized by a progressive replacement of liver cellsby scarring tissue.

 

**Colorectal AdenomateousPolyps**:Polyps which are considered precursors to colorectal cancer.

 

**Crohn’s Disease (CD)**: Inflammatory bowel disease thataffects the wall of the gastrointestinal tract. CD can affect any part of thegastrointestinal tract but mostly affects the ileum, the last portion of thesmall bowel and the colon.

 

**Cystic Fibrosis (CF)**: Congenital diseasecharacterized by excessive secretions of certain glands, resulting inpancreatic insufficiency and pulmonary disorders. The average lifespan of CFpatients is approximately 32 years.

 

**Distal**: The part of the colonclosest to the rectum.

 

**Duodenum**: Part of the smallintestine attached to the end of the stomach.

 

**Exocrine PancreaticInsufficiency**: Decreased production and release of the enzymes produced in thepancreas, which leads to digestive problems.

 

**Fistula**: Abnormal connection orpassageway between organs or vessels that normally do not connect.

 

**Gastric Cancer**: Cancer of the cell lining ofthe gastric mucosa.

 

**Gastro-esophageal refluxdisease (GERD**): Symptoms and/or mucosal damage produced by the abnormal reflux ofgastric contents into the esophagus, causing heartburn or acid regurgitation.

 

***HelicobacterPylori (Hp)***: Bacterium with a spiral tail which lives under thegastric mucosa layer. The presence of *Hp* iscorrelated with gastritis, as well as gastric and duodenal ulcers. *Hp* is considered to be the most important factor in thecause of peptic ulceration and is formally classified as a Category 1 humancarcinogen by the World Health Organization. Once a diagnosis of *Hp* infection has been established, a therapy should beprescribed to eradicate the bacterium in all peptic ulcer patients, to reducethe rate of ulcer recurrence.

 

**Hepatitis**: Inflammation of the liverdue to infection or toxins.

 

**High-Grade Dysplasia**: As associated with Barrett’sEsophagus, High-Grade Dysplasia is a condition that results from prolonged acidreflux (heartburn) which causes the lining of the esophagus to be convertedinto tissue similar to that which lines the stomach. This transformation makesthe esophageal tissue more susceptible to cancer.

 

**Inflammatory BowelDiseases (IBDs**): Chronic diseases of unknown cause characterized by inflammation ofportions of the gastrointestinal tract. Ulcerative colitis, ulcerativeproctitis (a distal form of ulcerative colitis) and Crohn’s Disease constitutethe group of illnesses referred to as idiopathic inflammatory bowel diseases.IBDS follow a pattern of acute attacks followed by periods of remission. Thereare no cures for IBDS and the goals of therapy are to reduce symptoms duringacute attacks and to maintain remission when the disease is under control.

 

**Irritable Bowel Syndrome(IBS)**:Functional bowel disorder which primarily affects gastrointestinal motility.

 

50

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**Liver:**Organ located in the top rightportion of the abdominal cavity connected to the digestive tract. It secretesbile that is excreted in the duodenum, thus facilitating digestion of food inthe small intestine. The liver plays a key role in the processing and storageof various products of absorption.

 

**Mesalamine:** five-aminosalicylic acid(5-ASA).

 

**Moiety:**One of two or more parts intowhich something may be divided, such as the various parts of a vitamin ormolecule.

 

**Motility:** Ability of thegastrointestinal tract to undergo rhythmic muscular contractions.

 

**Mucosa:** Thin sheets of tissue thatcover or line various parts of the body such as the mouth or digestive tract.

 

**Nocturnal AcidBreakthrough (NAB):** The presence of at least 60 continuous minutes ofintragastric pH less than 4 during the night, in patients taking a proton pumpinhibitor twice daily before meals.

 

**Pancreas:**Abdominal gland located behindthe stomach and connected to the gastrointestinal tract that secretespancreatic juice to aid digestion (pancreatic enzymes) and insulin, anessential hormone for the metabolism of sugars.

 

**Pancreatic Juice:** Alkaline secretion of thepancreas containing enzymes that aid in the digestion of protein,carbohydrates, and fats.

 

**Pancreatitis:** Inflammation of the pancreas.

 

**Perianal Fistula**: Abnormal connection thatconnects the rectum or other ano-rectal area to the skin surface.

 

**Polyp:** Small tumor-like growth thatprojects from a mucus membrane surface (i.e. colon or rectum).

 

**Primary Biliary Cirrhosis(PBC):**A chronic cholestatic liver disease that progresses slowly towards a terminalphase characterized by jaundice, signs of decompensated cirrhosis, ascites andvariceal bleeding. The prognosis averages seven to 12 years from diagnosis todeath or liver transplant.

 

**Primary SclerosingCholangitis (PSC):** A liver disorder characterized by an inflammatory andsclerosing process leading to a progressive reduction in the diameter of thebile ducts. Its progressive course generally leads to liver cirrhosis, portalhypertension and often death, as the bile that normally flows out of the liverinstead accumulates there, resulting in an alteration of liver cells. Theaverage survival rate is four to ten years following diagnosis.

 

**Proton pump inhibitor(PPI):**Proton-pump inhibitors reduce the production of acid by blocking the enzyme inthe wall of the stomach that produces acid. The reduction of acid preventsulcers and allows any ulcers that exist in the esophagus, stomach and duodenumto heal.

 

**Ulcer:** Necrotic lesion characterizedby a crater-like erosion of the wall of the stomach (gastric ulcer) or theduodenum (duodenal ulcer), often associated with painful symptoms.

 

**UlcerativeColitis/Proctitis:** Chronic inflammatory disease which affects the innermucus membrane of the colon, particularly the distal portions of the colon(i.e., the rectum and sigmoid).

 

**Ursodiol(ursodeoxycholic acid):** Naturally occurring bile acid present as a minorfraction of the total human bile acids, and in greater concentrations in thebile of certain animal species such as bears. Ursodiol is also a drug indicatedfor the treatment of different diseases such as dissolution of gallstones,primary biliary cirrhosis and other cholestatic liver diseases.

 

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