UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2011


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

For the transition period from to .

Commission File Number 333-153896

APTALIS PHARMA INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		74-3249870
(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer Identification No.)
organization)

22 Inverness Center Parkway
Suite 310
Birmingham, AL		35242
(Address of Principal Executive Offices)		(Zip Code)

(205) 991-8085
(Registrant’s telephone number, including area code)

(Registrant’s Former Name)

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

Yes o No o

Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

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

Yes þ No o

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


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

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

Yes o No þ

As of August 12, 2011, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Aptalis MidHoldings Inc.

APTALIS PHARMA INC.
INDEX


Forward-Looking Statements			3

PART I. FINANCIAL INFORMATION			4

Item 1. Financial Statements			4

Condensed Consolidated Balance Sheets			4

Condensed Consolidated Statements of Operations			5

Condensed Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss)			6

Condensed Consolidated Cash Flows			7

Notes to Condensed Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			36

Item 3. Quantitative And Qualitative Disclosure About Market Risk			60

Item 4. Controls and Procedures			60

PART II. OTHER INFORMATION			61

Item 1A. Risk Factors			61

Item 6. Exhibits			62

SIGNATURES			63

EXHIBIT INDEX			64
EX-2.1
EX-2.2
EX-2.3
EX-2.4
EX-2.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Page 2

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. federal securities laws. Statements other than statements of historical facts including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans, future industry growth and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “project,” “forecast,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Certain of the important factors that could cause actual results to differ materially from our expectations, or “cautionary statements,” include, but are not limited to, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Quarterly Report, “Risk Factors” in Item 1A of Part II of this Quarterly Report, as well as elsewhere in this Quarterly Report on Form 10-Q.

We caution you not to place undue reliance on any forward-looking statements and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.

Page 3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

APTALIS PHARMA INC.

Condensed Consolidated Balance Sheets

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


	June 30,			September 30,
	2011			2010
	*(unaudited)*			(audited)
	$			$
Assets
Current assets
Cash and cash equivalents		114,779			161,503
Accounts receivable, net		81,197			32,379
Accounts receivable from the parent company (Note 20)		603			487
Income taxes receivable		4,064			2,906
Inventories, net (Note 8)		51,608			23,866
Prepaid expenses and other current assets		14,200			3,277
Deferred income taxes, net (Note 15)		6,243			2,331

Total current assets		272,694			226,749
Property, plant and equipment, net (Note 9)		90,170			35,777
Intangible assets, net (Note 10)		716,715			347,962
Goodwill, net (Note 10)		182,591			73,540
Deferred debt issue expenses, net of accumulated amortization of $10,658 ($14,136 as of September 30, 2010) (Note 13)		30,855			20,443
Deferred income taxes, net (Note 15)		9,813			8,706

Total assets		1,302,838			713,177

Liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 12)		153,291			94,673
Income taxes payable (Note 15)		1,803			3,446
Installments on long-term debt (Note 13)		8,958			13,163
Deferred income taxes (Note 15)		49			47

Total current liabilities		164,101			111,329
Long-term debt (Note 13)		970,178			581,312
Other long-term liabilities		41,872			10,028
Employees severance indemnities (Note 14)		4,800			—
Deferred income taxes (Note 15)		88,755			31,540

Total liabilities		1,269,706			734,209

Shareholders’ Equity (Deficiency)
Capital Stock (Note 16)
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding as of June 30, 2011, and September 30, 2010		1			1
Deficit		(619,605	)		(468,152	)
9.05% Note receivable from the parent company (Note 20)		(78,154	)		(133,154	)
Additional paid-in capital		756,827			614,113
Accumulated other comprehensive loss		(25,937	)		(33,840	)

Total shareholders’ equity (deficiency)		33,132			(21,032	)

Total liabilities and shareholders’ equity		1,302,838			713,177

The accompanying notes are an integral part of the condensed consolidated financial statements.

These interim financial statements should be read in conjunction with the annual consolidated financial statements.

Page 4

APTALIS PHARMA INC.

Condensed Consolidated Statements of Operations

(in thousands of U.S. dollars)
(unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
	$			$			$			$
Net product sales		126,698			80,480			322,410			284,977
Development fees		1,371			—			1,970			—
Royalties		3,086			—			4,073			—

Total revenue		131,155			80,480			328,453			284,977

Cost of goods sold ^(a) (Note 8)		48,529			20,828			97,805			115,606
Selling and administrative expenses ^(a) (Note 14)		39,260			27,335			103,475			87,980
Management fees (Note 20)		892			703			2,460			2,558
Research and development expenses ^(a)		19,645			8,611			37,583			24,720
Other research and development expenses attributable to development fees ^(a)		1,506			—			2,361			—
Acquired in-process research (Note 6)		50,190			7,948			50,190			7,948
Depreciation and amortization		20,974			15,138			53,000			45,830
Loss on disposal of product line (Note 7)		—			—			7,365			—
Transaction, restructuring and integration costs (Notes 4 and 5)		12,672			—			34,969			—
Impairment of intangible assets and goodwill (Note 10)		—			—			—			107,158

Total operating expenses		193,668			80,563			389,208			391,800

Operating loss		(62,513	)		(83	)		(60,755	)		(106,823	)

Financial expenses (Note 14)		20,673			16,212			67,047			48,794
Loss on extinguishment of debt (Note 13)		—			—			28,311			—
Interest income		(56	)		(189	)		(371	)		(496	)
Other income		—			—			—			(7,700	)
Loss (gain) on foreign currencies		(284	)		(759	)		592			634

Total other expenses		20,333			15,264			95,579			41,232

Loss before income taxes		(82,846	)		(15,347	)		(156,334	)		(148,055	)
Income taxes expense (benefit) (Note 15)		(2,056	)		(5,448	)		(5,321	)		16,158

Net loss		(80,790	)		(9,899	)		(151,013	)		(164,213	)


^(a)		Excluding depreciation and amortization

The accompanying notes are an integral part of the condensed consolidated financial statements.

These interim financial statements should be read in conjunction with the annual consolidated financial statements.

Page 5

APTALIS PHARMA INC.

Condensed Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss)

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



	Common Shares							Additional			9.05% Note Receivable			Accumulated Other			Total
	Shares		Amount		Deficit			Paid-in Capital			From Parent Company			Comprehensive Loss			Shareholders’ Equity
	(number)			$		$			$			$			$			$
Balance, October 1, 2009		100		1		(297,658	)		619,053			(133,154	)		(24,478	)		163,764
Net loss		—		—		(164,213	)		—			—						(164,213	)
Hedging contracts fair value adjustments, net of taxes of $4		—		—		—			—			—			(7	)		(7	)
Foreign currency translation adjustments		—		—		—			—			—			(20,552	)		(20,552	)

Total Comprehensive loss																		(184,772	)
Dividends paid		—		—		(128	)		—			—			—			(128	)
Stock-based compensation expense		—		—					272			—			—			272
Stock-based compensation plan redemptions		—		—		—			(336	)		—			—			(336	)
Provision on interest receivable from parent company		—		—		—			(9,012	)		—			—			(9,012	)
Interest income from parent company, net of taxes of $3,155		—		—		—			5,857			—			—			5,857

Balance, June 30, 2010		100		1		(461,999	)		615,834			(133,154	)		(45,037	)		(24,355	)

Amounts related to foreign currency translation adjustments															(45,037	)

Accumulated other comprehensive loss															(45,037	)


Balance, October 1, 2010		100		1		(468,152	)		614,113			(133,154	)		(33,840	)		(21,032	)
Net loss		—		—		(151,013	)		—			—			—			(151,013	)
Hedging contracts fair value adjustments, net of taxes of $0		—		—		—			—			—			(8,356	)		(8,356	)
Foreign currency translation adjustments		—		—		—			—			—			16,259			16,259

Total Comprehensive loss																		(143,110	)
Dividends paid		—		—		(440	)		—			—			—			(440	)
Repayment of Note from Parent Company		—		—		—			—			55,000			—			55,000
Capital contribution		—		—		—			140,000			—			—			140,000
Stock-based compensation expense		—		—		—			6,381			—			—			6,381
Stock-based compensation plan redemptions		—		—		—			(894	)		—			—			(894	)
Provision on interest receivable from parent company		—		—		—			(7,921	)		—			—			(7,921	)
Interest income from parent company, net of taxes of $2,773		—		—		—			5,148			—			—			5,148

Balance, June 30, 2011		100		1		(619,605	)		756,827			(78,154	)		(25,937	)		33,132

Amounts related to foreign currency translation adjustments															(17,581	)
Amounts related to hedging contracts fair value adjustments															(8,356	)

Accumulated other comprehensive loss															(25,937	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

These interim financial statements should be read in conjunction with the annual consolidated financial statements.

Page 6

APTALIS PHARMA INC.

Condensed Consolidated Cash Flows

(in thousands of U.S. dollars)
(unaudited)


	Nine Months Ended June 30,
	2011			2010
		$			$
Cash flows from operating activities
Net loss		(151,013	)		(164,213	)
Adjustments to reconcile net income to cash flows from operating activities:
Non-cash financial expenses		18,967			5,259
Inventory stepped-up value expensed		17,432			—
Depreciation and amortization		53,000			45,830
Stock-based compensation expense		6,381			272
Loss on disposal of product line and write-down of assets		7,395			108
Impairment of intangible assets and goodwill (Note 10)		—			107,158
Non-cash gain (loss) on foreign exchange		209			(142	)
Change in fair value of derivatives		—			(621	)
Deferred income taxes		(12,345	)		11,416
Other non-cash adjustments related to unapproved PEPs (Note 2)		(3,706	)		68,335
Changes in assets and liabilities:
Accounts receivable		(21,200	)		11,400
Accounts receivable from the parent company		(116	)		(144	)
Income taxes receivable		1,551			1,482
Inventories		3,455			(8,509	)
Prepaid expenses and deposits		(6,956	)		443
Accounts payable and accrued liabilities		3,881			(13,334	)
Other long-term liabilities		22,009			—
Income taxes payable		(2,519	)		916

Net cash provided by (used in) operating activities		(63,575	)		65,656

Cash flows from investing activities
Acquisition, net of cash acquired (Note 4)		(525,667	)		—
Acquisition of intangible assets		(431	)		—
Disposal of intangible assets		500			—
Acquisition of property, plant and equipment		(5,315	)		(5,071	)

Net cash used in investing activities		(530,913	)		(5,071	)

Cash flows from financing activities
Issuance of long-term debt		746,250			—
Repayment of long-term debt		(371,286	)		(20,865	)
Repayment of the Note from the parent company		55,000			—
Deferred debt issue expenses		(22,963	)		—
Stock-based compensation plan redemptions		(894	)		(336	)
Capital contribution		140,000			—
Dividends paid		(440	)		(128	)

Net cash provided by (used in) financing activities		545,667			(21,329	)

Foreign exchange gain (loss) on cash held in foreign currencies		2,097			(1,916	)

Net increase (decrease) in cash and cash equivalents		(46,724	)		37,340
Cash and cash equivalents, beginning of period		161,503			126,435

Cash and cash equivalents, end of period		114,779			163,775

The accompanying notes are an integral part of the condensed consolidated financial statements.

These interim financial statements should be read in conjunction with the annual consolidated financial statements.

Page 7

APTALIS PHARMA INC.

Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

1. Governing Statutes, Description of Business and Basis of Presentation

On May 4, 2011, Axcan Intermediate Holdings Inc. announced that it has changed its name to Aptalis Pharma Inc. The entity is a corporation incorporated on November 28, 2007, under the General Corporation Law of the State of Delaware. The corporation and its subsidiaries (together the “Company”), commenced active operations with the purchase, through a wholly-owned indirect subsidiary on February 25, 2008, of all of the outstanding common shares of Axcan Pharma Inc. at a price of $23.35 per share (“the Acquisition”), a company incorporated under the Canada Business Corporation Act. The Company provides innovative, effective therapies for unmet medical needs including cystic fibrosis and gastrointestinal disorders. The Company has manufacturing and commercial operations in the United States, the European Union and Canada. The Company also formulates and clinically develops enhanced pharmaceutical and biopharmaceutical products for itself and others using its proprietary technology platforms including bioavailability enhancement of poorly soluble drugs, custom release profiles, and taste-masking/orally disintegration tablet (ODT) formulations.

On February 11, 2011, the Company completed the acquisition of Eurand N.V. (“Eurand”) through a wholly owned indirect subsidiary pursuant to a Share Purchase Agreement dated November 30, 2010 (as amended) resulting in Eurand becoming an indirect subsidiary of the Company. Eurand is a specialty pharmaceutical company that is engaged in the development, manufacturing and commercialization of enhanced pharmaceutical and biopharmaceutical products based on its proprietary pharmaceutical technologies.

As described in Note 4, the Eurand transaction has been accounted for in accordance with the acquisition method of accounting for business combinations. Accordingly, the Company’s condensed consolidated financial statements reflect the assets, liabilities and results of operations of Eurand from the date of acquisition.

The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency, and prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the requirements of the Securities and Exchange Commission for reporting on Form 10Q. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended September 30, 2010. When necessary, the financial statements include amounts based on informed estimates and best judgment of management. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. In Management’s opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operation for the periods shown. Certain prior period amounts have been reclassified to conform to the current period presentation. All intercompany transactions and balances have been eliminated on consolidation.

2. Significant Accounting Policies

The following policies are interim updates to those discussed in Note 2 to the Company’s audited financial statements for the fiscal year ended September 30, 2010.

Revenue recognition

Revenue is recognized when the product is shipped to the Company’s customers, provided the Company has not retained any significant risks of ownership or future obligations with respect to the product shipped. Provisions for sales discounts and estimates for chargebacks, managed care and Medicaid rebates, product returns and distribution service agreement fees are recorded as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by the Company at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such reserves. In certain circumstances, returns of products are allowed under the Company’s policy and provisions are maintained accordingly. These revenue reductions are generally reflected as an addition to accrued liabilities. Amounts received from customers as prepayments for products to be shipped in the future are reported as deferred revenue.

The Company presents, on a net basis, taxes collected from customers and remitted to governmental authorities; that is, they are excluded from revenues.

Page 8

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

ULTRASEand VIOKASE, the Company’s pancreatic enzyme products (“PEPs”) have historically accounted for approximately 19% of the Company’s net sales in the three years ended September 30, 2009. Prior to April 28, 2010, products that were marketed in the U.S. to treat exocrine pancreatic insufficiency had been available before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there were marketed PEPs that had not been approved under the NDA process by the FDA. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for exocrine pancreatic insufficiency drug products to April 28, 2010, for those companies that were (a) marketing unapproved pancreatic enzyme products as at April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval. The FDA has required all manufacturers with unapproved NDAs to cease distribution of unapproved products after April 28, 2010, until such time that NDA approval is granted. After this date, the unapproved products were still available on pharmacy shelves for a short time until stock is depleted. The FDA has stated that it will continue to review NDAs that have been submitted by manufacturers of unapproved PEPs, and will approve additional PEPs even after the April 28, 2010 deadline has passed, if they meet the required safety, effectiveness and product quality standards. The Company completed the submission for ULTRASE MT in the fourth quarter of fiscal year 2008. The submission of the Company’s rolling NDA for VIOKASEwas completed in the first quarter of fiscal year 2010.

ULTRASE MT and VIOKASE did not receive NDA approval by the April 28, 2010 deadline and the Company has ceased distributing the two products after that date, in compliance with the FDA guideline. The Company recorded an additional $23,453,000 sales deductions reserve in the fiscal year ended September 30, 2010. This reserve is for product returns and other sales deductions as an estimate of Company’s liability for ULTRASE MT and VIOKASE that may be returned by the original purchaser under the Company DSAs or applicable return policies. The cease distribution order issued by the FDA was not considered as a product recall. At June 30, 2011, the remaining reserve was $3,225,000 and was based on management estimates of ULTRASE MT and VIOKASE inventory in the distribution channel, assumptions on related expiration dates of this inventory as well as estimated erosion of ULTRASE MT and VIOKASE demand, based on competition from approved PEPs and the resulting estimated sell-through of ULTRASE MT and VIOKASE, actual return activity and other factors. In future periods, the Company will monitor and review the estimates and will prospectively record changes to the reserve.

On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE MT and VIOKASE be addressed before approval can be granted. The letters also require that deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs can be approved. The Company is in ongoing discussions with the FDA and continues to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA, as soon as possible.

3. Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the presentation of comprehensive income. The new guidance allows an entity two options to present the components of net income and other comprehensive income; (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Additionally, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. This new guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In May 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. Additional disclosure requirements include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. This new guidance is effective for annual and interim periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In December 2010, the FASB issued guidance that modifies the Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.

Page 9

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

In December 2010, the FASB issued guidance that clarified the recognition and classification of annual fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act in the income statements of pharmaceutical manufacturers. The guidance requires that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The annual fee shall be presented as an operating expense. This guidance is effective for calendar years beginning after December 31, 2010, when the fee initially becomes effective. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2010, the FASB issued guidance related to revenue recognition that applies to arrangements with milestones relating to research or development deliverables. This guidance provides criteria that must be met to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. This guidance is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2010, the FASB amended the existing guidance on stock compensation to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In October 2009, the FASB amended the existing guidance on revenue recognition related to accounting for multiple-element arrangements. This amendment addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset determined in accordance with the guidance on intangible assets and the period of expected cash flows used to measure the fair value of the asset determined in accordance with the amended guidance for business combinations and other authoritative guidance. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued guidance related to collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The guidance also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008, and shall be retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

4. Acquisition of Eurand N.V. (“Eurand”)

Description of the transaction

On February 11, 2011 or the Acquisition Date, Axcan Holdings Inc., which subsequently changed its name to Aptalis Holdings Inc. (“Aptalis Holdings”), the Company’s indirect parent, and Axcan Pharma Holding B.V. (“Axcan AcquisitionCo”), an indirect subsidiary of the Company, pursuant to a Share Purchase Agreement dated November 30, 2010 (as amended) acquired the outstanding equity of Eurand N.V. (“Eurand”) for total consideration of approximately $589,555,000 equity. As a result of the acquisition, Eurand has become an indirect subsidiary.

Page 10

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

Prior to the transaction, Eurand was a specialty pharmaceutical company that developed, manufactured and commercialized enhanced pharmaceutical and biopharmaceutical products based on its proprietary pharmaceutical technologies. Eurand has had six products approved by the FDA since 2001 and had a pipeline of product candidates in development for itself and its collaboration partners. Its technology platforms include bioavailability enhancement of poorly soluble drugs, custom release profiles and taste-masking/orally disintegrating tablet (ODT) formulations. Eurand was a global company with facilities in the U.S. and Europe. The acquisition of Eurand enables the Company to leverage the combination of two leading specialty pharmaceutical players, expand its gastroenterology product portfolio and provide the Company with a proprietary R&D growth engine and technology platforms supported by an extensive patent portfolio to meaningfully diversify its business and expand its geographic and manufacturing footprint.

Fair value of consideration transferred

The table below details the consideration transferred to acquire Eurand:

Conversion

Form of

Calculation

Fair Value

Consideration

Eurand common stock outstanding as of acquisition date

48,359,433

580,313

Cash

Multiplied by cash consideration per common share outstanding

12.00

Eurand stock options canceled for a cash payment^(a)

9,242

Cash

Total fair value of consideration transferred

589,555


^(a)		Each Eurand stock option, whether or not vested and exercisable on the acquisition date, was canceled for a cash payment equal to the excess of the per share value of the acquisition consideration over the per share exercise price of the Eurand stock option.

The aggregate equity purchase price of $589,555,000 plus acquisition costs (including related fees and expenses) were funded by cash equity contributions amounting to $140,000,000 from affiliates of TPG Capital L.P. and certain co-investors made through Aptalis Holdings, the proceeds from the Senior Secured Term Loan Facility (as defined below) under the Company’s amended and restated credit agreement and related security and other agreements and cash on hand from the Company and Eurand.

The amended and restated credit agreement and related security and other agreements is composed of (i) a senior secured revolving credit facility in an aggregate principal amount of $147,000,000 (the “Senior Secured Revolving Credit Facility”) and (ii) a $750,000,000 senior secured term loan facility (the “Senior Secured Term Loan Facility” and, together with the Senior Secured Revolving Credit Facility, collectively, the “Amended and Restated Senior Secured Credit Facilities”). The Senior Secured Revolving Credit Facility is comprised of $115,000,000 of existing revolving credit commitments that were extended or issued on February 11, 2011, (the “ Extended Commitments “) and $32,000,000 of existing revolving credit commitments that were not extended (the “ Unextended Commitments”) pursuant to the Senior Secured Revolving Credit Facility.

The Company borrowed $500,000,000 of the amount available under the Senior Secured Term Loan Facility at the closing of the acquisition. The Senior Secured Revolving Credit Facility remained undrawn at the closing of the acquisition. A portion of the proceeds of the equity and debt financings, together with cash on hand of the Company and Eurand, were also used to repay the outstanding term loan portion amounting to $125,660,000 of the Company’s prior senior secured credit facilities and to pay related fees and expenses. The remaining amount of $250,000,000 of the Senior Secured Term Loan Facility was used on March 15, 2011 to redeem 100% of the Company’s existing 9.25% senior secured notes due 2015.

Basis of presentation

The transaction has been accounted for in accordance with the acquisition method of accounting for business combinations under existing U.S. GAAP. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date including acquired in-process research and development assets.

Assets acquired and liabilities assumed

A preliminary purchase price allocation has been made and the recorded amounts are subject to change. The following recognized amounts are provisional and subject to change:

•		Amounts and useful lives for identifiable intangible assets and property, plant and equipment, pending the finalization of valuation;

•		Amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction, revision to fair value of acquired assets and liabilities, and the filing of Eurand’s pre-acquisition tax returns; and

•		The allocation of goodwill among reporting units.

The Company will finalize the purchase price allocation as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. The Company expects to finalize the purchase price allocation no later than one year from the acquisition date.

Page 11

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

Resulting from the preliminary purchase price allocation, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.


							Amounts
				Step-up to			recognized as of
	Book value			fair value			acquisition date
		$			$			$
Cash and cash equivalents		63,888			—			63,888
Accounts receivable ^(a)		22,662			—			22,662
Inventories ^(b)		25,465			18,727			44,192
Other current assets ^(c)		6,552			—			6,552
Property, plant and equipment ^(d)		44,652			10,874			55,526
Identifiable intangible assets ^(d)		7,053			406,876			413,929
Current liabilities ^(e)		(51,960	)		—			(51,960	)
Long-term debt, including current portion		(3,394	)		—			(3,394	)
Deferred income taxes liabilities, net ^(f)		(237	)		(61,012	)		(61,249	)
Other non-current liabilities		(8,489	)		2,278			(6,211	)

Total identifiable net assets		106,192			377,743			483,935
Goodwill ^(g)		37,540			68,977			106,517

Net assets acquired		143,732			446,720			590,452

Effective settlement of pre-existing relationships ^(h)		(897	)		—			(897	)

Total fair value of consideration transferred								589,555


^(a)		As of acquisition date, the fair value of accounts receivable acquired approximated book value. The gross contractual amount receivable was $23,118,000 of which $456,000 was not expected to be collected.

^(b)		Reflects the adjustment to step-up the carrying value of inventory acquired by $18,727,000 to estimated fair value as of February 11, 2011. The stepped-up value is recorded as a charge to cost of goods sold as acquired inventory is sold.

^(c)		Includes prepaid assets and income tax receivable.

^(d)		The amounts recorded for the major components of acquired identifiable intangible assets are as follows:


	Amounts		Weighted
	recognized as of		average useful
	acquisition date		lives (years)
		$
Trademarks, trademark licenses, manufacturing rights and other intangible assets with a finite life		413,929		17.04

Total identifiable intangible assets		413,929		17.04


		In addition, the estimated aggregate amortization expense for the five succeeding years will be $25,599,000 annually.

^(e)		Includes accounts payable, accrued liabilities and income taxes payable.

^(f)		Comprises of current deferred tax assets $823,000, non current deferred tax assets $15,703,000, current deferred tax liabilities $3,000 and non current deferred tax liabilities $77,772,000.

^(g)		The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to synergies expected to result from combining the operations of Eurand and the Company and intangible assets that do not qualify for separate recognition. The Company does not expect any portion of this goodwill to be deductible for tax purposes. The allocation of goodwill among reporting units is not complete, pending finalization of the Company’s internal reporting structure and composition of its post-acquisition operating segments and reporting units.

^(h)		The Company had entered into an exclusive development license and supply agreement with Eurand. No gain or loss was recognized in conjunction with the effective settlement of the contractual relationship between the Company and Eurand as a result of this acquisition.

Page 12

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

Transaction related costs

During the three and nine months ended June 30, 2011, the Company expensed $473,000 and $11,765,000 respectively (an additional $1,070,000 was expensed in the fiscal year ended September 30, 2010) of costs relating to legal, financial, valuation and accounting advisory services performed in connection with effecting the transaction with Eurand, which are included in transaction, restructuring and integration costs in the accompanying Condensed Consolidated Statements of Operations.

Actual and proforma information

The revenues derived from the Eurand entities for the period from the Acquisition Date to June 30, 2011 were $69,654,000 and earnings before income taxes was $652,000 excluding the effects of the non-recurring acquisition accounting adjustments described above.

The following table presents unaudited pro forma consolidated results of operations as if the acquisition of Eurand had occurred as of October 1, 2009:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
		$			$			$			$
Total revenue		131,155			116,635			392,552			377,993
Loss before income taxes		(57,124	)		(34,389	)		(84,583	)		(151,459	)

Net loss		(56,922	)		(27,074	)		(83,355	)		(161,855	)

The pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and Eurand. The pro forma information does not reflect any synergies and other benefits that the Company may achieve as a result of the acquisition, or the costs necessary to achieve these synergies. In addition, the pro forma information does not reflect the costs to integrate the operations of the Company and Eurand.

The pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the transaction been completed on October 1, 2009. In addition, the pro forma information does not purport to project the future results of operations of the Company. The pro forma information reflects primarily the following pro forma adjustments:

•		elimination of product sales and royalties between Eurand and the Company, an elimination of the Company’s cost of sales for Eurand-sourced inventories, and the elimination of certain PEP-related charges stemming from intercompany transactions;

•		elimination of Eurand’s historical intangible asset amortization expense;

•		additional amortization expense related to the fair value of identifiable intangible assets acquired;

•		additional depreciation expense related to the fair value adjustment to property, plant and equipment acquired;

•		elimination of interest expense and amortization of deferred financing costs related to the Company’s term loan under the legacy senior secured credit facilities and 9.25% senior secured notes due 2015 that were repaid as part of the acquisition transaction;

•		additional interest expense and amortization of deferred financing costs associated with financing obtained under the Amended and Restated Senior Secured Credit Facilities obtained by the Company in connection with the acquisition transaction;

•		reduction of interest income associated with cash and cash equivalents that were used to partially fund the acquisition;

•		elimination of acquisition-related costs and acquisition-related restructuring charges;

•		elimination of $13,050,000 for the three months and $17,432,000 for the nine months ended June 30, 2011 of the acquisition accounting adjustment on Eurand’s inventory that was sold subsequent to the Acquisition Date, which will not have a continuing impact on the Company’s operations.

The pro forma effective tax rate differs from the statutory rate due to the relatively large impact of actual permanent differences on relatively small pro forma income before tax, valuation allowances on deferred tax assets in certain jurisdictions, and the expected impact of foreign withholding taxes upon repatriation of foreign earnings.

Page 13

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

5. Restructuring and Integration

Acquisition related cost-rationalization and integration initiatives

The Company has initiated restructuring measures in conjunction with the integration of the operations of Eurand. These measures are intended to capture synergies and generate cost savings across the Company.

Restructuring actions taken thus far include workforce reductions across the Company and other organizational changes. These reductions primarily come from the elimination of redundancies and consolidation of staff in the sales and marketing, manufacturing, research and development, and general and administrative functions, as well as from the planned closure of Eurand’s manufacturing facility in Nogent-Oise, France.

The Company recorded a restructuring expense in the amount of $3,655,000 during the three months and $8,680,000 during the nine months ended June 30, 2011 related to planned employee termination costs included in Transaction, restructuring and integration on the Condensed Consolidated Statements of operations. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits and health insurance continuation, many of which may be paid out during periods after termination.

The following table summarizes restructuring liability activity related to the Eurand acquisition through June 30, 2011:


						Foreign
						Currency		Balance
	Charges		Payments			Translation		June 30,2011
		$		$			$		$
Severance and related benefits		8,680		(6,093	)		123		2,710

The Company estimates to incur additional restructuring costs of between $13,000,000 and $17,000,000 primarily consisting of severance costs. The restructuring actions taken thus far are expected to be substantially completed by the end of 2012.

Through June 30, 2011, the Company has incurred integration costs of $14,523,000 representing certain external, incremental costs directly related to integrating the Eurand business and primarily include expenditures for consulting and systems integration. Restructuring and integration costs are included in transaction, restructuring and integration costs in the accompanying Condensed Consolidated Statements of Operations.

6. Acquisitions, Research Collaborations and License Agreements

Agreements with Mpex Pharmaceuticals Inc. for the acquisition and development of Aeroquin™

On April 11, 2011, Aptalis Holdings, an indirect parent company of the Company, entered into a series of agreements with Mpex Pharmaceuticals Inc. (“Mpex”) for the acquisition and development of Aeroquin™ (the “Aeroquin Transaction”), a proprietary aerosol formulation of levofloxacin, which is currently in Phase 3 clinical trials for the treatment of pulmonary infections in patients with cystic fibrosis (CF). Under these agreements, Aptalis Holdings has an option to acquire all of Mpex’s assets related to Aeroquin™ in a merger, with continued development of Aeroquin™ by Mpex under the terms of a Development Agreement between the parties. Prior to the merger, Mpex will transfer all of its assets that are not related to Aeroquin™ to a newly formed company that will be owned primarily by current Mpex stockholders. As a result of the Aeroquin Transaction, the Company made an initial non-contingent payment of $12,000,000 on April 21, 2011. Additional remaining time-based, non-contingent payments in relation with the Aeroquin Transaction amounting to $33,000,000 and an additional $17,500,000 of time-based payments contingent only on completing the Merger to be expensed to acquired in-process research upon completing the Merger and will be paid in a number of installments, of which the final installment is due on April 1, 2014.

Under the terms of the Option Agreement dated April 11, 2011 among Axcan Holdings, Mpex, and Axcan Lone Star Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Aptalis Holdings and a direct wholly-owned subsidiary of the Company (“Merger Sub”), Aptalis Holdings has an option to terminate the Merger Agreement described below. This option could have been exercised during a certain period of time, which period in no event ended on August 1, 2011. The Company did not exercise the option.

Under the terms of the Agreement and Plan of Merger dated April 11, 2011 (the “Merger Agreement”) among Axcan Holdings, Merger Sub, Mpex and certain stockholders of Mpex who will serve as representatives of the Mpex security holders under the Merger Agreement, Merger Sub will merge with and into Mpex, with Mpex surviving (the “Surviving Company”) as an indirect wholly-owned subsidiary of Aptalis Holdings and a direct wholly-owned subsidiary of the Company (the “Merger”). Pursuant to the Merger Agreement, the aggregate merger consideration that the Mpex security holders will receive, subject to the consummation of the Merger, consists of (i) the non-contingent payments mentioned above; (ii) contingent payments of up to $195,000,000 if certain regulatory and commercial milestones are met related to Aeroquin™, and (iii) earn-out payments based on net sales of Aeroquin™. Indemnity obligations of the Mpex security holders will be satisfied by set-off against a portion of the foregoing merger consideration payments.

Page 14

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

The Merger is expected to close during the fourth quarter of 2011. The further development of Aeroquin™ will be conducted pursuant to the terms of the Development Agreement dated April 11, 2011 among Axcan Holdings, Merger Sub, and Mpex. Upon completion of the divestiture of assets and liabilities unrelated to Aeroquin™ (the “Divestiture”) to a newly formed company (“Spinco”), Spinco will assume all of Mpex’s obligations under the Development Agreement. Under the Development Agreement, Mpex (and after the Divestiture, Spinco) will be paid for the actual development costs of Aeroquin™ and will have primary responsibility for conducting day-to-day development activities. Aptalis Holdings will be required to pay in advance development costs estimated for the next three months based on a rolling three month forecast. Aptalis Holdings and Merger Sub will have input regarding development strategy. Pursuant to the Development Agreement, on April 12, 2011 Mpex was paid $8,731,000 for development expenses incurred by Mpex since from November 15, 2010, to March 31, 2011, which has been expensed as acquired in-process researchand an additional $9,913,000 for estimated development costs to be incurred during the first three months of the Development Agreement, of which $8,514,000 has been expensed as research and develpment. All payments under the Development Agreement, Option Agreement and Merger Agreement to Mpex or Mpex security holders, as applicable, will be made by or on behalf of Merger Sub (or after the consummation of the Merger, the Surviving Company).

During the three months ended June 30, 2011, the Company expensed $50,190,000 as acquired in-process research and development reflecting the initial non-contingent payment of $12,000,000, the discounted value of future time-based non-contingent payments payable under the Option agreement of $29,459,000 (with a corresponding liability) and the payment for certain pre-agreement incurred development expenses of $8,731,000. As of June 30, 2011, $8,700,000 reflecting forecasted development costs for the next three months is included in prepaid expenses and other current assets.

Equity investment in Axcan Holdings

Simultaneous with the execution of the Mpex agreements, Aptalis Holdings received the proceeds of a $55,000,000 equity investment from funds managed by Investor Growth Capital Limited. Aptalis Holdings contributed the proceeds of the equity investment to its subsidiaries to fund a portion of the cost of the Mpex transactions and a partial repayment on the Company’s $133,154,000 note receivable from its parent company.

7. Disposal of the PHOTOFRIN/PHOTOBARR Product Line

On March 28, 2011, The Company entered into a definitive agreement with Pinnacle Biologics, Inc., which acquired all global assets and rights related to PHOTOFRIN/PHOTOBARR, including inventory, for non-contingent payments amounting to $4,252,000. In addition to the non-contingent payments, additional payments shall be made to the Company after the achievement of certain milestones events. In addition, the Company will be paid royalties on annual net sales of PHOTOFRIN/PHOTOBARR.

During the nine months period ended June 30, 2011 the Company recorded a loss of $7,365,000 as a result of the disposal of the PHOTOFRIN/PHOTOBARR product line. Consideration for additional contingent payments to be made to the Company shall be recorded as a gain in the period in which they are received.

Page 15

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

8. Inventories


	June 30,		September 30,
	2011		2010
	$		$
Raw material and packaging material, net of reserve for obsolescence of $3,342 (nil at September 30, 2010)		24,737		10,316
Work in progress, net of reserve for obsolescence of $1,114 (nil at September 30, 2010)		5,826		595
Finished goods, net of reserve for obsolescence of $3,191 ($758 at September 30, 2010)		21,045		12,955

		51,608		23,866

As disclosed in Note 2, the Company’s PEPs did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA. As a result, a charge of $44,883,000 was recorded during the fiscal year ended September 30, 2010, to cost of goods sold to reduce inventories to their net realizable value and for estimated loss for purchase and other materials and supply commitments related to ULTRASE MT and VIOKASE products.

Inventories include the adjustment to step-up the carrying value of inventory acquired in the Eurand acquisition by $18,727,000 to estimated fair value as of February 11, 2011, less a charge to cost of goods sold as acquired inventory is sold amounting to $17,432,000 for the nine months ended June 30, 2011.

9. Property, Plant and Equipment

June 30, 2011

Accumulated

Cost

depreciation

Net

Land

4,936

—

4,936

Buildings

47,084

5,560

41,524

Furniture and equipment

36,462

4,449

32,013

Automotive equipment

Computer equipment and software

24,384

13,599

10,785

Leasehold and building improvements

1,356

473

883

114,252

24,082

90,170


	September 30, 2010
			Accumulated
	Cost		depreciation		Net
	$		$		$
Land		2,240		—		2,240
Buildings		23,252		4,490		18,762
Furniture and equipment		8,534		3,515		5,019
Computer equipment and software		18,419		9,588		8,831
Leasehold and building improvements		1,220		295		925

		53,665		17,888		35,777

Page 16

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

10. Goodwill and Intangible Assets

The following table reflects the changes in carrying amount of goodwill from September 30, 2010 to June 30, 2011:


	June 30,		September 30,
	2011		2010
	$		$
Balance, beginning of period		73,540		165,823
Acquisition of Eurand		106,517		—
Impairment		—		(91,400	)
Foreign exchange		2,534		(883	)

Balance, end of period		182,591		73,540

As disclosed in Note 4, the amount recorded as goodwill for the acquisition of Eurand is provisional and subject to the completion of the allocation of the fair value assigned to the assets acquired and liabilities assumed.

Trademarks, trademark licenses, manufacturing rights and other intangible assets with a finite life

The following table reflects the changes in the carrying amount of intangible assets:

June 30, 2011

Accumulated

Cost

amortization

Net

Balance, at October 1, 2010

459,207

111,245

347,962

Acquisition of Eurand

413,929

—

413,929

Other additions

431

—

431

Disposal of the PHOTOFRIN/PHOTOBARR product line

(11,749

)

(1,503

)

(10,246

)

Amortization

—

44,170

(44,170

)

Foreign exchange

10,061

1,252

8,809

Balance, at June 30, 2011

871,879

155,164

716,715


	September 30, 2010
				Accumulated
	Cost			amortization			Net
	$			$			$
Balance, at October 1, 2009		491,411			70,121			421,290
Impairment		(26,400	)		(10,642	)		(15,758	)
Amortization		—			52,465			(52,465	)
Foreign exchange		(5,804	)		(699	)		(5,105	)

Balance, at September 30, 2010		459,207			111,245			347,962

Page 17

APTALIS PHARMA INC.
Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

11. Segment Information

Prior to the acquisition of Eurand, the Company operated in one segment, pharmaceutical products. Effective with the acquisition of Eurand, the Management of the Company is reassessing the Company’s internal reporting structure and composition of its operating segments for disclosure in succeeding interim and annual reporting periods.

The Company operates in the following geographic areas:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2011		2010		2011		2010
	$		$		$		$
Total revenue
United States
Domestic sales		89,386		55,779		227,413		207,926
Foreign sales		2,436		530		4,998		3,151
Canada
Domestic sales		9,086		7,965		27,231		24,694
Foreign sales		80		192		441		192
European Union
Domestic sales		23,477		12,057		54,757		40,772
Foreign sales		6,690		3,957		13,613		8,242

		131,155		80,480		328,453		284,977

Revenue is attributed to geographic areas based on the country of origin of the sales.


	June 30,		September 30,
	2011		2010
	$		$
Property, plant, equipment and intangible assets
Canada		261,650		299,180
United States		50,126		13,906
European Union		495,109		70,653

		806,885		383,739


	June 30,		September 30,
	2011		2010
	$		$
Goodwill
Canada		61,887		61,887
United States		20,931		—
European Union		99,773		11,653

		182,591		73,540

Page 18

APTALIS PHARMA INC.
Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

12. Accounts payable and accrued liabilities


	June 30,		September 30,
	2011		2010
	$		$
Accounts payable		22,967		18,677
Accounts payable to a shareholding company		942		1,574
Contract rebates, product returns and accrued chargebacks		61,174		29,039
Accrued interest on long-term debt		10,006		4,254
Accrued royalty fees		1,995		4,010
Accrued salaries		5,822		4,790
Accrued bonuses		13,487		6,695
Accrued liability related to Unapproved Pep’s		3,225		18,607
Option Agreement payment related to the Aeroquin Transaction		7,450		—
Severance indemnities		3,163		—
Deferred revenue		4,033		—
Other accrued liabilities		19,027		7,027

		153,291		94,673

13. Long-term Debt


	June 30,		September 30,
	2011		2010
	$		$
Senior secured term loan of $746,250 at June 30, 2011 bearing interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the prime rate of Banc of America Securities LLC, (b) the federal funds effective rate plus 1/2 of 1.00% and (c) the three-month LIBOR rate plus 1.00% or (2) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margins for borrowings under the Senior Secured Term Loan Facility are 3.00% with respect to base rate borrowings and 4.00% with respect to LIBOR borrowings. In addition, the LIBOR rate and base rate for borrowings under the Senior Secured Term Loan Facility are subject to a floor of 150 basis points and 250 basis points, respectively, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in February 2017, subject to interest rate swap agreements as further disclosed in Note 18.		742,874		—
Term loans of $138,823 at September 30, 2010, bearing interest at the one-month British Banker Association LIBOR (0.26% at September 30, 2010), plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months		—		135,210
Unsecured loan of 2,002 Euros at June 30, 2011, with a variable interest of 1.6% above Euribor. Euribor interest rate has a cap of 2.5%		2,907		—
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016		233,355		233,094
Senior notes bearing interest at 9.25%, redeemed on March 15, 2011		—		226,171

		979,136		594,475
Installments due within one year		8,958		13,163

		970,178		581,312

On February 11, 2011, the Company entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition.

Page 19

APTALIS PHARMA INC.
Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

The Company borrowed $500,000,000 of the amount available under the Senior Secured Term Loan Facility at the closing of the acquisition of Eurand. The Senior Secured Revolving Credit Facility remained undrawn at the closing of the acquisition. A portion of the proceeds of the equity and debt financings, together with cash on hand of the Company and Eurand, were used to repay the outstanding term loan portion amounting to $125,660,000 of the Company’s existing senior secured credit facilities. Following the repayment, all unamortized deferred financing fees of $2,653,000 and original issuance discount of $3,188,000 related to the term loan were written off and are included in Loss on extinguishment of debt in the accompanying Statement of Condensed Consolidated Operations.

On February 25, 2008, the Company had issued $228,000,000 aggregate principal amount of its 9.25% senior secured notes (the “Senior Secured Notes”) due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a 10% yield to March 1, 2015. On March 15, 2011, $250,000,000 of the Senior Secured Term Loan Facility was drawn to redeem the Company’s Senior Secured Notes at a redemption price of 106.938%. The aggregate redemption amount consisted of $228,000,000 in aggregate principal amount, and $15,819,000 of redemption premium which is included in loss on extinguishment of debt in the accompanying Statement of Condensed Consolidated Operations. Following the redemption all unamortized deferred financing fees of $4,992,000 and original issuance discount of $1,659,000 related to these notes were written off and are included in Loss on extinguishment of debt in the accompanying Statement of Condensed Consolidated Operations.

The Company’s Amended and Restated Senior Secured Credit Facilities totaling $897,000,000 is composed of a Senior Secured Term Loan Facility amounting to $750,000,000 and a Senior Secured Revolving Credit Facility totaling $147,000,000. The Senior Secured Revolving Credit Facility is comprised of $115,000,000 of existing revolving credit commitments that were extended or issued (the “ Extended Commitments”) and $32,000,000 of existing revolving credit commitments that were not extended (the “ Unextended Commitments”) pursuant to the Senior Secured Revolving Credit Facility. The Amended and Restated Senior Secured Credit Facilities bear interest at a variable rate available composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months. The principal amount of the Senior Secured Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount with payments beginning in fiscal year 2011. The principal amount outstanding of the loans under the Senior Secured Term Loan Facility will be due and payable on February 11, 2017. The principal amount of outstanding loans under the Senior Secured Revolving Facility will be due and payable on February 11, 2016 with respect to Extended Commitments and on February 25, 2014 with respect to Unextended Commitments.

At June 30, 2011, $750,000,000 of term loans had been issued and no amounts had been drawn during the quarter against the revolving credit facility. The term loans were priced at $0.995, with a yield to maturity of 5.6%, before the effect of interest rate swaps as disclosed in Note 18. The Amended and Restated Senior Secured Credit Facility requires the Company to meet certain financial covenants, beginning quarter ending June 30, 2011. The maintenance of these financial covenants is solely with respect to the Senior Secured Revolving Credit Facility. These covenants were met as of June 30, 2011.The credit agreement governing the Amended and Restated Senior Secured Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Amended and Restated Senior Secured Credit Facility, (2) commencing with the fiscal year ending September 30, 2011, 50% (which percentage will be reduced if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Senior Secured Term Loan Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestment rights and certain other exceptions.

Pursuant to the annual excess cash flow requirements defined in the preceding credit agreement, the Company was required to prepay $13,163,000 of outstanding term loans in the first quarter of fiscal year 2011 ($17,583,000 for the fiscal year 2009 which was paid in the first quarter of fiscal year 2010).

On May 6, 2008, the Company had issued $235,000,000 of 12.75% senior unsecured notes due March 1, 2016, (the “Senior Unsecured Notes”). The Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior Unsecured Notes are subordinated to the Credit Facility and Senior Secured Notes.

The Company may redeem some or all of the Senior Unsecured Notes prior to March 1, 2012, at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2012, the Company may redeem some or all of the Senior Unsecured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Unsecured Notes to be redeemed) set forth below:


	Senior
	Unsecured Notes
	%
2012		106.375
2013		103.188
2014 and thereafter		100.000

Page 20

APTALIS PHARMA INC.
Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

Payments required in each of the next five twelve-month periods to meet the retirement provisions of the long-term debt are as follows:


	$
2012		8,958
2013		8,950
2014		7,500
2015		7,500
2016		242,500
Thereafter		708,750

		984,158
Unamortized original issuance discount		5,022

		979,136

14. Information Included in the Consolidated Operations and Cash Flows

a) Financial expenses


	Three Months Ended June 30,				Nine Months Ended June 30,
	2011		2010		2011		2010
	$		$		$		$
Interest on long-term debt , including amortization of original issuance discount of $209 and $1,229 in 2011 ($510 and $1,535 in 2010)		18,187		14,604		49,959		43,983
Accretion expense on option agreement payment related to the Aeroquin transaction		345		—		345
Interest and bank charges		110		224		632		649
Interest rate swaps (Note 18)		—		—		—		17
Financing fees		659		143		11,216		421
Amortization of deferred debt issue expenses		1,372		1,241		4,895		3,724

		20,673		16,212		67,047		48,794

b) Other information


	Three Months Ended June 30,				Nine Months Ended June 30,
	2011		2010		2011		2010
	$		$		$		$
Rental expenses		1,190		920		3,047		2,797
Shipping and handling expenses		2,078		1,758		5,278		5,052
Advertizing expenses		3,775		337		7,814		8,191
Depreciation of property, plant and equipment		3,141		2,136		8,832		6,235
Amortization of intangible assets		17,833		13,002		44,168		39,595
Stock-based compensation expense		617		1,163		6,381		272

Page 21

APTALIS PHARMA INC.
Notes to Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

c) Employee benefit plan

A subsidiary of the Company has a defined contribution plan (the “Plan”) for its U.S. employees. Participation is available to substantially all U.S. employees. Employees may contribute up to 15% of their gross pay or up to limits set by the U.S. Internal Revenue Service. The Company may make matching contributions of a discretionary percentage. The Company charged to operations contributions to the plan totaling $181,000 for the three months and $542,000 for the nine months ended June 30, 2011, ($378,000 for the three-month period and $780,000 for the nine months ended June 30, 2010).

d) Employees severance indemnities

The liability for severance indemnities relates primarily to Eurand’s and now the Company’s employees in Italy. The unfunded severance indemnity liability is calculated in accordance with local civil and labor laws based on each employee’s length of service, employment category and remuneration. There is no vesting period or funding requirement associated with the liability. The liability recorded on the balance sheet is the amount the employee would be entitled to if the employee were to immediately terminate their employment.

e) Comprehensive Loss

Comprehensive loss was $84,076,000 and $143,110,000 for the three and nine months ended June 30, 2011, respectively and was $20,328,000 and $184,772,000 for the three and nine months ended June 30, 2010, respectively.

f) Cash flows relating to interest and income taxes of operating activities


	Nine Months Ended June 30,
	2011		2010
	$		$
Interest received		354		496
Interest paid		30,450		30,449
Income taxes received		765		2,400
Income taxes paid		9,342		4,128

15. Income Taxes

The Company establishes a valuation allowance against deferred tax assets in accordance with U.S. GAAP. At June 30, 2011, the Company has a valuation allowance of $111,694,000 against the Company’s net deferred tax assets generated in the U.S., of $4,857,000 against the deferred tax assets generated in Europe and of $931,000 against the deferred tax assets generated in Canada. In future periods, if the deferred tax assets are determined by management to be more likely than not to be realized, the tax benefits relating to the reversal of the valuation allowance will be recorded.

The Company’s effective tax rates for the three months and nine months ended June 30, 2011, were 2.5% and 3.4% respectively, as compared to 35.5% and minus10.9% respectively in the prior year’s periods. The effective tax rate for the three months and six months ended June 30, 2011, is affected by a number of elements, the most important being the non- deductibility of certain expenses and the establishment of a valuation allowance of $45,730,000 mainly against the Company’s net deferred tax assets generated in the U.S. during the nine months period ended June 30, 2011.

At June 30, 2011, with respect to uncertain tax positions, the Company had unrecognized tax benefits of $12,011,000 ($11,485,000 at September 30, 2010).

The following table presents a summary of the changes to unrecognized tax benefits:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
	$			$			$			$
Balance, beginning of period		12,110			11,318			11,485			10,409
Acquisition of Eurand		—			—			401			—
Additions based on tax positions related to the current year		8			8			24			23
Additions for tax positions of prior years		194			120			1,494			1,040
Settlements		—			—			(1,063	)		—
Reductions for tax positions of prior years		(301	)		(423	)		(330	)		(449	)

Balance, end of period		12,011			11,023			12,011			11,023

Page 22

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

The Company has historically recognized interest relating to income tax matters as a component of financial expenses and penalties related to income tax matters as a component of income tax expense. At June 30, 2011, the Company had accrued $1,293,000 ($1,075,000 at September 30, 2010) for interest relating to income tax matters. There were no amounts recorded for penalties at June 30, 2011.

The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various states, local and foreign jurisdictions including Canada and France. In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is subject to federal and state income tax examination by U.S. tax authorities for fiscal years 2005 through 2010. The Company is subject to Canadian and provincial income tax examination for fiscal years 2005 through 2010. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant. The Company is currently being audited by Canada Revenue Agency for fiscal year 2005 to fiscal year 2008.

The Company and its U.S. subsidiaries file as members of a U.S. Federal consolidated income tax return, of which Axcan Holdings is the parent. The consolidated income tax liability is allocated among the members of the group in accordance with a tax allocation agreement. The tax allocation agreement provides that each member of the group is allocated its share of the consolidated tax provision determined generally on a separate income tax return method.

At June 30, 2011, and September 30, 2010, no provision has been made for income taxes on the undistributed earnings of the Company’s foreign subsidiaries that the Company intends to indefinitely reinvest.

16. Stock Incentive Plans

Management equity incentive plan

In April 2008, the Company’s indirect parent company adopted a Management Equity Incentive Plan (the “MEIP Plan”), pursuant to which the indirect parent company grants options to selected employees and directors of the Company. The MEIP Plan provides that a maximum of 3,833,307 shares of common stock of the indirect parent company are issuable pursuant to the exercise of options. The per share purchase price cannot be less than the fair value of the share of common stock of the indirect parent company at the grant date and the option expires no later than ten years from the date of grant. Vesting of these stock options is split into 3 categories: 1) time-based options: 50% of option grants generally vest ratably over 5 years and feature a fixed exercise price equal to the fair value of common stock of the indirect parent company on grant date; 2) premium options: 25% of stock option grants with an exercise price initially equal to the fair value of common stock on grant date that will increase by 10% each year and generally vesting ratably over 5 years; and 3) performance-based options: 25% of stock option grants with a fixed exercise price equal to the fair value of common stock on grant date which vest upon the occurrence of a liquidity event (as defined under the terms of the MEIP Plan) based on the achievement of return targets calculated based on the return received by majority shareholders from the liquidity event. While the time-based options and the premium options are expensed over the requisite service period, the performance-based options will not be expensed until the occurrence of the liquidity event. The MEIP Plan was amended and restated effective February 11, 2011 primarily to reflect an increase to a maximum of 5,033,507 shares of common stock of the indirect parent company issuable pursuant to the exercise of options and to change the required return targets that need to be achieved for vesting performance based options for options issued under the amended and restated plan.

Special equity grant

In April 2008, the indirect parent company approved the Restricted Stock Unit grant agreement and the penny option grant agreement (collectively “Equity Grant Agreements”) pursuant to which a one-time grant of equity-based awards of either restricted stock units (“RSUs”) or options to purchase shares of common stock of the indirect parent company for a penny (“Penny Options”) was made to certain employees of the Company. A maximum of 1,343,348 shares of common stock of the indirect parent company are issuable with respect to the special grants. As a result of the option to allow the recipients to elect to have an amount withheld that is in excess of the required minimum withholding under the current tax law, the special grants will be accounted for as liability awards. As a liability award, the fair value on which the expense is based is remeasured each period based on the estimated fair value and the final expense will be based on the fair value of the shares on the date the award is settled. The RSUs and Penny Options expire no later than four years and ten years respectively from the date of grant. One third of the granted RSUs and Penny Options vested immediately on date of grant; one third vested on August 25, 2009, and the remainder vested on August 25, 2010.

The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the indirect parent company. The RSUs and Penny Options entitle the holders to receive common shares of the indirect parent company at the end of a vesting period. The total number of RSUs and Penny Options granted were 1,343,348 with an initial fair value of $10, equal to the share price at the date of grant. At June 30, 2011, there were 956,587 outstanding RSUs and Penny Options (1,172,396 at September 30, 2010) of which 953,253 (1,167,396 at September 30, 2010) were vested.

Page 23

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

Annual grant

In June 2008, the Company’s indirect parent company adopted a Long Term Incentive Plan (the “LTIP”), pursuant to which the indirect parent company is expected to grant annual awards to certain employees of the Company (the “participants”). The value of an award is initially based on the participant’s pay grade and base salary and is subsequently adjusted based on the outcome of certain performance conditions relating to the fiscal year. Each award that vests is ultimately settleable, at the option of the participant, in cash or in parent company common stock of equivalent value. The awards vest (i) upon the occurrence of a liquidity event (as defined under the terms of the LTIP) and (ii) in varying percentages based on the level of return realized by majority shareholders as a result of the liquidity event.

The awards granted under this LTIP are classified as liabilities in accordance with the FASB issued guidance on distinguishing liabilities from equity, since the award is for a fixed amount of value that can be settled, at the option of the participant, in (i) cash, or (ii) a variable number of parent company common stock of equivalent value.

The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event was probable as of June 30, 2011, the value of the awards to be expensed by the Company would range between $5,300,000 and $6,400,000 depending on the level of return expected to be realized by the majority shareholders.

17. Financial Instruments

Interest rate risk

The Company is exposed to interest rate risk on its variable interest bearing term loans. The term loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 18, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.

Currency risk

The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company has used derivative instruments historically to reduce its exposure to foreign currencies risk. At June 30, 2011, no foreign exchange contracts were outstanding. At June 30, 2011, the financial assets totaling $195,871,000 ($194,005,000 at September 30, 2010) include cash and cash equivalents and accounts receivable for CAN$7,090,000, 24,366,000 Euros and 1,089,000 Swiss francs respectively (CAN$4,073,000, 18,658,000 Euros and 1,820,000 Swiss francs at September 30, 2010). At June 30, 2011, the financial liabilities totaling $1,132,421,000 ($689,148,000 at September 30, 2010) include accounts payable and accrued liabilities and long-term debt of CAN$7,353,000, 28,927,000 Euros respectively (CAN$10,234,000 and 8,158,000 Euros at September 30, 2010).

Credit risk

The Company has approximately 72% of its cash and cash equivalents as of June 30, 2011 with two financial institutions. At times, such deposits may exceed the amount insured by the Federal Deposit Insurance Corporation.

Fair value of the financial instruments on the balance sheet

The estimated fair value of the financial instruments is as follows:

June 30, 2011

September 30, 2010

Fair

Carrying

Fair

Carrying

value

amount

value

amount

Assets

Cash and cash equivalents

114,779

161,503

Accounts receivable from the parent company

603

487

Accounts receivable, net

80,489

32,015

Liabilities

Accounts payable and accrued liabilities

153,291

94,673

Long-term debt

999,448

979,136

608,535

594,475

Page 24

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

The following methods and assumptions were used to calculate the estimated fair value of the financial instruments on the balance sheet.

a) Financial instruments for which fair value is deemed equivalent to carrying amount

The estimated fair value of certain financial instruments shown on the consolidated balance sheet is equivalent to their carrying amount. These financial instruments include cash and cash equivalents, accounts receivable, net, accounts receivable from the parent company, accounts payable and accrued liabilities.

b) Long-term debt

The fair value of the long-term debt bearing interest at fixed rates has been established according to market prices obtained from a large U.S. financial institution. The fair value of the variable interest bearing term loan has been established based on broker-dealer quotes.

18. Derivates and Hedging Activities

Risk management objective of using derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources, conditions and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments, if any, are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.

Cash flow hedges of interest rate risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three months ended June 30, 2011, such derivatives were used to hedge the variable cash flows associated with a portion of the existing variable-rate debt.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

On April 4, 2011, the Company entered into two separate pay-fixed, receive-floating interest rate swap agreements with an effective date of June 30, 2011 effectively converting a portion of the variable rate debt under its Amended and Restated Senior Secured Credit Facilities to fixed rate debt. The first swap has a notional amount of $331,000,000 amortizing to $84,000,000 by its maturity in December 2015. The second swap has a notional amount of $219,000,000 and matures in December 2016. These swaps were designated as cash flow hedges of interest rate risk. The interest rate swaps will effectively fix the Company’s interest payments on the hedged debt at 2.386% for the first swap and 3.18% for the second swap, respectively, inclusive of a LIBOR floor of 1.5%, plus the appropriate margin on each debt interest period which is currently 4%. As of June 30, 2011, the Company had two interest rate swaps with a combined notional amount of $550,000,000 that were designated as cash flow hedges of interest rate risk. The weighted average fixed interest rate on these swaps is 2.7%.

In March 2009, the Company had entered into a pay-fixed, receive-floating interest rate swap of a notional amount of $52,000,000 amortizing to $13,000,000 through February 2010. The Company’s two interest rate swaps with a combined notional amount of $63,000,000 that were designated as cash flow hedges of interest rate risk matured during the quarter ended March 31, 2010.

Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that $6,715,000 presently classified in Accumulated Other Comprehensive Income will be reclassed as an increase to interest expense during the next twelve months.

Page 25

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of June 30, 2011.

Tabular disclosure of fair values of derivative instruments


			Liability Derivatives
			June 30, 2011
	Balance sheet location		Fair value
Derivatives designated as hedging instruments		$
Interest rate swaps	Other long-term liabilities		8,356

Total derivatives designated as hedging instruments			8,356

The tables below present the effect of the Company’s derivative financial instruments on the consolidated operations at June 30, 2011, and June 30, 2010.

Tabular disclosure of the effect of derivative instruments for the three months and nine months ended June 30, 2011, and 2010:


	Location in the
	Condensed
	Consolidated
	Financial
	Statements	Three Months Ended June 30,
		2011			2010
Interest rate swaps in cash flow hedging relationships		$			$
Gain (loss) recognized in other comprehensive income on derivatives (effective portion), net of tax of $0	OCI		(8,374	)		—
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)	Financial expenses		(18	)		—
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Financial expenses		—			—

Interest rate swaps not designated as hedging instruments Loss recognized in income on derivatives	Financial expenses		—			—


	Location in the
	Condensed
	Consolidated	Nine Months Ended June 30,
	Financial
	Statements	2011			2010
Interest rate swaps in cash flow hedging relationships		$			$
Gain (loss) recognized in other comprehensive income on derivatives (effective portion), net of tax of $166 in 2010	OCI		(8,374	)		(309	)
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)	Financial expenses		(18	)		(464	)
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Financial expenses		—			447

Interest rate swaps not designated as hedging instruments Loss recognized in income on derivatives	Financial expenses		—			—

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. If the Company had breached this provision, it could have been required to settle its obligations under the agreements at their termination value, including accrued interest and excluding any adjustment for nonperformance risk , related to these agreements of $9,361,000. The Company has not posted any collateral related to these agreements.

Page 26

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)

19. Fair Value Measurements

Effective October 1, 2008, the Company adopted the authoritative guidance for fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Inputs that are unobservable and significant to the overall fair value measurement.

If the inputs used to measure the financial assets and liabilities fall within the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 are summarized below:

Quoted prices in

active markets for

Significant

identical assets

Significant other

unobservable

and liabilities

observable inputs

inputs

Balance at

(Level 1)

(Level 2)

(Level 3)

June 30, 2011

Liabilities

Derivative financial instruments

8,374

Derivative financial instruments represent interest rate swap agreements as more fully described in Note 18 and are measured at fair value based on market observable interest rate curves as of the measurement date. There are no other financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010.

During the nine months ended June 30, 2010, the Company recorded a goodwill impairment charge of $91,400,000 and an intangible assets impairment charge of $15,758,000 related to the PEPs event. The fair value measurement method used in the Company’s impairment analysis utilized a discounted cash flow model and market approach that incorporates significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of the Company’s future operating results, the implied fair value using an income approach by preparing a discounted cash flow analysis and other subjective assumptions.

20. Related Party Transactions

At June 30, 2011, the Company had a note receivable from its parent company amounting to $78,154,000 ($133,154,000 at September 30, 2010). During the three months ended June 30, 2011, the parent company made a partial repayment of $55,000,000 on the note receivable from the contributions made by Aptalis Holdings of proceeds received from an equity investment made by Investor Growth Capital Limited managed funds. The Company earned interest income on the note of $1,244,000 (net of taxes of $670,000) and $5,149,000 (net of taxes of $2,773,000) during the three and nine months ended June 30, 2011 respectively. The Company earned interest income on the note of $1,952,000 (net of taxes of $1,052,000) and $5,857,000 (net of taxes of $3,155,000) during the three and nine months ended June 30, 2010 respectively. The related interest receivable from the parent company amounting to $35,052,000 at June 30, 2011, ($27,130,000 at September 30, 2010) has been recorded in the shareholders’ equity section of the condensed consolidated balance sheet. This amount was subject to a full provision which was also recorded in the statement of shareholders’ equity. At June 30, 2011, the Company has also an account receivable from the parent company amounting to $603,000 ($487,000 at September 30, 2010).

The Company recorded charges pursuant to the terms of a management fee arrangement with a controlling shareholding company of $891,000 and $2,460,000 during the three and nine months ended June 30, 2011 respectively ($703,000 and $2,558,000 for the three and nine months ended June 30 2010). Also, during the nine months ended June 30, 2011, the Company recorded fees from a controlling shareholding company amounting to $5,028,000 of which $1,508,000 was accounted for as deferred debt issue costs, $2,514,000 as selling and administrative expense and $1,006,000 as financing fees. At June 30, 2011, the Company accrued fees payable to a controlling shareholding company amounting to $942,000 ($1,574,000 at September 30, 2010).

The Company paid a dividend to its parent company of $415,000 and $440,000 during the three and nine months ended June 30, 2011 respectively ($128,000 for three and nine months ended June 30, 2010) to allow for the payment of certain group expenses.

Page 27

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

21. Condensed Consolidating Financial Information

As of June 30, 2011, the Company had outstanding $742,874,000 aggregate principal amount of the Senior Secured Term Loan Facility. The Senior Secured Term Loan Facility is fully and unconditionally guaranteed, jointly and severally by certain of the Company’s wholly-owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors and non-guarantors at June 30, 2011, and September 30, 2010, the condensed consolidating statements of operations for the three and nine months ended June 30, 2011, and June 30, 2010, and the condensed consolidating statement of cash flows for the nine months ended June 30, 2011, and June 30, 2010.

Condensed consolidating balance sheet as of June 30, 2011

Subsidiary

Aptalis

Subsidiary

non-

Pharma Inc.

guarantors

Eliminations

Consolidated

Assets

Current assets

Cash and cash equivalents

9,527

49,997

55,255

—

114,779

Accounts receivable, net

—

57,856

23,341

—

81,197

Accounts receivable from the parent company

550

—

603

Intercompany receivables

66,792

14,140

14,453

(94,385

)

—

Income taxes receivable

—

3,296

768

—

4,064

Inventories, net

36,577

23,287

(8,256

)

51,608

Prepaid expenses and other current assets

2,697

11,684

(271

)

14,200

Deferred income taxes, net

—

1,873

1,778

2,592

6,243

Total current assets

75,462

166,986

130,566

(100,320

)

272,694

Property, plant and equipment, net

—

40,096

50,074

—

90,170

Intangible assets, net

—

271,680

445,035

—

716,715

Investments in subsidiaries

(192,111

)

1,240,553

184,298

(1,232,740

)

—

Intercompany advances

1,070,670

245,265

641,954

(1,957,889

)

—

Goodwill, net

—

82,818

99,773

—

182,591

Deferred debt issue expenses, net

29,101

1,754

—

30,855

Deferred income taxes, net

—

9,813

—

9,813

Total assets

983,122

2,049,152

1,561,513

(3,290,949

)

1,302,838

Liabilities

Current liabilities

Accounts payable and accrued liabilities

12,504

103,311

37,747

(271

)

153,291

Income taxes payable

—

1,148

655

—

1,803

Intercompany payables

2,172

72,830

19,383

(94,385

)

—

Short-term portion of long term debt

6,770

730

1,458

—

8,958

Deferred income taxes

—

Total current liabilities

21,446

178,019

59,292

(94,656

)

164,101

Long-term debt

897,152

71,576

1,450

—

970,178

Intercompany advances

23,849

1,730,469

203,571

(1,957,889

)

—

Other long-term liabilities

7,543

11,975

22,354

—

41,872

Employees severance indemnities

—

4,800

—

4,800

Deferred income taxes

—

26,791

61,964

—

88,755

Total liabilities

949,990

2,018,830

353,431

(2,052,545

)

1,296,706

Shareholders’ Equity

Capital stock

Common shares

29,519

1,103,747

(1,133,266

)

Preferred shares

—

298,298

—

(298,298

)

—

Purchased price allocation at equity

—

3,757

(3,757

)

—

Retained earnings (deficit)

(619,605

)

(400,124

)

62,447

337,677

(619,605

)

9.05% Note receivable from the parent company

(78,154

)

—

(78,154

)

Additional paid-in capital

756,827

121,023

31,654

(152,677

)

756,827

Accumulated other comprehensive loss

(25,937

)

(18,394

)

6,477

11,917

(25,937

)

Total shareholders’ equity

33,132

30,322

1,208,082

(1,238,404

)

33,132

Total liabilities and shareholders’ equity

983,122

2,049,152

1,561,513

(3,290,949

)

1,302,838

Page 28

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating balance sheet as of September 30, 2010


	Aptalis			Subsidiary			Subsidiary
	Pharma Inc.			guarantors			non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Assets
Current assets
Cash and cash equivalents		864			104,608			56,031			—			161,503
Accounts receivable, net		—			19,262			13,117			—			32,379
Accounts receivable from the parent company		50			437			—			—			487
Intercompany receivables		11,092			1,618			4,265			(16,975	)		—
Income taxes receivable		—			2,906			—			—			2,906
Inventories, net		—			17,697			6,563			(394	)		23,866
Prepaid expenses and other current assets		48			2,385			844			—			3,277
Deferred income taxes, net		—			1,355			857			119			2,331

Total current assets		12,054			150,268			81,677			(17,250	)		226,749
Property, plant and equipment, net		—			27,383			8,394			—			35,777
Intangible assets, net		—			285,703			62,259			—			347,962
Investments in subsidiaries		(354,104	)		830,813			78,175			(554,884	)		—
Intercompany advances		826,431			91,811			679,391			(1,597,633	)		—
Goodwill, net		—			61,887			11,653			—			73,540
Deferred debt issue expenses, net		18,021			2,422			—			—			20,443
Deferred income taxes, net		—			—			8,706			—			8,706

Total assets		502,402			1,450,287			930,255			(2,169,767	)		713,177

Liabilities
Current liabilities
Accounts payable and accrued liabilities		5,975			77,887			10,811			—			94,673
Income taxes payable		—			1,938			1,508			—			3,446
Intercompany payables		449			15,340			1,186			(16,975	)		—
Installments on long-term debt		5,546			7,617			—			—			13,163
Deferred income taxes		—			47			—			—			47

Total current liabilities		11,970			102,829			13,505			(16,975	)		111,329
Long-term debt		510,663			70,649			—			—			581,312
Intercompany advances		801			1,512,092			84,740			(1,597,633	)		—
Other long-term liabilities		—			10,028			—			—			10,028
Deferred income taxes		—			30,618			922			—			31,540

Total liabilities		523,434			1,726,216			99,167			(1,614,608	)		734,209

Shareholders’ Equity (Deficiency)
Capital stock
Common shares		1			21,020			735,742			(756,762	)		1
Preferred shares		—			78,175			—			(78,175	)		—
Retained earnings (deficit)		(468,152	)		(354,020	)		98,657			255,363			(468,152	)
9.05% Note receivable from the parent company		(133,154	)		—			—			—			(133,154	)
Additional paid-in capital		614,113			12,736			689			(13,425	)		614,113
Accumulated other comprehensive loss		(33,840	)		(33,840	)		(4,000	)		37,840			(33,840	)

Total shareholders’ equity (deficiency)		(21,032	)		(275,929	)		831,088			(555,159	)		(21,032	)

Total liabilities and shareholders’ equity (deficiency)		502,402			1,450,287			930,255			(2,169,767	)		713,177

Page 29

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating operations for the three months ended June 30, 2011

Aptalis

Subsidiary

Pharma Inc.

guarantors

non-guarantors

Eliminations

Consolidated

Net product sales

—

97,125

29,583

(10

)

126,698

Development fees

—

945

426

—

1,371

Royalties

—

2,905

181

—

3,086

Total revenue

—

100,975

30,190

(10

)

131,155

Cost of goods sold

—

31,168

17,818

(457

)

48,529

Selling and administrative expenses

236

27,804

11,313

(93

)

39,260

Management fees

892

—

892

Research and development expenses

—

8,141

11,504

—

19,645

Other research and development expenses attributable to development fees

—

931

575

—

1,506

Acquired in-process research

—

50,190

—

50,190

Depreciation and amortization

—

12,564

8,410

—

20,974

Transaction and restructuring costs

3,925

7,948

799

—

12,672

Total operating expenses

5,053

88,556

100,609

(550

)

193,668

Operating income (loss)

(5,053

)

12,419

(70,419

)

540

(62,513

)

Financial expenses

19,080

31,700

4,099

(34,206

)

20,673

Interest income

(16,205

)

(3,695

)

(14,362

)

34,206

(56

)

Other income

—

(242

)

242

—

Loss (gain) on foreign currencies

(6,225

)

4,278

(619

)

2,282

(284

)

Total other expenses (income)

(3,350

)

32,283

(11,124

)

2,524

20,333

Loss before income taxes

(1,703

)

(19,864

)

(59,295

)

(1,984

)

(82,846

)

Income taxes expense (benefit)

(668

)

554

(2,081

)

139

(2,056

)

Equity in loss in subsidiaries

(79,755

)

(5,969

)

—

85,724

—

Net loss

(80,790

)

(26,387

)

(57,214

)

83,601

(80,790

)

Page 30

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating operations for the three months ended June 30, 2010


	Aptalis			Subsidiary			Subsidiary
	Pharma Inc.			guarantors			non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		—			64,305			16,280			(105	)		80,480

Cost of goods sold		—			14,634			6,585			(391	)		20,828
Selling and administrative expenses		3,905			16,671			6,759			—			27,335
Management fees		703			—			—			—			703
Research and development expenses		—			7,678			933			—			8,611
Acquired in-process research		—			7,948			—			—			7,948
Depreciation and amortization		—			13,298			1,840			—			15,138

Total operating expenses		4,608			60,229			16,117			(391	)		80,563

Operating income (loss)		(4,608	)		4,076			163			286			(83	)

Financial expenses		14,923			27,989			1,711			(28,411	)		16,212
Interest income		(12,154	)		(1,852	)		(14,594	)		28,411			(189	)
Loss (gain) on foreign currencies		24,824			(17,417	)		(122	)		(8,044	)		(759	)

Total other expenses (income)		27,593			8,720			(13,005	)		(8,044	)		15,264

Income (loss) before income taxes		(32,201	)		(4,644	)		13,168			8,330			(15,347	)
Income taxes expense (benefit)		(17,726	)		9,691			2,501			86			(5,448	)
Equity in earnings in subsidiaries		4,576			18,911			—			(23,487	)		—


Net income (loss)		(9,899	)		4,576			10,667			(15,243	)		(9,899	)

Page 31

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating operations for the nine months ended June 30, 2011

Aptalis

Subsidiary

Pharma Inc.

guarantors

non-guarantors

Eliminations

Consolidated

Net product sales

—

254,828

67,617

(35

)

322,410

Development fees

—

1,442

528

—

1,970

Royalties

—

3,825

248

—

4,073

Total revenue

—

260,095

68,393

(35

)

328,453

Cost of goods sold

—

64,724

31,501

1,580

97,805

Selling and administrative expenses

2,713

73,686

27,169

(93

)

103,475

Management fees

2,460

—

2,460

Research and development expenses

—

23,339

14,244

37,583

Other research and development expenses attributable to development fees

—

1,562

799

—

2,361

Acquired in-process research

—

50,190

—

50,190

Depreciation and amortization

—

36,734

16,266

—

53,000

Loss on disposal of assets

—

7,365

—

7,365

Transaction and restructuring costs

22,171

8,251

4,547

—

34,969

Total operating expenses

27,344

215,661

144,716

1,487

389,208

Operating income (loss)

(27,344

)

44,434

(76,323

)

(1,522

)

(60,755

)

Financial expenses

62,091

91,159

8,132

(94,335

)

67,047

Loss of extinguishment of debt

24,269

4,042

—

28,311

Interest income

(42,567

)

(7,879

)

(44,260

)

94,335

(371

)

Other income

—

(725

)

725

—

Loss (gain) on foreign currencies

(16,829

)

11,863

(306

)

5,864

592

Total other expenses (income)

26,964

99,185

(37,159

)

6,589

95,579

Loss before income taxes

(54,308

)

(54,751

)

(39,164

)

(8,111

)

(156,334

)

Income taxes expense (benefit)

(2,773

)

926

(2,961

)

(513

)

(5,321

)

Equity in loss in subsidiaries

(99,478

)

9,567

—

89,911

—

Net loss

(151,013

)

(46,110

)

(36,203

)

82,313

(151,013

)

Page 32

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating operations for the nine months ended June 30, 2010


	Aptalis			Subsidiary			Subsidiary
	Pharma Inc.			guarantors			non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Net product sales		—			236,888			49,500			(1,411	)		284,977
Cost of goods sold — 98,718 18,247 (1,359) 115,606
Selling and administrative expenses		5,250			61,794			20,756			—			87,980
Management fees		2,558			—			—			—			2,558
Research and development expenses		—			21,448			3,272			—			24,720
Acquired in-process research		—			7,948									7,948
Depreciation and amortization		—			39,954			5,876			—			45,830
Impairment of intangible assets and goodwill		—			107,158			—			—			107,158

Total operating expenses		7,808			337,200			48,151			(1,359	)		391,800

Operating income (loss)		(7,808	)		(100,312	)		1,349			(52	)		(106,823	)

Financial expenses		44,826			84,506			5,476			(86,014	)		48,794
Interest income		(36,690	)		(5,782	)		(44,038	)		86,014			(496	)
Other income		—			(7,700	)		—			—			(7,700	)
Loss (gain) on foreign currencies		47,689			(31,685	)		(144	)		(15,226	)		634

Total other expenses (income)		55,825			39,339			(38,706	)		(15,226	)		41,232

Income (loss) before income taxes		(63,633	)		(139,651	)		40,055			15,174			(148,055	)
Income taxes expense (benefit)		16,245			(1,637	)		1,566			(16	)		16,158
Equity in earnings (loss) in subsidiaries		(84,335	)		53,679			—			30,656			—

Net income (loss)		(164,213	)		(84,335	)		38,489			45,846			(164,213	)

Page 33

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating cash flows for the nine months ended June 30, 2011


	Aptalis			Subsidiary			Subsidiary
	Pharma Inc.			guarantors			non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(103,132	)		59,863			(20,306	)		—			(63,575	)

Cash flows from investing activities
Acquisition, net of cash acquired		—			—			(525,667	)		—			(525,667	)
Disposal of intangible assets		—			500			—			—			500
Acquisition of property, plant and equipment		—			(2,729	)		(2,586	)		—			(5,315	)
Acquisition of intangible assets		—			—			(431	)		—			(431	)
Intercompany advances		(330,397	)		(157,503	)		52,341			435,559			—
Investments in subsidiaries		(138,142	)		(339,621	)		(106,123	)		583,886			—

Net cash used in investing activities		(468,539	)		(499,353	)		(582,466	)		1,019,445			(530,913	)

Cash flows from financing activities
Issuance of long-term debt		673,615			72,635			—			—			746,250
Repayment of long-term debt		(289,876	)		(80,698	)		(712	)		—			(371,286	)
Repayment of the Note from the Parent Company		55,000			—			—			—			55,000
Stock-based compensation plan redemptions		—			(894	)		—			—			(894	)
Deferred debt issue expenses		(21,014	)		(1,949	)		—			—			(22,963	)
Intercompany advances		23,049			175,659			236,851			(435,559	)		—
Dividends paid		(440	)		—			—			—			(440	)
Capital contribution		140,000			—			(6,502	)		6,502			140,000
Issue of shares		—			220,123			370,265			(590,388	)		—

Net cash provided by financing activities		580,334			384,876			599,902			(1,019,445	)		545,667

Foreign exchange gain on cash held in foreign currencies		—			3			2,094			—			2,097

Net increase (decrease) in cash and cash equivalents		8,663			(54,611	)		(776	)		—			(46,724	)
Cash and cash equivalents, beginning of period		864			104,608			56,031			—			161,503

Cash and cash equivalents, end of period		9,527			49,997			55,255			—			114,779

Page 34

APTALIS PHARMA INC.
Notes to Condensed Consolidated Financial Statements

(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)

Condensed consolidating cash flows cash flows for the nine months ended June 30, 2010


	Aptalis			Subsidiary			Subsidiary
	Pharma Inc.			guarantors			non-guarantors			Eliminations			Consolidated
	$			$			$			$			$
Cash flows from operating activities
Net cash provided by (used in) operating activities		(40,940	)		73,672			32,924			—			65,656

Cash flows from investing activities
Acquisition of property, plant and equipment		—			(4,256	)		(815	)		—			(5,071	)
Intercompany advances		7,408			(42,154	)		—			34,746			—
Investments in subsidiaries		—			—			(68,000	)		68,000			—

Net cash provided by (used in) investing activities		7,408			(46,410	)		(68,815	)		102,746			(5071	)

Cash flows from financing activities
Repayment of long-term debt		(8,791	)		(12,074	)		—			—			(20,865	)
Stock-based compensation plan redemptions		(336	)		—			—			—			(336	)
Intercompany advances		42,154			(7,408	)		—			(34,746	)		—
Dividends paid		(128	)		—			—			—			(128	)
Issue of shares		—			68,000			—			(68,000	)		—

Net cash provided by (used in) financing activities		32,899			48,518			—			(102,746	)		(21,329	)

Foreign exchange gain (loss) on cash held in foreign currencies		—			33			(1,949	)		—			(1,916	)

Net increase (decrease) in cash and cash equivalents		(633	)		75,813			(37,840	)		—			37,340
Cash and cash equivalents, beginning of period		702			41,859			83,874			—			126,435

Cash and cash equivalents, end of period		69			117,672			46,034			—			163,775

Page 35

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On May 4, 2011, Axcan Intermediate Holdings Inc. announced that it has changed its name to Aptalis Pharma Inc.

You should read the following discussion in conjunction with the Interim Condensed Consolidated Financial Statements and the related notes that appear in Part I, Item 1 of this Quarterly Report. The results of operations for the three and nine months ended June 30, 2011, and June 30, 2010, reflect the results of operations for Aptalis Pharma Inc. previously known as Axcan Intermediate Holdings Inc. and its consolidated subsidiaries.

Unless the context otherwise requires, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the terms “Axcan”, “Aptalis”, “Company”, “we”, “us” and “our” refer to Aptalis Pharma Inc.

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in Part 2, Item 1A of this Quarterly Report and “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010. Actual results may differ materially from those contained in any forward-looking statements.

OVERVIEW

Our Business

Aptalis Pharma Inc. is a privately held, leading specialty pharmaceutical company providing innovative, effective therapies for unmet medical needs including cystic fibrosis and gastrointestinal disorders. Aptalis has manufacturing and commercial operations in the United States, the European Union and Canada, and its products include ZENPEP^®, CANASA^®, CARAFATE^®, LACTEOL^®, DELURSAN^®, and SALOFALK^®. Our vision is to become the reference specialty pharma company providing innovative, effective therapies for unmet medical needs, including cystic fibrosis and gastrointestinal disorders, and we hope to achieve this through our mission: to improve health and quality of care by providing specialty therapies for patients around the world. The Company will strive to improve patient quality of care thanks to a broad range of products in cystic fibrosis and gastrointestinal disorders, a robust pipeline, technology platform, manufacturing capabilities and a skilled team of professionals with deep understanding of our customers’ needs.

In addition to our marketing activities, the Company also formulates and clinically develops enhanced pharmaceutical and biopharmaceutical products for itself and others using its proprietary pharmaceutical technology platforms including bioavailability enhancement of poorly soluble drugs, custom release profiles, and taste-masking/orally disintegrating tablet (ODT) formulations.

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

Business Environment

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

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

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

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

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

On April 29, 2010, we announced that we had taken steps to cease the distribution of ULTRASEMT and VIOKASE, effective April 28, 2010, in response to FDA guidance related to the distribution of unapproved pancreatic enzyme products, or PEPs. The effects of ceasing to distribute these product lines on our financial statements are summarized in the section “Unapproved pancreatic enzyme products (“PEPs”) event” below.

Page 36

Acquisition of Eurand N.V. (“Eurand Acquisition”)

On February 11, 2011 or Acquisition Date, Axcan Holdings Inc., which subsequently changed its name to Aptalis Holdings Inc. (“Aptalis Holdings”), the Company’s indirect parent, and Axcan Pharma Holding B.V. (“Axcan AcquisitionCo”), an indirect subsidiary of the Company, pursuant to a Share Purchase Agreement dated November 30, 2010 (as amended) acquired the outstanding equity of Eurand N.V. (“Eurand”) for total consideration of approximately $589.6 million equity. As a result of the acquisition, Eurand has become an indirect subsidiary.

Prior to the transaction, Eurand was a specialty pharmaceutical company that developed, manufactured and commercialized enhanced pharmaceutical and biopharmaceutical products based on its proprietary pharmaceutical technologies. Eurand has had six products approved by the FDA since 2001 and has a pipeline of product candidates in development for itself and its collaboration partners. Its technology platforms include bioavailability enhancement of poorly soluble drugs, custom release profiles and taste-masking/orally disintegrating tablet (ODT) formulations. Eurand was a global company with facilities in the U.S. and Europe. The acquisition of Eurand enables us to leverage the combination of two leading specialty pharmaceutical players, expand our gastroenterology product portfolio and provide us with a proprietary R&D growth engine and technology platforms supported by an extensive patent portfolio to meaningfully diversify its business and expand its geographic and manufacturing footprint.

Fair value of consideration transferred

The table below details the consideration transferred to acquire Eurand:

Conversion

Form of

Calculation

Fair Value

Consideration

(in millions of U.S. dollars)

Eurand common stock outstanding as of acquisition date

48,359,433

580.3

Cash

Multiplied by cash consideration per common share outstanding

12.00

Eurand stock options canceled for a cash payment^(a)

9.3

Cash

Total fair value of consideration transferred

589.6


^(b)		Each Eurand stock option, whether or not vested and exercisable on the acquisition date, was canceled for a cash payment equal to the excess of the per share value of the acquisition consideration over the per share exercise price of the Eurand stock option.

The aggregate equity purchase price of $589.6 million plus acquisition costs (including related fees and expenses) were funded by cash equity contributions, made through Aptalis Holdings Inc., amounting to $140.0 million from affiliates of TPG Capital L.P. and certain co-investors, the proceeds from the Senior Secured Term Loan Facility (as defined below) under the Company’s amended and restated credit agreement and related security and other agreements and cash on hand from Aptalis and Eurand.

The amended and restated credit agreement and related security and other agreements is composed of (i) a senior secured revolving credit facility in an aggregate principal amount of $147.0 million (the “Senior Secured Revolving Credit Facility”) and (ii) a $750.0 million senior secured term loan facility (the “Senior Secured Term Loan Facility” and, together with the Senior Secured Revolving Credit Facility, collectively, the “Amended and Restated Senior Secured Credit Facilities”). The Senior Secured Revolving Credit Facility is comprised of $115.0 million of existing revolving credit commitments that were extended or issued on February 11, 2011 (the “ Extended Commitments”) and $32.0 million of existing revolving credit commitments that were not extended (the “ Unextended Commitments”) pursuant to the Senior Secured Revolving Credit Facility.

Basis of presentation

The transaction has been accounted for in accordance with the acquisition method of accounting for business combinations under existing U.S. generally accepted accounting principles (“GAAP”). The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date including acquired in-process research and development assets.

Page 37

Assets acquired and liabilities assumed

A preliminary purchase price allocation has been made and the recorded amounts are subject to change. The following recognized amounts are provisional and subject to change:

•		Amounts and useful lives for identifiable intangible assets and property, plant and equipment, pending the finalization of valuation;

•		Amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction, revision to fair value of acquired assets and liabilities, and the filing of Eurand’s pre-acquisition tax returns; and

•		The allocation of goodwill among reporting units.

We will finalize the purchase price allocation as we obtain the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. We expect to finalize the purchase price allocation no later than one year from the acquisition date.

Resulting from the preliminary purchase price allocation, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.


							Amounts
	Book value as at			Step-up to			recognized as of
(in millions of U.S. dollars)	February 11, 2011			fair value			acquisition date
	$			$			$
Cash and cash equivalents		63.9			—			63.9
Accounts receivable ^(a)		22.7			—			22.7
Inventories ^(b)		25.5			18.7			44.2
Other current assets ^(c)		6.6			—			6.6
Property, plant and equipment		44.6			10.9			55.5
Identifiable intangible assets ^(d)		7.0			406.9			413.9
Current liabilities ^(e)		(52.0	)		—			(52.0	)
Long-term debt, including current portion		(3.4	)		—			(3.4	)
Deferred income taxes liabilities, net ^(f)		(0.2	)		(61.0	)		(61.2	)
Other non-current liabilities		(8.5	)		2.3			(6.2	)

Total identifiable net assets		106.2			377.8			484.0
Goodwill ^(g)		37.5			69.0			106.5

Net assets acquired		143.7			446.8			590.5
Effective settlement of pre-existing relationships ^(h)		(0.9	)		—			(0.9	)

Total fair value of consideration transferred								589.6

⁽ⁱ⁾		As of acquisition date, the fair value of accounts receivable acquired approximated book value. The gross contractual amount receivable was $23.2 million, of which $0.5 million was not expected to be collected.

^(j)		Reflects the adjustment to step-up the carrying value of inventory acquired by $18.7 million to estimated fair value as of February 11, 2011. The stepped-up value is recorded as a charge to cost of goods sold as acquired inventory is sold.

^(k)		Includes prepaid assets and income tax receivable.

^(l)		The amounts recorded for the major components of acquired identifiable intangible assets are as follows:


	Amounts		Weighted
	recognized as of		average useful
(in millions of U.S. dollars)	acquisition date		lives (years)
	$		$
Trademarks, trademark licenses, manufacturing rights and other intangible assets with a finite life		413.9		17.04

Total identifiable intangible assets		413.9		17.04

		In addition, the estimated aggregate amortization expense for the five succeeding years will be $25.6 million annually.

^(m)		Includes accounts payable, accrued liabilities and income taxes payable.

⁽ⁿ⁾		Comprises of current deferred tax assets $0.8 million, non-current deferred tax assets $15.7 million and non-current deferred tax liabilities $77.7 million.

Page 38

^(o)		The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to synergies expected to result from combining the operations of Eurand and the Company and intangible assets that do not qualify for separate recognition. The Company does not expect any portion of this goodwill to be deductible for tax purposes. The allocation of goodwill among reporting units is not complete, pending finalization of the Company’s internal reporting structure and composition of its post-acquisition operating segments and reporting units.

^(p)		The Company had entered into an exclusive development license and supply agreement with Eurand. No gain or loss was recognized in conjunction with the effective settlement of the contractual relationship between the Company and Eurand as a result of this acquisition.

Transaction related costs

During the three and nine months ended June 30, 2011, we have expensed $0.5 million and $11.8 million respectively (an additional $1.1 million was expensed in the fiscal year ended September 30, 2010) of costs relating to legal, financial, valuation and accounting advisory services performed in connection with effecting the acquisition of Eurand, which are included in Transaction, restructuring and integration costs in the accompanying Statement of Condensed Consolidated Operations.

Actual and proforma information

The revenues derived from the Eurand entities for the period from the Acquisition Date to June 30, 2011 were $69.7 million and earnings before income taxes was $0.7 million, excluding the effects of the non-recurring acquisition accounting adjustments described above.

The following table presents pro forma consolidated results of operations as if the acquisition of Eurand had occurred as of October 1, 2009:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
	$			$			$			$
Total revenue		131.2			116.6			392.6			378.0
Loss before income taxes		(57.1	)		(34.4	)		(84.6	)		(151.5	)

Net loss		(56.9	)		(27.1	)		(83.4	)		(161.9	)

•		elimination of product sales and royalties between Eurand and the Company, an elimination of the Company’s cost of sales for Eurand-sourced inventories, and the elimination of certain PEP-related charges stemming from intercompany transactions;

•		elimination of Eurand’s historical intangible asset amortization expense;

•		additional amortization expense related to the fair value of identifiable intangible assets acquired;

•		additional depreciation expense related to the fair value adjustment to property, plant and equipment acquired;

•		elimination of interest expense and amortization of deferred financing costs related to the Company’s term loan under the legacy senior secured credit facilities and 9.25% senior secured notes due 2015 that were repaid as part of the acquisition transaction;

•		additional interest expense and amortization of deferred financing costs associated with financing obtained under the Amended and Restated Senior Secured Credit Facilities obtained by the Company in connection with the acquisition transaction;

•		reduction of interest income associated with cash and cash equivalents that were used to partially fund the acquisition;

•		elimination of acquisition-related costs and acquisition-related restructuring charges;

•		elimination of $17.4 million of the acquisition accounting adjustment on Eurand’s inventory that was sold subsequent to the Acquisition Date, which will not have a continuing impact on the Company’s operations.

Page 39

Agreements with Mpex Pharmaceuticals Inc. for the acquisition and development of Aeroquin™

On April 11, 2011, Aptalis Holdings, an indirect parent company of the Company, entered into a series of agreements with Mpex Pharmaceuticals Inc. (“Mpex”) for the acquisition and development of Aeroquin™ (the “Aeroquin Transaction”), a proprietary aerosol formulation of levofloxacin, which is currently in Phase 3 clinical trials for the treatment of pulmonary infections in patients with cystic fibrosis (CF). Under these agreements, Aptalis Holdings has an option to acquire all of Mpex’s assets related to Aeroquin™ in a merger, with continued development of Aeroquin™ by Mpex under the terms of a Development Agreement between the parties. Prior to the merger Mpex will transfer all of its assets that are not related to Aeroquin™ to a newly formed company that will be owned primarily by current Mpex stockholders. As a result of the Aeroquin Transaction, the Company made an initial non-contingent payment of $12.0 million on April 21, 2011. Additional remaining time-based, non-contingent payments in relation with the Aeroquin Transaction amounting to $33.0 million and an additional $17.5 million of time-based payments contingent only on completing the Merger to be expensed to acquired in-process research upon completing the Merger and will be paid in a number of installments, of which the final installment is due on April 1, 2014.

Under the terms of the Option Agreement dated April 11, 2011 among Aptalis Holdings, Mpex, and Axcan Lone Star Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Aptalis Holdings and a direct wholly-owned subsidiary of the Company (“Merger Sub”), Aptalis Holdings had option to terminate the Merger Agreement described below. This option could have been exercised during a certain period of time, which period in no event ended on August 1, 2011. We did not exercise the option.

Under the terms of the Agreement and Plan of Merger dated April 11, 2011 (the “Merger Agreement”) among Aptalis Holdings, Merger Sub, Mpex and certain stockholders of Mpex who will serve as representatives of the Mpex security holders under the Merger Agreement, Merger Sub will merge with and into Mpex, with Mpex surviving (the “Surviving Company”) as an indirect wholly-owned subsidiary of Aptalis Holdings and a direct wholly-owned unrestricted subsidiary of the Company (the “Merger”). Pursuant to the Merger Agreement, the aggregate merger consideration that the Mpex security holders will receive, subject to the consummation of the Merger, consists of (i) the non-contingent payments mentioned above; (ii) contingent payments of up to $195 million if certain regulatory and commercial milestones are met related to Aeroquin™, and (iii) earn-out payments based on net sales of Aeroquin™. Indemnity obligations of the Mpex security holders will be satisfied by set-off against a portion of the foregoing merger consideration payments.

The Merger is expected to close during the fourth quarter of 2011.The further development of Aeroquin™ will be conducted pursuant to the terms of the Development Agreement dated April 11, 2011 among Aptalis Holdings, Merger Sub, and Mpex. Upon completion of the divestiture of assets and liabilities unrelated to Aeroquin™ (the “Divestiture”) to a newly formed company (“Spinco”), Spinco will assume all of Mpex’s obligations under the Development Agreement. Under the Development Agreement, Mpex (and after the Divestiture, Spinco) will be paid for the actual development costs of Aeroquin™ and will have primary responsibility for conducting day-to-day development activities. Aptalis Holdings will be required to pay in advance development costs estimated for the next three months based on a rolling three month forecast. Aptalis Holdings and Merger Sub will have input regarding development strategy. Pursuant to the Development Agreement, on April 12, 2011 Mpex was paid $8.7 million for development expenses incurred by Mpex since November 15, 2010, which has been expensed as acquired in-process research and an additional $9.9 million for estimated development costs to be incurred during the first three months of the Development Agreement, of which $8.5 million has been expensed as research and development. All payments under the Development Agreement, Option Agreement and Merger Agreement to Mpex or Mpex security holders, as applicable, will be made by or on behalf of Merger Sub (or after the consummation of the Merger, the Surviving Company).

During the three months ended June 30, 2011, the Company expensed $50.2 million as acquired in-process research and development reflecting the initial non-contingent payment of $12.0 million, the discounted value of future time-based non-contingent payments payable under the Option agreement of $29.5 million (with a corresponding liability) and the payment towards certain pre-agreement incurred development expenses of $8.7 million. As of June 30, 2011, $8.7 million reflecting forecasted development costs for the next three months is included in prepaid expenses and other current assets.

Equity investment in Aptalis Holdings

Simultaneous with the execution of the Mpex agreements, Aptalis Holdings received the proceeds of a $55.0 million equity investment from funds managed by Investor Growth Capital Limited. Aptalis Holdings contributed the proceeds of the equity investment to its subsidiaries to fund a portion of the cost of the Mpex transactions and a partial repayment on the Company’s $133.2 million note receivable from its parent company.

Page 40

FINANCIAL OVERVIEW FOR THREE AND NINE MONTHS ENDED JUNE 30, 2011

This discussion and analysis is based on our unaudited condensed interim financial statements as of June 30, 2011 and our audited annual consolidated financial statements and the related notes thereto reported under U.S. GAAP. The results of Eurand’s business have been included in our results of operations, financial condition and cash flows only for the period subsequent to the completion of the Acquisition Date. For a description of our products prior to the Eurand acquisition, see the section entitled “Business Products” in Item 1, Part I in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, filed with the Securities and Exchange Commission.

For the three months ended June 30, 2011, total revenue was $131.2 million ($80.5 million for the three months ended June 30, 2010), operating loss was $62.5 million ($0.0 million for the three months ended June 30, 2010) and net loss was $80.8 million ($9.9 million for the three months ended June 30, 2010). For the nine months ended June 30, 2011, total revenue was $328.5 million ($285.0 million for the nine months ended June 30, 2010), operating loss was $60.7 million ($106.8 million for the corresponding period of fiscal year 2010) and net loss was $151.0 million ($164.2 million for the corresponding period of fiscal year 2010).

Total revenue in the United States was $91.8 million (70.0% of total revenue) for the three months ended June 30, 2011, compared to $56.3 million (69.9% of total revenue) for the corresponding period of the preceding fiscal year. In the European Union, total revenue was $30.2 million (23.0% of total revenue) for the three months ended June 30, 2011, compared to $16.0 million (19.9% of total revenue) for the corresponding period of the preceding fiscal year. In Canada, total revenue was $9.2 million (7.0% of total revenue) for the three months ended June 30, 2011, compared to $8.2 million (10.2% of total revenue) for the corresponding period of the preceding fiscal year. Total revenue in the United States was $232.4 million (70.8% of total revenue) for the nine months ended June 30, 2011 compared to $211.1 million (74.1% of total revenue) for the corresponding period of the preceding fiscal year. In the European Union, total revenue was $68.4 million (20.8% of total revenue) for the nine months ended June 30, 2011, compared to $49.0 million (17.2% of total revenue) for the corresponding period of the preceding fiscal year. In Canada, total revenue was $27.7 million (8.4% of total revenue) for the nine months ended June 30, 2011, compared to $24.9 million (8.7% of total revenue) for the corresponding period of the preceding fiscal year.

Unapproved pancreatic enzyme products (“PEPs”) event

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

This action was taken as we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products. We also interrupted shipments of product from the United States to Canada and export markets to allow time for the U.S. Food and Drug Administration to review our request confirming that applicable export requirements were being met as the FDA does not currently allow any shipment of this product within the U.S. As of June 30, 2011, this interruption of shipments was still in place.

We are in ongoing discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical ingredient to address the remaining open issues identified by the FDA. However, we do not believe those remaining issues require us to conduct additional clinical studies.

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

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

a)		The quantity and expiration dates of PEPs inventory in the distribution channel;

b)		Short-term prescription demand during the period of time during which the products continued to be available at the pharmacy level;

c)		Other factors.

The reserve related to the PEPs event, was $3.2 million at June 30, 2011, ($11.0 million at September 30, 2010). This reserve was affected by a reversal of $3.7 million in the nine months ended June 30, 2011 to reflect the estimated sales value of the remaining inventory in the distribution channel as of June 30, 2011. In future periods, we will continue to monitor and review the assumptions and estimates and will prospectively record changes to the PEPs reserve.

Page 41

Financial highlights


	June 30,		September 30,
(in millions of U.S. dollars)	2011		2010
	$		$
Total assets		1,302.8		713.2
Long-term debt ^(a)		979.1		594.5
Shareholders’ equity (deficiency)		33.1		(21.0	)


^(a)		Including the current portion


	Three Months Ended June 30,						Nine Months Ended June 30,
(in millions of U.S. dollars)	2011			2010			2011			2010
	$			$			$			$
Total revenue		131.2			80.5			328.5			285.0
EBITDA ⁽¹⁾		(41.2	)		15.9			(36.6	)		(53.9	)
Adjusted EBITDA ⁽¹⁾		46.0			41.7			118.7			137.9
Net loss		(80.8	)		(9.9	)		(151.0	)		(164.2	)


⁽¹⁾		A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA to Adjusted EBITDA (a non-U.S. GAAP measure) for the three and nine months ended June 30, 2011 and 2010 are as follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
(in millions of U.S. dollars)	2011			2010			2011			2010
	$			$			$			$
Net loss		(80.8	)		(9.9	)		(151.0	)		(164.2	)
Financial expenses		20.7			16.3			67.1			48.8
Interest income		(0.1	)		(0.2	)		(0.4	)		(0.5	)
Income tax expense (benefit)		(2.0	)		(5.4	)		(5.3	)		16.2
Depreciation and amortization		21.0			15.1			53.0			45.8

EBITDA ⁱ⁾		(41.2	)		15.9			(36.6	)		(53.9	)
Transaction, integration, refinancing costs and other payments to third parties ^a)		22.5			1.1			46.8			5.5
Management fees ^b)		0.9			0.6			2.5			2.5
Stock-based compensation expense excluding impact of the unapproved PEPs event^c)		0.6			1.2			6.4			5.2
Impairment of intangible assets and goodwill related to the unapproved PEPs event ^d)		—			—			—			107.2
Adjustments related to the unapproved PEPs event ^e)		—			14.9			(3.7	)		63.4
Loss on extinguishment of debt		—			—			28.3			—
Loss on disposal of product line ^f)		—			—			7.4			—
Inventory stepped-up value expenses ^g)		13.0			—			17.4			—
Acquired in-process research ^h)		50.2			8.0			50.2			8.0

Adjusted EBITDA ⁱ⁾		46.0			41.7			118.7			137.9

Page 42

^a)		Represents transaction, integration, restructuring and refinancing costs as well as due diligence costs related to the Eurand Acquisition as well as to certain other business development projects, non-recurring transactions, payments to third parties in respect of research and development milestones and other progress payments as defined within our credit agreement.

^b)		Represents management fees and other charges associated with the Management Services Agreement with TPG.

^c)		Represents stock-based employee compensation expense.

^d)		Intangible assets and goodwill write-downs related to the unapproved PEPs event.

^e)		Adjustments and other write-downs related to the unapproved PEPs event, including a reduction of $3.7 million to the sales returns reserve during the nine months ended June 30, 2011 (additional returns provision of $13.0 million during the three months and $23.4 million during the nine months ended June 30, 2010, inventory write-down and accrual for purchases and other materials and supply commitments of $1.9 million during the three months and $44.9 million during the nine months ended June 30, 2010, and a stock-based compensation recovery of $4.9 million during the nine months ended June 30, 2010).

^f)		Loss resulting from the disposal of the PHOTOFRIN/PHOTOBARR product line.

^g)		As part of the purchase price allocation for Eurand Acquisition, the book value of inventory acquired was stepped up to fair value by $18.7 million as at Acquisition date. The stepped-up value is recorded as charge to cost of goods sold as acquired inventory is sold, until acquired inventory is sold off.

^h)		Represent the initial non-contingent payment of $12.0 million, the discounted value of future time-based non-contingent payments payable under the Option agreement of $29.5 million and the payment towards certain pre-agreement incurred development expenses of $8.7 million related to the Aeroquin Transaction as described in Acquired-in-Process Research section below.

ⁱ⁾		EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are presented in this report because our management considers them important supplemental measures of our performance and believes that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income before financial expenses, interest income, income taxes and depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. We believe that EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items and other adjustments set forth above. Adjusted EBITDA is calculated in the same manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indentures governing our notes and Credit Facility further described in the section “Liquidity and Capital Resources-Long-term Debt and New Senior Secured Credit Facility”, except that in calculating Adjusted EBITDA, we do not include certain additional adjustments under the indenture and the Credit Facility that permit us to increase “EBITDA” and “Consolidated EBITDA” by including projected cost savings and synergies calculated on a pro forma basis that we expect to realize in future periods related to actions already taken or expected to be taken within twelve months of the end of the applicable period, including the Eurand Acquisition and related initiatives. We believe that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in our indentures and Credit Facility. Adjusted EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and they should not be considered in isolation, or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

	•		EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures, or contractual commitments;

	•		EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;

	•		EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

	•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

	•		Adjusted EBITDA reflects additional adjustments as provided in the indentures governing our secured and unsecured notes and new senior secured credit facilities; and

	•		Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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

Page 43

Overview of results of operations


	Three Months Ended June 30,
(in millions of U.S. dollars)	2011			2010			Change
	$			$			$			%
Net product sales		126.7			80.5			46.2			57.4
Development fees		1.4			—			1.4			100.0
Royalties		3.1			—			3.1			100.0

Total revenue		131.2			80.5			50.7			63.0

Cost of goods sold ^{a) b)}		48.5			20.8			27.7			133.2
Selling and administration expenses ^{a) b)}		39.3			27.4			11.9			43.4
Management fees		0.9			0.6			0.3			50.0
Research and development expenses^a)		19.6			8.6			11.0			127.9
Other Research and development expenses attributable to development fees ^a)		1.5			—			1.5			—
Acquired in-process research		50.2			8.0			42.2			527.5
Depreciation and amortization		21.0			15.1			5.9			39.1
Transaction, restructuring and integration costs		12.7			—			12.7			—

Total operating expenses		193.7			80.5			113.2			140.6

Operating loss		(62.5	)		—			(62.5	)		—

Financial expenses		20.7			16.3			4.4			27.0
Interest income		(0.1	)		(0.2	)		0.1			—
Gain on foreign currencies		(0.3	)		(0.8	)		0.5			62.5

Total other expenses		20.3			15.3			5.0			32.7

Loss before income taxes		(82.8	)		(15.3	)		(67.5	)		(441.2	)
Income taxes expense (benefit) ^b)		(2.0	)		(5.4	)		3.4			63.0

Net loss		(80.8	)		(9.9	)		(70.9	)		(716.2	)

^a)		Exclusive of depreciation and amortization

^b)		Including one time charges related to the unapproved PEPs event

Page 44


	Nine Months Ended June 30,
(in millions of U.S. dollars)	2011			2010			Change
	$			$			$			%
Net product sales ^b)		322.4			285.0			37.4			13.1
Development fees		2.0			—			2.0			100.0
Royalties		4.1			—			4.1			100.0

Total revenue		328.5			285.0			43.5			15.3

Cost of goods sold ^{a) b)}		97.8			115.6			(17.8	)		(15.4	)
Selling and administration expenses ^{a) b)}		103.4			88.0			15.4			17.5
Management fees		2.5			2.5			—			—
Research and development expenses^a)		37.5			24.7			12.8			51.8
Other Research and development expenses attributable to development fees ^a)		2.4			—			2.4			—
Acquired in-process research		50.2			8.0			42.2			527.5
Loss on disposal of product line		7.4			—			7.4			—
Depreciation and amortization		53.0			45.8			7.2			15.7
Transaction, restructuring and integration costs		35.0			—			35.0			—
Impairment of intangible assets and goodwill ^b)		—			107.2			(107.2	)		(100.0	)

Total operating expenses		389.2			391.8			(2.6	)		(0.7	)

Operating loss		(60.7	)		(106.8	)		46.1			43.2

Financial expenses		67.1			48.8			18.3			37.5
Loss on extinguishment of debt		28.3			—			28.3			100.0
Interest income		(0.4	)		(0.5	)		0.1			20.0
Other income		—			(7.7	)		7.7			100.0
Loss (gain) on foreign currencies		0.6			0.6			—			—

Total other expenses		95.6			41.2			54.4			132.0

Loss before income taxes		(156.3	)		(148.0	)		(8.3	)		(5.6	)
Income taxes expense (benefit) ^b)		(5.3	)		16.2			(21.5	)		(132.7	)

Net loss		(151.0	)		(164.2	)		13.2			8.0

^a)		Exclusive of depreciation and amortization

^b)		Including one time charges related to the unapproved PEPs event

Net product sales

Net product sales in the U.S. amounted to $87.9 million for the three months ended June 30, 2011, compared to $56.3 million for the corresponding period of the preceding fiscal year, an increase of $31.6 million (56.1%) and $227.1 million for the nine months ended June 30, 2011, compared to $211.1 million for the corresponding period of the preceding fiscal year, an increase of $16.0 million (7.6%). For the three-month period, the increase in sales in U.S. is mainly due to the inclusion of post-acquisition sales of legacy Eurand products amounting to $27.0 million. For the nine-month period, the increase in net products sales is mainly due to the inclusion of post-acquisition sales of legacy Eurand products amounting to $46.0 million and the favourable impact of the sales returns provision related to the PEPs event amounting to $19.7 million. The increase is partially offset by the absence of Ultrase and Viokase product sales amounting to $49.6 million in the nine months ended June 30, 2010.

Net product sales in the European Union increased $13.6 million (85.0%), to $29.6 million for the three months ended June 30, 2011, compared to $16.0 million for the corresponding period of the preceding fiscal year and increased $18.6 million (38.0%) to $67.6 million for the nine months ended June 30, 2011, from $49.0 million for the nine months ended June 30, 2010. The increase is mostly due to the inclusion of post-acquisition sales of legacy Eurand products amounting to $12.4 million and $17.6 million for the three months and nine months ended June 30, 2011.

Net product sales in Canada increased 12.2%, to $9.2 million for the three months ended June 30, 2011, compared to $8.2 million for the corresponding period of the preceding fiscal year and increased 11.2% to $27.7 million for the nine months ended June 30, 2011, from $24.9 million for the nine months ended June 30, 2010. The increase in sales resulted primarily from higher sales volume of SALOFALK combined with the positive impact of currency fluctuations compared to the preceding year, as the value of the Canadian dollar improved against the U.S. dollar by 7.4% for the three months and by 5.4% for the nine months ended June 30, 2011.

Page 45

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


	Three Months Ended June 30,
(in millions of U.S. dollars)	2011		2010		Change
	$		$		$			%
Gross product sales		165.9		112.2		53.7			47.9

Gross-to-net product sales adjustments
Product returns		4.3		2.0		2.3			115.0
Product returns related to unapproved PEPs event		—		13.0		(13.0	)		(100.0	)
Chargebacks		11.2		7.2		4.0			55.6
Contract rebates		18.1		6.6		11.5			174.2
DSA fees		2.9		1.2		1.7			141.7
Discounts and other allowances		2.7		1.7		1.0			58.8

Total gross-to-net product sales adjustments		39.2		31.7		7.5			23.7

Total net product sales		126.7		80.5		46.2			57.4


	Nine Months Ended June 30,
(in millions of U.S. dollars)	2011			2010		Change
	$			$		$			%
Gross product sales		407.0			391.2		15.8			4.0

Gross-to-net product sales adjustments
Product returns		12.2			6.1		6.1			100.0
Product returns related to unapproved PEPs event		(3.7	)		23.4		(27.1	)		(115.8	)
Chargebacks		31.3			32.7		(1.4	)		(4.3	)
Contract rebates		31.7			32.6		(0.9	)		(2.8	)
DSA fees		6.3			4.7		1.6			34.0
Discounts and other allowances		6.8			6.7		0.1			1.5

Total gross-to-net product sales adjustments		84.6			106.2		(21.6	)		(20.3	)

Total net product sales		322.4			285.0		37.4			13.1

Product returns, contract rebates, DSA fees, discounts and other allowances totalled $39.2 million (23.6% of gross product sales) for the three months ended June 30, 2011 compared to $31.7 million (28.3% of gross product sales) for the corresponding period of the preceding fiscal year.

The decrease in total deductions as a percentage of gross product sales was mainly due to the PEPs event (additional provision amounting to $13.0 million during the three months ended June 30, 2010) as well as changes in the overall product sales mix as a result of the Eurand Acquisition. This was partially offset by an increase in contract rebates.

Product returns, contract rebates, DSA fees, discounts and other allowances totalled $84.6 million (20.8% of gross product sales) for the nine months ended June 30, 2011, compared to $106.2 million (27.1% of gross product sales) for the corresponding period of the preceding fiscal year.

The decrease in total deductions as a percentage of gross product sales was mainly due to the PEPs event (additional provision amounting to $23.4 million during the nine months ended June 30, 2010 partially offset by a reversal of the provision amounting to $3.7 million during the nine months ended June 30, 2011).

Page 46

Affordable Care Act

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

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

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

While certain aspects of the new legislation implemented in 2010 are expected to reduce our revenues in future years, other provisions of this legislation may offset, at some level, any reduction in revenues when these provisions become effective. In future years, based on our understanding, these other provisions are expected to result in higher revenues due to an increase in the total number of patients covered by health insurance and an expectation that existing insurance coverage will provide more comprehensive consumer protections. This would include a federal subsidy for a portion of a beneficiary’s out-of-pocket cost under Medicare Part D. However, these higher revenues will be negatively impacted by the branded prescription drug manufacturers’ fee.

The impact in terms of additional reserves recorded has been $0.6 million for the three months ended June 30, 2011 and $2.8 million for the nine months ended June 30, 2011 compared to $0.3 million and $1.1 million for the same periods last year.

Development fees

For the three and nine months ended June 30, 2011, development fees amounted to $1.4 million and $2.0 million respectively. These fees resulted from the inclusion of Eurand’s business in the post-acquisition period. Development of a new pharmaceutical formulation generally includes the following stages:

•		feasibility and prototype development;

•		formulation optimization and preparation of pilot clinical samples;

•		scale-up, validation and preparation of clinical samples for regulatory and commercial purposes;

•		clinical trials; and

•		preparation of documents and regulatory filings.

The Company applies its proprietary pharmaceutical technologies in one of two ways — either to develop products on behalf of our collaborators or as internal programs. In both situations, the Company is involved in all stages of the formulation development process and performs largely the same types of work although, in general, the Company only performs clinical trials for the products we develop internally. Clinical trials for co-developed products are typically performed by our collaboration partners. For internal projects, we fund all of the development costs with a view either to out-license the product once it is fully developed and has obtained the applicable regulatory approvals, or to market it directly.

In our typical co-development contract, we generally receive development fees and milestones payments from our collaborators. Most of our current co-development agreements provide for us to perform development activities based on an hourly service fee. Our current co-development agreements also typically include provisions for the receipt of milestone payments upon the achievement of certain development and/or regulatory milestones including, by way of example, successful completion of development phases, successful demonstration of bioequivalence, and acceptance and approval by the applicable regulatory agencies. Milestone payments are usually structured as lump sum payments, which are due if and when we reach certain mutually agreed-upon development milestones as set forth in the agreements. In many cases, achievement of such milestone payments is based on factors that are out of our control, including, among other things, regulatory approval of the product. In addition, in many cases, decisions directly affecting the receipt of these payments are made at the sole discretion of our collaborator. Due to the structure of our co-development agreements and the inherent difficulty in predicting progress on development plans, our development fees may fluctuate significantly from quarter to quarter. In addition, development fees will fluctuate depending on the number of co-development agreements we enter into in a given year or quarter.

Page 47

Royalties

For the three and nine months ended June 30, 2011, royalties amounted to $3.1 million and $4.1 million respectively and resulted from the inclusion of legacy Eurand’s business in the post-acquisition period. The Company earns royalty revenues from its collaborators equal to a percentage of their sales of products which we assisted in the development of.

Cost of goods sold

Cost of goods sold consists principally of the cost of raw materials, royalties and manufacturing. For the three months ended June 30, 2011, cost of goods sold increased $27.7 million (133.2%) to $48.5 million from $20.8 million for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the three months ended June 30, 2011, increased compared to the corresponding period of the preceding fiscal year to 38.3% from 25.8% mostly due to the expense associated to the inventory stepped up to fair value.

For the nine months ended June 30, 2011, cost of goods sold decreased $17.8 million (15.4% ) to $97.8 million from $115.6 for the corresponding period ended June 30, 2010. As a percentage of net product sales, cost of goods sold for the nine months ended June 30, 2011 decreased compared to the corresponding period of the preceding fiscal year to 30.3% from 40.6% primarily due to the unfavourable impact from the provisions taken as a result of the unapproved PEPs event in the nine months ended June 30, 2010 amounting to $44.9 million. The decrease related to the unapproved PEPs event was partially offset by the additional expense associated with the inventory stepped up to fair value as a result of the Eurand transaction. As part of the purchase price allocation for the Eurand Acquisition, the book value of the inventory acquired was stepped up to fair value by $18.7 million as at Acquisition Date. The stepped up value is recorded as charge to cost of goods sold as acquired inventory is sold, until the acquired inventory is sold off. An amount of $13.1 million and $17.4 million was expensed during the three and nine months ended June 30, 2011 respectively.

Excluding the impact of the unapproved PEPs, the charge related to the inventory stepped-up value and the integration of Eurand business, cost of goods sold as a percentage of net product sales would have been 21.1% compared to 20.2% for the three months ended June 30, 2010 and 25.2% compared to 22.9% for the nine months ended June 30, 2010.

Selling and administrative expenses

Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other costs associated with our sales force and marketing activities. For the three months ended June 30, 2011, selling and administrative expenses increased $11.9 million (43.4%) to $39.3 million from $27.4 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, selling and administrative expenses increased $15.4 million (17.5% ) to $103.4 million from $88.0 million for the corresponding period of the preceding fiscal year. The increases are resulting from the inclusion of legacy Eurand’s business in the post-acquisition period amounting to $15.0 million for the three months and $21.8 million for the nine months ended June 30, 2011. The increases were partially offset by a reduction of ULTRASE and VIOKASE products marketing expenses and patient programs.

During the three months ended June 30, 2011, the Company completed the rationalization of its sales force as part of its cost reduction initiatives. Separation costs associated with sales force reductions are reflected in transaction, restructuring and integration costs as discussed below. The associated synergies will be realized to a greater extent in future quarters

Management fees

Management fees consist of fees and other charges associated with the Management Services Agreement with TPG. For the three months ended June 30, 2011, management fees increased $0.3 million (50.0% ) to $0.9 million from $0.6 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, and June 30, 2010, management fees amounted to $2.5 million.

Research and development expenses

Research and development expenses refer to internal research and development expense and consist principally of fees paid to outside parties that we use to conduct clinical studies and to submit governmental approval applications on our behalf, as well as the salaries and benefits paid to personnel involved in research and development projects. For the three months ended June 30, 2011, research and development expenses increased $11.0 million (127.9% ) to $19.6 million, from $8.6 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, research and development expenses increased $12.8 million (51.8% ) to $37.5 million, from $24.7 million for the corresponding period of the preceding fiscal year. The increase in research and development expenses is mainly due to (i) the inclusion of expenses associated with Eurand activities in the post-acquisition period amounting to $4.1 million for the three months and $6.9 million for the nine months ended June 30, 2011 and (ii) expenses of $8.5 million for the three months ended June 30, 2011 incurred under the Mpex Development Agreement as described in the Aeroquin transaction section above. This increase was partially offset by the reduction in expenses related to the development work on PEPs for the nine months ended June 30, 2011.

During the three months ended June 30, 2011, the Company commenced the rationalization of its internal research and development team as part of its cost reduction initiatives. Separation costs associated with headcount reductions are reflected in transaction, restructuring and integration costs as discussed below. The associated synergies will be realized to a greater extent in future quarters. The Company will also continue to incur ongoing development costs of Aeroquin under the Mpex Development Agreement.

During the quarter, the Company received regulatory approval to begin marketing Pylera in a market in Europe. We are currently preparing plans for the launch of the product in this market.

Page 48

Other research and development expenses attributable to development fees

The Company incurs research and development expense on a number of external projects with third parties that generate development fee revenues and consist principally of personnel cost. For the three and nine months ended June 30, 2011, research and development expenses attributable to development fees amounted to $1.5 million and $2.4 million respectively and resulted from the inclusion of expenses associated with Eurand activities in the post-acquisition period.

Acquired in-process research

Acquired in-process research represents incomplete research and development projects acquired in a business combination or an asset acquisition which, at the time of acquisition are determined to have no future alternative use. The fair value of in-process research acquired in a business combination is capitalized as indefinite-lived intangible asset subject to impairment testing until completion or abandonment of the project. The fair value of in-process research acquired as part of an asset acquisition is expensed on acquisition.

The further development of Aeroquin™ will be conducted pursuant to the terms of the Development Agreement dated April 11, 2011 among Aptalis Holdings, Merger Sub, and Mpex. Pursuant to the Development Agreement, on April 12, 2011 Mpex was paid $8.7 million for development expenses incurred by Mpex since November 15, 2010 and $9.9 million for estimated development costs to be incurred during the first three months of the Development Agreement.

During the three months ended June 30, 2011, we expensed $50.2 million as acquired in-process research and development reflecting the initial non-contingent payment of $12.0 million, the discounted value of future time-based non-contingent payments payable under the Option agreement of $29.5 million (with a corresponding liability) and the payment towards certain pre-agreement incurred development expenses of $8.7 million

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

Loss on disposal of product line

On March 28, 2011, we entered into a definitive agreement with Pinnacle Biologics, Inc., which acquired all global assets and rights related to PHOTOFRIN/PHOTOBARR, including inventory, for non-contingent payments amounting to $4.2 million. In addition to the non-contingent payments, additional payments will be made to us after the achievement of certain milestones events. In addition, the Company will be paid royalties on annual net sales of PHOTOFRIN/PHOTOBARR.

During the nine months ended June 30, 2011, we recorded a loss of $7.4 million as a result of the disposal of the PHOTOFRIN/PHOTOBARR product line. Consideration for additional contingent payments to be made to the Company shall be recorded as a gain in the period in which they are received.

Depreciation and amortization

Depreciation and amortization consists principally of the amortization of intangible assets with a finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For the three months ended June 30, 2011, depreciation and amortization increased $5.9 million (39.1% ) to $21.0 million from $15.1 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, depreciation and amortization increased $7.2 million (15.7% ) to $53.0 million from $45.8 million for the corresponding period of the preceding fiscal year. These increases are mainly due to additional depreciation and amortization of intangible assets recognized on the acquisition of Eurand.

Page 49

Transaction, restructuring and integration costs

During the three and nine months ended June 30, 2011, we have expensed $0.5 million and $11.8 million respectively (an additional $1.1 million was expensed in the fiscal year ended September 30, 2010) of costs relating to legal, financial, valuation and accounting advisory services performed in connection with effecting the transaction with Eurand, which are included in Transaction, restructuring and integration costs in the accompanying Statement of Condensed Consolidated Operations.

We have initiated restructuring measures in conjunction with the integration of the operations of Eurand. These measures are intended to capture synergies and generate cost savings across the Company.

During the three and nine months ended June 30, 2011, we recorded a restructuring expense of $3.7 million and $8.7 million respectively related to planned employee termination costs. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits and health insurance continuation, many of which may be paid out during periods after termination.

We estimate we will incur additional restructuring costs of between $13.0 million and $17.0 million, primarily consisting of severance costs. The restructuring actions taken thus far are expected to be substantially completed by the end of 2012.

Through the nine months ended June 30, 2011, we have incurred integration costs of $14.5 million representing certain external, incremental costs directly related to integrating the Eurand business and primarily include expenditures for consulting and systems integration.

Impairment of intangible assets and goodwill

The value of goodwill and intangible assets with an indefinite life are subject to an annual impairment test unless events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. The intangible assets with a finite life and property, plant and equipment are subject to an impairment test whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. As a result of the unapproved PEPs event, we compared the carrying value of the intangible assets with a finite life affected by the unapproved PEPs event to estimated future undiscounted cash flows. The change in circumstances associated with the unapproved PEPs event also caused us to review the carrying value of our long lived intangible assets including goodwill. Based on this review, an impairment charge of $107.2 million was recorded during the nine months ended June 30, 2010, reflecting charges of $91.4 million for the goodwill allocated to our U.S. reporting unit and of $15.8 million related to finite life intangible assets.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed primarily for the Eurand acquisition and for the acquisition of the Company by TPG Capital in February 2008. For the three months ended June 30, 2011, financial expenses increased $4.4 million (27.0%) to $20.7 million from $16.3 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, financial expenses increased $18.3 million (37.5%) to $67.1 million from $48.8 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, financial expenses included certain one-time fees related to bridge financing and the renegotiation of our credit agreement. On February 11, 2011, we entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition as described in the Long-term Debt and Credit Facility section below.

Loss on extinguishment of debt

In conjunction with the Eurand Acquisition, the proceeds of the debt and equity financing were used to repay the outstanding term loan amounting to $125.7 million of our then existing senior secured credit facilities. Subsequent to the Eurand Acquisition, we redeemed our existing 9.25% senior secured notes of $228.0 million due 2015 at a price equal to 106.938% of the outstanding principal amount of the notes. The difference between the net carrying value and the repayment price of the outstanding term loan and 9.25% senior secured notes was recognized as a loss on extinguishment of debt. For the nine months ended June 30, 2011, Loss on extinguishment of debt amounted to $28.3 million and comprised of the write-off of the unamortized deferred financing fees, the original issuance discount and the redemption premium.

Interest income

For the three months ended June 30, 2011, total interest income decreased to $0.1 million from $0.2 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, total interest income decreased to $0.4 million from $0.5 million for the corresponding period of the preceding fiscal year.

Other income

In June 2007, we initiated a lawsuit under the U.S. Lanham Act against a number of defendants alleging they falsely advertised their products to be similar or equivalent to ULTRASE^® MT. During the nine months ended June 30, 2010, an amount of $7.7 million was paid to us pursuant to settlement arrangements entered into with the defendants in these matters.

Page 50

Income taxes

For the three months ended June 30, 2011, income tax benefit amounted to $2.0 million compared to income tax benefit of $5.4 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, income tax benefit amounted to $5.3 million compared to income tax expense of $16.2 million for the corresponding period of the preceding fiscal year. The effective tax rate was 2.5%, for the three months ended June 30, 2011, compared to 35.5% for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, the effective tax rate was 3.4% compared to minus10.9% for the corresponding period of the preceding fiscal year. The effective tax rate for the three and nine months ended June 30, 2011, is affected by a number of elements, the most important being the non-deductibility of certain expenses and the establishment of a valuation allowance of $45.7 million during the nine months ended June 30, 2011 mainly against our net deferred tax assets generated in the U.S. If, in future periods, the deferred tax assets are determined by management to be more likely than not to be realized, the tax benefits relating to the reversal of the valuation allowance will be recorded.

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


	Three months ended June 30,
(in millions of US dollars)	2011						2010
	%			$			%			$
Combined statutory rate applied to pre-tax income (loss)	35.00				(29.0	)		35.00			(5.4	)
Increase (decrease) in taxes resulting from:
Change in promulgated rates		0.00			0.0			0.21			(0.0	)
Difference with foreign tax rates		(1.34	)		1.1			6.15			(0.9	)
Valuation allowance		(19.49	)		16.2			(49.80	)		7.6
Tax benefit arising from a financing structure	3.00				(2.5	)		25.81			(4.0	)
Non-deductible items		(15.69	)		13.0			(3.03	)		0.5
Investment tax credits		0.23			(0.2	)		4.41			(0.7	)
State taxes		0.21			(0.2	)		1.57			(0.2	)
Other		0.56			(0.4	)		15.18			(2.3	)

		2.48			(2.0	)		35.50			(5.4	)


	Nine months ended June 30,
(in millions of US dollars)	2011						2010
	%			$			%			$
Combined statutory rate applied to pre-tax income (loss)		35.00			(54.7	)		35.00			(51.8	)
Increase (decrease) in taxes resulting from:
Change in promulgated rates		(0.04	)		0.1			0.01			(0.0	)
Difference with foreign tax rates		(0.49	)		0.7			1.66			(2.5	)
Valuation allowance		(29.25	)		45.7			(35.54	)		52.6
Tax benefit arising from a financing structure		6.99			(10.9	)		7.83			(11.6	)
Non-deductible items		(9.83	)		15.4			(23.53	)		34.8
Investment tax credits		0.71			(1.1	)		0.87			(1.3	)
State taxes		(0.09	)		0.1			2.39			(3.5	)
Other		0.40			(0.6	)		0.38			(0.5	)

		3.40			(5.3	)		(10.93	)		16.2

Page 51

Net income

For the three months ended June 30, 2011, net loss increased $70.9 million (716.2%) to $80.8 million from $9.9 million for the corresponding period of the preceding fiscal year. The increase in net loss is mainly due by the acquired-in process research charge amounting to $50.2 million and the development expenses amounting to $8.5 million related to the Aeroquin Transaction and the transaction, integration and restructuring costs amounting to $12.7 million related to Eurand Acquisition.

For the nine months ended June 30, 2011, net loss decreased $13.2 million (8.1% ) to $151.0 million from net loss of $164.2 million for the corresponding period of the preceding fiscal year. For the nine months ended June 30, 2011, the net loss is mainly due by the acquired-in process research charge amounting to $50.2 million and the development expenses amounting to $8.5 million related to the Aeroquin Transaction combined with the transaction, integration and restructuring costs amounting to $35.0 million and the loss on extinguishment of debt amounting to $28.3 million. For the nine months ended June 30, 2010, the net loss is mainly due the additional charges related to the unapproved PEPs event amounting to $192.1 million.

Balance sheets as of June 30, 2011, and September 30, 2010

The following table summarizes balance sheet information as of June 30, 2011, compared to September 30, 2010.


	June 30,		September 30,
(in millions of U.S. dollars)	2011		2010			Change
	$		$			$			%
Cash and cash equivalents		114.8		161.5			(46.7	)		(28.9	)
Current assets		272.7		226.7			46.0			20.3
Total assets		1,302.8		713.2			589.6			82.7
Current liabilities		164.1		111.3			52.8			47.4
Long-term debt		970.2		581.3			388.9			66.9
Total liabilities		1,269.7		734.2			535.5			72.9
Shareholders’ equity (deficiency)		33.1		(21.0	)		54.1			257.6
Working capital		108.6		115.4			(6.8	)		(5.9	)

Working capital decreased by $6.8 million (5.9% ) to $108.6 million as of June 30, 2011, from $115.4 million as of September 30, 2010.

Total assets increased $589.6 million (82.7% ) to $1,302.8 million as of June 30, 2011, from $713.2 million as of September 30, 2010. This increase was mainly due to the total assets acquired with Eurand Acquisition amounting to $690.3 million as of June 30, 2011.

Long-term debt increased $388.9 million (66.9% ) to $970.2 million as of June 30, 2011, from $581.3 million as at September 30, 2010. On February 11, 2011, the Company entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition as described in the Long-term debt and Credit Facility section below.

Page 52

Liquidity and Capital Resources

Cash requirements

As of June 30, 2011, working capital was approximately $108.6 million and $115.4 million as of September 30, 2010. Cash generated from operations, is used to fund working capital, capital expenditures, milestone payments, debt service and business development activities. We regularly review product and other acquisition opportunities and may therefore require additional debt or equity financing. We cannot be certain that such additional financing, if required, will be available on acceptable terms, or at all.

The aggregate equity purchase price of $589.6 million plus acquisition costs (including related fees and expenses) for the Eurand acquisition were funded by cash equity contributions amounting to $140.0 million from affiliates of TPG Capital L.P. and certain co-investors, the proceeds from the Senior Secured Term Loan Facility (as defined below) under the Company’s amended and restated credit agreement and related security and other agreements and cash on hand from Axcan and Eurand.

The amended and restated credit agreement and related security and other agreements is composed of (i) a senior secured revolving credit facility in an aggregate principal amount of $147.0 million (the “Senior Secured Revolving Credit Facility”) and (ii) a $750.0 million senior secured term loan facility (the “Senior Secured Term Loan Facility” and, together with the Senior Secured Revolving Credit Facility, collectively, the “Amended and Restated Senior Secured Credit Facilities”). The Company borrowed $500.0 million of the amount available under the Senior Secured Term Loan Facility at the closing of the acquisition. The Senior Secured Revolving Credit Facility remained undrawn at the closing of the acquisition.

A portion of the proceeds of the equity and debt financings, together with cash on hand of Aptalis and Eurand, were also used to repay the outstanding term loan portion amounting to $125.7 million of the Company’s existing senior secured credit facilities and to pay related fees and expenses. The remaining amount of $250.0 million of the Senior Secured Term Loan Facility was used on March 15, 2011 to redeem 100% of the Company’s existing 9.25% senior secured notes due 2015.

There are currently two rating agencies (Moody’s and Standard & Poor’s) rating our debt. These ratings are revised from time to time.

Contractual obligations and other commitments

The following table summarizes our significant contractual obligations as of June 30, 2011, and the effect such obligations are expected to have on our liquidity and cash flows in future years. This table excludes the payment of amounts already recorded on the balance sheet as current liabilities as of June 30, 2011, and certain other purchase obligations as discussed below:


(in millions of U.S. dollars)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	$		$		$		$		$
Long-term debt		984.3		9.0		16.5		250.0		708.8
Operating leases		5.5		2.6		2.8		0.1		—
Other commitments		3.5		2.8		0.7		—		—
Interest on long-term debt		422.9		78.3		154.5		155.0		35.1

		1,416.2		92.7		174.5		405.1		743.9

Purchase orders for raw materials, finished goods and other goods and services are not included in the above table. Management is not able to accurately determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table, contractual obligations for the purchase of goods or services are only included in other commitments where there exist agreements that are legally binding and enforceable on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current needs and are fulfilled by our vendors within relatively short timetables. We do not have significant agreements for the purchase of raw materials or finished goods specifying minimum quantities or set prices that exceed our short-term expected requirements. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. As milestone payments are primarily contingent upon successfully achieving clinical milestones or on receiving regulatory approval for products under development, they do not have defined maturities and therefore are not included in the above table.

Page 53

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

As of June 30, 2011, we had unrecognized tax benefits of $12.0 million ($11.3 million as of September 30, 2010). Due to the nature and timing of the ultimate outcome of these uncertain tax positions, we cannot make a reasonably reliable estimate of the amount and period of related future payments. Therefore, our unrecognized tax benefits with respect to our uncertain tax positions has been excluded from the above contractual obligations table.

Long-term debt and Credit Facility

On February 11, 2011, the Company entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition.

We borrowed $500.0 million of the amount available under the Senior Secured Term Loan Facility at the closing of the acquisition. The Senior Secured Revolving Credit Facility remained undrawn at the closing of the acquisition. A portion of the proceeds of the equity and debt financings, together with cash on hand of Aptalis and Eurand, were used to repay the outstanding term loan portion amounting to $125.7 million of our existing senior secured credit facilities and to pay related fees and expenses. Following the repayment, all unamortized deferred financing fees of $2.7 million and original issuance discount of $3.2 million related to the term loan were written off and are included in Loss on extinguishment of debt in the accompanying Statement of Condensed Interim Consolidated Operations. The remaining amount of $250.0 million of the Senior Secured Term Loan Facility was drawn on March 15, 2011 to redeem our existing 9.25% senior secured notes due 2015.

On February 25, 2008, the Company issued $228.0 million aggregate principal amount of its 9.25% senior secured notes (the “Senior Secured Notes”) due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a 10% yield to March 1, 2015. On March 15, 2011, $250.0 million of the Senior Secured Term Loan Facility was used to redeem 100% of the Company’s Senior Secured Notes at a redemption price of 106.938%. The aggregate redemption amount consisted of $228.0 million in aggregate principal amount, $0.8 million accrued interest and $15.8 million of redemption premium which is included in Loss on extinguishment of debt in the accompanying Statement of Condensed Interim Consolidated Operations. Following the redemption all unamortized deferred financing fees of $5.0 million and original issuance discount of $1.7 million related to these notes were written off and are included in Loss on extinguishment of debt in the accompanying Statement of Condensed Interim Consolidated Operations.

The Company’s Amended and Restated Senior Secured Credit Facilities totaling $897.0 million is composed of a Senior Secured Term Loan Facility amounting to $750.0 million and a Senior Secured Revolving Credit Facility totaling $147.0 million. The Senior Secured Revolving Credit Facility is comprised of $115.0 million of existing revolving credit commitments that were extended or issued on February 11, 2011 (the “ Extended Commitments”) and $32.0 million of existing revolving credit commitments that were not extended (the “ Unextended Commitments”) pursuant to the Senior Secured Revolving Credit Facility. The Amended and Restated Senior Secured Credit Facilities bear interest at a variable rate composed of either (i) the highest of the federal funds rate plus 0.5%, Bank of America, N.A.’s “prime rate”, or the one month British Banker Association LIBOR rate plus 1.00%, or (ii) the British Banker Association LIBOR rate (subject to a floor) of 1.50% with respect to borrowings under the Senior Secured Term Loan Facility at the option of the Company, plus an applicable rate established by the credit agreement governing the Amended and Restated Secnior Secured Credit Facilities (including, with respect to borrowings under the Senior Secured Revolving Credit Facility, step-downs based on the company’s consolidated total leverage ratio). The principal amount of the Senior Secured Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount with payments beginning in March 2011. The principal amount outstanding of the loans under the Senior Secured Term Loan Facility will be due and payable on February 11, 2017. The principal amount of outstanding loans under the Senior Secured Revolving Facility will be due and payable on February 11, 2016 with respect to Extended Commitments and on February 25, 2014 with respect to Unextended Commitments.

As of June 30, 2011, $750.0 million of term loans had been issued and no amounts are currently drawn against the Senior Secured Revolving Credit Facility. The term loans were priced at $0.995 with a yield to maturity of 5.6% before the effect of the interest rate swaps. The Company uses interest rate swaps as part of its interest rate risk management strategy to add stability to interest expense and to manage its exposure to interest rate movements. On April 4, 2011, the Company entered into two separate pay-fixed, receive-floating interest rate swap agreements with an effective date of June 30, 2011 effectively converting a portion of the variable rate debt under its Amended and Restated Senior Secured Credit Facilities to fixed rate debt. The first swap has a notional amount of $331 million amortizing to $84 million by its maturity in December 2015. The second swap has a notional amount of $219 million and matures in December 2016. These swaps were designated as cash flow hedges of interest rate risk. The interest rate swaps will effectively fix the Company’s interest payments on the hedged debt at 2.386% for the first swap and 3.18% for the second swap, respectively, inclusive of a LIBOR floor of 1.5%, plus the appropriate margin on each debt interest period, which is currently 4%.. As of June 30, 2011, the Company had two interest rate swaps with a combined notional amount of $550 million that were designated as cash flow hedges of interest rate risk. The weighted average fixed interest rate on these swaps is 2.7%. The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. If the Company had breached this provision, it could have been required to settle its obligations under the agreements at their termination value. As of June 30, 2011, the termination value of derivatives in a net liability position including accrued interest and excluding any adjustment for nonperformance risk, related to these agreements was $9.4 million and the Company has not posted any collateral related to these agreements.

The credit agreement governing the Amended and Restated Senior Secured Credit Facilities requires the Company to meet certain financial covenants, beginning the quarter ending June 30, 2011. The maintenance of these financial covenants is solely with respect to the Senior Secured Revolving Credit Facility. These covenants were met as of June 30, 2011. The credit agreement governing the Amended and Restated Senior Secured Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of events, subject to

Page 54

certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the credit agreement governing the Amended and Restated Senior Secured Credit Facilities, (2) commencing with the fiscal year ended September 30, 2011, 50% (which percentage will be reduced if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Senior Secured Term Loan Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestments rights and certain other exceptions.

Pursuant to the annual excess cash flow requirements of our credit agreement in effect prior to the Amended and Restated Senior Secured Credit Facilities, the Company was required to prepay $13.2 million of outstanding term loans in the first quarter of fiscal year 2011 ($17.6 million for the fiscal year 2009 which was paid in the first quarter of fiscal year 2010).

On May 6, 2008, the Company issued $235.0 million of 12.75% senior unsecured notes due March 1, 2016, (the “Senior Unsecured Notes”). The Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior Unsecured Notes are subordinated to the Amended and Restated Senior Secured Credit Facilities.


	Senior
	Unsecured
	Notes
	%
2012		106.375
2013		103.188
2014 and thereafter		100.000

Operating leases

We have various long-term operating lease agreements for office space, automotive equipment and other equipment. The latest expiry date for these agreements is in 2015.

Other commitments

Other operating commitments consist primarily of amounts relating to administrative services, clinical studies and other research and development services.

Related party transactions

As of June 30, 2011, we had a note receivable from our parent company of $78.2 million ($133.2 million as of September 30, 2010). During the three months ended June 30, 2011, the parent company made a partial repayment of $55.0 million on the note receivable from the contributions made by Axcan Holdings of proceeds received from an equity investment made by Investor Growth Capital Limited managed funds. The note receivable has been recorded in the shareholders’ equity section of the consolidated balance sheet. The Company earned interest income on the note of $1.2 million (net of taxes of $0.7 million) and $5.1 million (net of taxes of $2.8 million) during the three and nine months ended June 30, 2011 respectively. The Company earned interest income on the note of $1.9 million (net of taxes of $1.1million) and $5.9 million (net of taxes of $3.2 million) during the three and nine months ended June 30, 2010 respectively. The related interest receivable from our parent company is $35.1 million as of June 30, 2011, ($27.1 million as of September 30, 2010) has been recorded in the shareholder’s equity section of the consolidated balance sheet. This amount was subject to a full provision which was also recorded in the statement of shareholders’ equity. As of June 30, 2011, we have also an account receivable from our parent company of $0.6 million ($0.5 million as of September 30, 2010).

Pursuant to the terms of a management fee arrangement with a controlling shareholding company, we recorded charges of $0.9 million and $2.5 million during the three and nine months ended June 30, 2011 respectively ($0.7 million and $2.5 million for the three and nine months ended June 30, 2010). Also, during the nine months ended June 30, 2011, we recorded fees from a controlling shareholding company amounting to $5.0 million of which $1.5 million was accounted for as deferred debt issue costs, $2.5 million as selling and administrative expense and $1.0 million as financing fees. As of June 30, 2011, the Company accrued fees payable to a controlling shareholding company of $0.9 million ($1.6 million as of September 30, 2010).

During the three and nine months ended June 30, 2011, we paid a dividend to our parent company amounting to $0.4 million to allow for the payment of certain group expenses ($0.1 million during the three and nine months ended June 30, 2010).

Balance sheet arrangements

We do not have any transactions, arrangements and other relationships with unconsolidated entities that are likely to affect our operating results, our liquidity or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, and do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the condensed consolidated interim financial statements.

Page 55

Cash flows

Our cash flows from operating, investing and financing activities for the three months ended June 30, 2011 and 2010 as reflected in the condensed consolidated statements of cash flows, are summarized in the following table:


	Three months ended June 30,
(in millions of U.S. dollars)	2011			2010			Change
	$			$			$
Net cash provided by (used by) operating activities		(22.4	)		6.0			(28.4	)
Net cash used by investing activities		(2.2	)		(1.6	)		(0.6	)
Net cash provided by financing activities		51.5			—			51.5

Our cash flows from operating, investing and financing activities for the nine months ended June 30, 2011, and June 30, 2010 as reflected in the condensed consolidated statements of cash flows, are summarized in the following table:


	Nine months ended June 30,
(in millions of U.S. dollars)	2011			2010			Change
	$			$			$
Net cash provided by (used by) operating activities		(63.6	)		65.7			(129.3	)
Net cash used by investing activities		(530.9	)		(5.1	)		(525.8	)
Net cash provided by (used by) financing activities		545.7			(21.3	)		567.0

Cash flows provided by operating activities decreased $28.4 million to $22.4 million of cash used by operating activities from $6.0 million of cash provided by operating activities for the three months ended June 30, 2011 and 2010 respectively. Cash flows provided by operating activities decreased $129.3 million to $63.6 million of cash used by operating activities from $65.7 million of cash provided by operating activities for the nine months ended June 30, 2011 and 2010 respectively. The decreases in net cash provided by operating activities are mainly due to the payments to Mpex related to the Aeroquin Transaction combined with the transaction and restructuring costs, and financing fees related to the Eurand Acquisition.

Cash flows used by investing activities increased $0.6 million to $2.2 million from $1.6 million for the three months ended June 30, 2011 and 2010 respectively. Cash flows used by investing activities increased $525.8 million to $530.9 million from $5.1 million for the nine months ended June 30, 2011 and 2010 respectively. The increases in cash flows used by investing activities are due to the Eurand Acquisition.

Cash flows provided by financing activities increased $51.5 million to $51.5 million of cash provided in the three months ended June 30, 2011, from $0.0 million of cash provided in the three months ended June 30, 2010. Simultaneous with the execution of the Mpex agreements, Aptalis Holdings received the proceeds of a $55.0 million equity investment from funds managed by Investor Growth Capital Limited. Aptalis Holdings contributed the entire proceeds to the Company’s parent to make a partial repayment on the $133.2 million note receivable from parent company. Cash flows provided by financing activities increased $567.0 million to $545.7 million of cash provided in the nine months ended June 30, 2011, from $21.3 million of cash used in the nine months ended June 30, 2010. On February 11, 2011, the Company entered into an amended and restated credit agreement and related security and other agreements in connection with the Eurand Acquisition as described in the Long-term debt and Credit Facility section above.

Page 56

Significant accounting policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, applied on a consistent basis. Some of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Therefore, a change in the facts and circumstances of an underlying transaction could significantly change the application of our accounting policies to that transaction, which could have an effect on our financial statements. The policies that management believes are critical and require the use of complex judgment in their application are discussed below.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and also affect the recognized amounts of revenues and expenses during the fiscal year. Estimates are used when accounting for amounts recorded in connection with acquisitions, including fair value determinations of assets and liabilities. Other significant estimates and assumptions made by management include those related to the charges to be recorded in conjunction with ceasing of distributing ULTRASE MT and VIOKASE, allowances for accounts receivable, inventories, reserves for product returns, rebates, chargebacks and DSA fees, the classification of intangible assets between finite life and indefinite life, the useful lives of long-lived assets, the expected cash flows used in evaluating long-lived assets, goodwill and investments for impairment, stock based compensation costs, pending legal settlements and the establishment of provisions for income taxes including the realizability of deferred tax assets. The estimates are made using the historical information and various other relevant factors available to management. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any adjustments when necessary. Actual results could differ from those estimates based upon future events, which could include, among other risks, changes in regulations governing the manner in which we sell our products, changes in the healthcare environment, foreign exchange and managed care consumption patterns.

The charges that we have recorded as a result of having ceased distribution of ULTRASE MT and VIOKASE also reflect many subjective estimates that were required to be made by management. These estimates include:

a) The quantity and expiration dates of ULTRASE MT and VIOKASE inventory in the distribution channel;

b) Assumptions regarding market share growth after an eventual re-launch of our ULTRASE MT and VIOKASE; and

c) Other factors.

In future periods, management will monitor and review the assumptions and estimates and will prospectively record changes to provisions reflected in the current fiscal year.

Revenue recognition

Revenue is recognized when the product is delivered to our customers, provided we have not retained any significant risks of ownership or future obligations with respect to the product delivered. Provisions for sales discounts and estimates for chargebacks, managed care and Medicaid rebates, product returns and DSA fees are established as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by us at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such reserves. In certain circumstances, product returns are allowed under our policy and provisions are maintained accordingly. These revenue reductions are generally reflected as an addition to accrued liabilities. Amounts received from customers as prepayments for products to be delivered in the future are reported as deferred revenue.

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


																Reserves
																related
																to the
	Product			Contract			Charge-			DSA			Discounts			unapproved
(in millions of U.S. dollars)	returns			rebates			backs			fees			and other			PEPs event			Total
	$			$			$			$			$			$			$
Balance as of September 30, 2010		13.4			6.1			8.1			1.3			0.2			11.0			40.1
Provisions		12.2			31.7			31.3			6.3			6.8			—			88.3
Provisions related to the unapproved PEPs event		—			—			—			—			—			(3.7	)		(3.7	)
Eurand Acquisition		7.3			7.8			0.9			1.9			0.2			—			18.1
Settlements		(9.5	)		(24.6	)		(27.4	)		(6.3	)		(6.5	)		(4.1	)		(78.4	)

Balance as of June 30, 2011		23.4			21.0			12.9			3.2			0.7			3.2			64.4

Page 57

Product returns

We do not provide any form of price protection to our wholesale customers and we generally permit product returns only if the product is returned in the six months prior to and twelve months following its expiration date. Under our policy, credit for returns is issued to the original purchaser at current wholesale acquisition cost less 10%.

We estimate the proportion of recorded revenue that will result in a return by considering relevant factors, including:

•		past product returns activity;

•		the duration of time taken for products to be returned;

•		the estimated level of inventory in the distribution channel;

•		product recalls and discontinuances;

•		the shelf life of products;

•		the launch of new drugs or new formulations; and

•		the loss of patent protection or new competition.

Our estimate of the level of inventory in the distribution channel is based on inventory data provided by wholesalers, third-party prescription data and, for some product return provisions, estimated retail pharmacy information.

Returns for new products are more difficult to estimate than for established products. For shipments made to support the commercial launch of a new product under standard terms, our estimate of sales return accruals are primarily based on the historical sales returns experience of similar products. Once sufficient historical data on actual returns of the product are available, the returns provision is based on this data and any other relevant factors as noted above.

The accrual estimation process for product returns involves in each case a number of interrelating assumptions, which vary for each combination of product and customer. Accordingly, it would not be meaningful to quantify the sensitivity to change for any individual assumption or uncertainty. However, we do not believe that the effect of uncertainties, as a whole, significantly impacts our financial condition or results of operations.

The accrued liabilities include reserves of $23.4 million as of June 30, 2011, ($13.4 million as of September 30, 2010) for estimated product returns, excluding the additional provision related to the unapproved PEPs event. The increase is due to the integration of legacy Eurand products ($5.7 million).

As of June 30, 2011, the product returns reserve related to the unapproved PEPs event amounted to $3.2 million which represents primarily management’s current estimate of the balance of ULTRASE MT and VIOKASE inventory in the distribution channel. Due to the subjectivity of this estimate, we prepared various sensitivity analyses to ensure our final estimate is within a reasonable range. A change in assumptions that resulted in a 10% change in the quantity of ULTRASE MT and VIOKASE inventory in the distribution channel would have resulted in a change in the return reserve of approximately $0.3 million.

Rebates, chargebacks and other sales deduction

In the U.S., we establish and maintain reserves for amounts payable to managed care organizations, state Medicaid and other government programs for the reimbursement of portions of the retail price of prescriptions filled that are covered by these programs. We also establish and maintain reserves for amounts payable to wholesale distributors for the difference between their regular sale price and the contract price for the products sold to our contract customers.

The amounts are recognized as revenue reductions at the time of sale based on our best estimate of the product’s utilization by these managed care and state Medicaid patients and sales to our contract customers, using historical experience, the timing of payments, the level of reimbursement claims, changes in prices (both normal selling prices and statutory or negotiated prices), changes in prescription demand patterns, and the levels of inventory in the distribution channel.

Amounts payable to managed care organizations and state Medicaid programs are based on statutory or negotiated discounts to the selling price. Medicaid rebates generally increase as a percentage of the selling price over the life of the product. As it can take up to six months for information to reach the Company on actual usage of the Company’s products in managed care and Medicaid programs and on the total discounts to be reimbursed, the Company maintains reserves for amounts payable under these programs relating to sold products. We estimate the level of inventory in the distribution channels based on inventory data provided by wholesalers and third-party prescription data.

Revisions or clarification of guidelines related to state Medicaid and other government program reimbursement practices which are meant to apply to prior periods, or retrospectively, can result in changes to management’s estimates of the rebates reported in prior periods. However, since the prices of the Company’s products are fixed at the time of sale and the quantum of rebates is therefore reasonably determinable at the outset of each transaction; these factors would not impact the recording of revenues in accordance with generally accepted accounting principles.

Page 58

The accrual estimation process for managed care organizations, state Medicaid and other government programs rebates involves in each case a number of interrelating assumptions, which vary for each combination of products and programs. Accordingly, it would not be meaningful to quantify the sensitivity to change for any individual assumption or uncertainty. However, we do not believe that the effect of uncertainties, as a whole, significantly impacts the Company’s financial condition or results of operations.

Accrued liabilities include reserves of $21.0 million and $12.9 million as of June 30, 2011, ($6.1 million and $8.1 million as of September 30, 2010) for estimated contract rebates and chargebacks. The increase is mainly due to the integration of legacy Eurand products ($14.4 million) and additional reserves related to the Affordable Care Act ($2.8 million).

If the levels of chargebacks, fees pursuant to DSAs, managed care, Medicaid and other government rebates, product returns and discounts fluctuate significantly and/or if our estimates do not adequately reserve for these reductions of net product revenues, our reported revenue could be negatively affected.

Intangible assets and goodwill

Intangible assets with a finite life are amortized over their estimated useful lives according to the straight-line method over periods varying from 6 months to 20 years. The straight-line method of amortization is used because it reflects, in the opinion of management, the pattern in which the intangible assets with a finite life are used. In determining the useful life of intangible assets, we consider many factors including the intention of management to support the asset on a long-term basis by maintaining the level of expenditure necessary to support the asset, the use of the asset, the existence and expiration date of a patent, the existence of a generic version of, or competitor to, the product and any legal or regulatory provisions that could limit the use of the asset.

The following table summarizes the changes to the carrying value of the intangible assets and goodwill from September 30, 2010, to June 30, 2011:


	Intangible
	assets			Goodwill
	$			$
Balance as at September 30, 2010		348.0			73.5
Eurand Acquisition		413.9			106.5
Other additions		0.4			—
Depreciation and amortization		(44.2	)		—
Disposal of product line		(10.2	)		—
Foreign exchange translation adjustments		8.8			2.6

Balance as of June 30, 2011		716.7			182.6

Research and development expenses

Research and development expenses are charged to operations in the period they are incurred. The costs of intangibles that are purchased from others for a particular research and development project that have no alternative future use are expensed at the time of acquisition.

Income taxes

Income taxes are calculated using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized to account for the estimated taxes that will result from the recovery or settlement of assets and liabilities recorded at their financial statement carrying amounts. Deferred income tax assets and liabilities are measured based on enacted tax rates and laws at the date of the financial statements for the fiscal years in which the temporary differences are expected to reverse. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to remain unrealized. Adjustments to the deferred income tax asset and liability balances are recognized in net income as they occur.

We conduct business in various countries throughout the world and are subject to tax in numerous jurisdictions. As a result of our business activities, we file a significant number of tax returns that are subject to examination by various federal, state, and local tax authorities. Tax examinations are often complex as tax authorities may disagree with the treatment of items reported by us and this may require several years to resolve.

Changes in accounting standards

See Note 3 to our Condensed Consolidated Financial Statements in Item 1 of Part 1 for a description of recently issued accounting standards, including our expected adoption dates and estimated effects, if any, on our results of operations, financial condition and cash flows.

Page 59

Item 3. Quantitative And Qualitative Disclosure About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, which is incorporated herein by reference. As of June 30, 2011, our exposure to market risk has not changed materially since September 30, 2010.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of June 30, 2011, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. During the period covered by the Quarterly Report on Form 10-Q, no change occurred in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Page 60

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed, in October 2008, Eurand N.V. (“Eurand”) and Cephalon, Inc. (“Cephalon) received Paragraph IV certification letters relating to ANDAs submitted to the FDA by Mylan Pharmaceuticals, Inc. (“Mylan”) and Barr Laboratories, Inc. (“Barr”), each requesting approval to market and sell a generic version of the 15 mg and 30 mg strengths of AMRIX. In November 2008, Eurand received a similar certification letter from Impax Laboratories, Inc. (“Impax”). In May 2009, Eurand received a similar certification letter from Anchen Pharmaceuticals, Inc. (“Anchen”).

Mylan, Impax, and Anchen alleged that U.S. Patent Number 7,387,793 (the “‘793 Patent”), entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants,” issued to Eurand, will not be infringed by the manufacture, use or sale of the product described in the applicable ANDA and reserved the right to challenge the validity and/or enforceability of the ‘793 Patent. Barr alleged that the ‘793 Patent is invalid, unenforceable and/or will not be infringed by its manufacture, use or sale of the product described in its ANDA.

In late November 2008, Eurand filed a lawsuit with Cephalon, in the U.S. District Court in Delaware against Mylan (and its parent) and Barr (and its parent) for infringement of the ‘793 Patent. In January 2009, Eurand filed a lawsuit with Cephalon in the U.S. District Court in Delaware against Impax for infringement of the ‘793 Patent. In July 2009, Eurand filed a lawsuit with Cephalon in the U.S. District Court in Delaware against Anchen (and its parent) for infringement of the ‘793 Patent. Subsequently, in response to additional Paragraph IV certification letters regarding U.S. Patent Number 7,544,372, (the “‘372 Patent”) entitled “Modified Release Dosage Forms of Skeletal Muscle Relaxants” Eurand and Cephalon also filed lawsuits against Mylan, Barr, and Anchen for the infringement of the ‘372 Patent. All cases were consolidated in one action in the U.S. District Court in Delaware, and were tried in a bench trial in September-October, 2010.

The district court ruled that Eurand’s patents were infringed but invalid, and Mylan launched its generic product “at risk” in May. Cephalon has appealed the district court’s invalidity ruling to the Court of Appeals for the Federal Circuit. Stating that Cephalon’s “success on appeal is just as likely as not,” the district court judge later enjoined Mylan from selling its product during the pendency of the appeal and to recall its previously sold product from the marketplace. Recently, the appellate court stayed the injunction requiring Mylan to recall its previously sold product, but maintained the injunction against further sales.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our Form 10-Q for the quarterly period ended December 31, 2010.

Page 61

Item 6. Exhibits.


Exhibit No.		Exhibit

2.1*		Agreement and Plan of Merger entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc., Mpex Pharmaceuticals, Inc. and, solely with respect to Sections 1.1, 1.15, 1.16, 1.17, 1.18, 5.9 and 7.3 and Articles VIII and IX, the Securityholders’ Representative Committee (as defined therein). (1)

2.2*		Option Agreement entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc. (2)

2.3*		Development Agreement entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc. (3)

2.4		License Agreement entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc.

2.5		First Amendment to Option Agreement and Agreement and Plan of Merger entered into as of May 26, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.


*		Confidential treatment requested as to certain portions. Material has been omitted and separately filed with the Securities and Exchange Commission.

(1)		Schedule A to the Agreement and Plan of Merger has been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of this schedule to the SEC upon request.

(2)		Exhibit A to the Option Agreement has been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of the schedules comprising this exhibit to the SEC upon request.

(3)		Schedule 1.78 to the Development Agreement has been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of this schedule to the SEC upon request.

Page 62

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	APTALIS PHARMA INC.
Date: August 12, 2011	BY:	/s/ Steve Gannon
		Steve Gannon
		Senior Vice President, Finance, Chief Financial Officer and Treasurer

Page 63

EXHIBIT INDEX


Exhibit No.		Exhibit

2.1*		Agreement and Plan of Merger entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc., Mpex Pharmaceuticals, Inc. and, solely with respect to Sections 1.1, 1.15, 1.16, 1.17, 1.18, 5.9 and 7.3 and Articles VIII and IX, the Securityholders’ Representative Committee (as defined therein). (1)

2.2*		Option Agreement entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc. (2)

2.3*		Development Agreement entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc. (3)

2.4		License Agreement entered into as of April 11, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc.

2.5		First Amendment to Option Agreement and Agreement and Plan of Merger entered into as of May 26, 2011 by and among Aptalis Holdings Inc., Axcan Lone Star Inc. and Mpex Pharmaceuticals, Inc.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Shareholders’ Equity (Deficiency) and Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.


*		Confidential treatment requested as to certain portions. Material has been omitted and separately filed with the Securities and Exchange Commission.

(1)		Schedule A to the Agreement and Plan of Merger has been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of this schedule to the SEC upon request.

(2)		Exhibit A to the Option Agreement has been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of the schedules comprising this exhibit to the SEC upon request.

(3)		Schedule 1.78 to the Development Agreement has been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of this schedule to the SEC upon request.

Page 64

Aptalis Pharma Inc 10-Q