UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended September 30, 2011

¨	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 organization)

(IRS Employer

Identification Number)

22 Inverness Center Parkway

Suite 310

Birmingham, AL 35242

(Address of Principal Executive Offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes x No ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

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

As of September 30, 2011, the last business day of the registrant’s most recently completed second fiscal year, there was no established public trading market for any of the common stock of the registrant and therefore, an aggregate market value of common stock of the registrant based on sales or bid and asked prices is not determinable. As of December 19, 2011, there were 100 shares of common stock of the registrant outstanding, all of which were owned by Aptalis MidCo Inc.

Documents incorporated by reference: None.

TABLE OF CONTENTS


	Page
Forward-Looking Statements
Part I
Item 1. Business		3
Item 1a. Risk Factors		26
Item 1b. Unresolved Staff Comments		60
Item 2. Properties		60
Item 3. Legal Proceedings		61
Item 4. (Removed And Reserved)		62
Part II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities		63
Item 6. Selected Financial Data		63
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations		68
Item 8. Financial Statements And Supplementary Data		105
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure		152
Item 9a. Controls And Procedures		152
Item 9b. Other Information		153
Part III
Item 10. Directors, Executive Officers And Corporate Governance		154
Item 11. Executive Compensation		159
Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters		180
Item 13. Certain Relationships And Related Transactions, And Director Independence		182
Item 14. Principal Accounting Fees And Services		183
Part IV
Item 15. Exhibits And Financial Statement Schedules		185
Signatures		186

FORWARD-LOOKING STATEMENTS

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

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

In addition to the risks and uncertainties included or incorporated by reference in this Annual Report on Form 10-K, other factors that could cause our actual results or actual outcomes to differ materially from those expressed in or implied by such forward-looking statements include, but are not limited to:

•

our ability to market, commercialize and achieve market acceptance for any of the products that we are developing, commercializing or may develop or commercialize in the future, including the growth, establishment, maintenance or acquisition of specialty sales, marketing and distribution capabilities to commercialize products;

•

our ability to integrate acquired companies and successfully realize expected synergies, including from the acquisition of Eurand, without adversely affecting our business or results of operations;

•

the expected timing, costs, progress or success of any of our preclinical and clinical development programs, regulatory approvals, or commercialization efforts;

•

our ability to continue to successfully manufacture and commercialize our existing products or obtain third-party manufactured existing products;

•

the potential advantages of our products or product candidates over other existing or potential products;

•

our ability to enter into any new co-development, supply, or licensing agreements or to effectively maintain any existing co-development, supply, or licensing agreements with respect to our product candidates or products;

•

the expense, time and uncertainty involved in the development of our product candidates, some or all of which may never reach the regulatory approval stage;

•

our reliance on collaboration partners and licensees, to obtain and maintain regulatory approval for certain of our products and product candidates and to manufacture and commercialize such products;

•

our ability to compete in the pharmaceutical industry against other branded or generic products, including in the pharmaceutical technologies market segment;

•

delays in obtaining, or a failure to obtain and maintain, regulatory approval for our product candidates, including, but not limited to, ULTRASE MT, VIOKASE and AEROQUIN, in the United States and PYLERA and ZENPEP in the European Union;

•

our ability to successfully regain market share for ULTRASE MT OR VIOKASE in the United States;

•

our ability to obtain reimbursement for the products we commercialize;

•

our ability to protect our intellectual property and know-how and operate our business without infringing the intellectual property rights or regulatory exclusivity of others;

•

a loss of rights to develop and commercialize our products under our license and sublicense agreements;

•

a loss of any of our key scientists or management personnel;

•

our estimates of market sizes and anticipated uses of our product candidates;

•

our estimates of future performance; and

•

and our estimates regarding anticipated future revenue, expenses, operating losses, capital requirements and our needs for additional financing.

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

The names APTALIS®, APTALIS PHARMA®, EURAND®, ADVATAB®, BIORISE™, CANASA®, CARAFATE®, DIFFUCAPS®, DIFFUTAB®, DELURSAN®, PHOSPHO-SODA®, FLUTTER®, LACTEOL®, MICROCAPS®, ORBEXA®, PANZYTRAT®, PHOTOBARR®, PHOTOFRIN®, PHOTOSAN®, PYLERA®, SALOFALK®, SULCRATE®, ULTRASE®, URSO®, URSO 250®, URSO DS®, URSO FORTE®, VIOKASE®, ZENPEP® and ZPOINTS® are trademarks or registered trademarks owned or used under license by the Company and/or its affiliated companies.

All other trademarks or service marks appearing in this Annual Report on Form 10-K, including ACTIGALL™, ADVIL®, ADVATAB®, AMRIX®, APRISO®, ASACOL®, CIBALGINEDUE®, CITRAFLEET®, COLAZAL®, CREON®, DICLOMAX RETARD, DIPENTUM®, eFLOW®, HELIDAC®, IBUPROPHEN®, INNOPRAN XL®, KREON®, LAMICTAL® ODT, LIALDA®, METADATE CD®, MEZAVANT®, NITOROLR®, PANCREAZE™, PANCRELIPASE™, PENTASA®, PREVPAC®, ROWASA®, RULIDE®, SLOZEN®, SOLPURA®, TRIO®, TYLENOL®, UNISOM®, UNISOM SLEEPMELTS®, and URSOLVAN® , that are not identified as marks owned by us are the property of their respective owners.

PART I

ITEM 1.

BUSINESS

APTALIS PHARMA INC., a Delaware corporation incorporated on November 28, 2007 as Axcan Intermediate Holdings Inc., is a leading specialty pharmaceutical company concentrating in the field of gastroenterology and cystic fibrosis, with operations in the United States (U.S.), Canada and the European Union (EU).

Our website address is www.aptalispharma.com. Information on our website is not incorporated herein by reference. Our reports filed with the Securities and Exchange Commission, or SEC, are available free of charge on the SEC’s website, http://www.sec.gov, or at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports may also be accessed through, the “Investor Relations” section of the Company’s website as soon as reasonably practicable after we file or furnish such material with or to the SEC. In addition, copies of these reports will be made available free of charge, upon written request to Jim Porter, Senior Director, Communications, Aptalis Pharma, 100 Somerset Corporate Boulevard, Bridgewater, NJ 08807, USA. APTALIS PHARMA INC.’s corporate office is located at 22 Inverness Center Parkway, Suite 310, Birmingham, AL 35242.

Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we”, “our”, “us”, the “Company”, “API”, “Aptalis” and “Axcan” mean APTALIS PHARMA INC., and all of its subsidiaries.

Overview

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. We have manufacturing and commercial operations in the United States, the European Union and Canada, and our products include ZENPEP®, CANASA®, CARAFATE®, PYLERA®, PANZYTRAT®, 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. We 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.

We also formulate and clinically develop enhanced pharmaceutical and biopharmaceutical products for itself and others using its proprietary pharmaceutical technology (“PT”) 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 capabilities; and 5) expanding internationally.

INDUSTRY AND COMPANY

Industry Overview

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

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

According to a report entitled “Opportunities & Challenges in Digestive Diseases Research” (U.S. Department of Health and Human Services, National Institutes of Health —March 2009), at least 60 to 70 million Americans are affected each year by digestive diseases, placing a burden on society that exceeds $100 billion in direct medical costs in the U.S. Annually, in the U.S., about 14 million hospitalizations —10% of the total— and 15% of all in-patient hospital procedures are attributed to treatment of digestive diseases. In addition, in the U.S., 105 million visits to doctors’ offices occur each year for digestive diseases, frequently in response to symptoms such as abdominal pain, diarrhea, vomiting or nausea. Prescription drugs for the treatment of certain digestive diseases such as gastroesophageal reflux disease (GERD) rank among the most commonly used pharmaceutical drugs in the U.S. Even more worrying, digestive diseases are associated with significant mortality, morbidity and loss of quality of life. Digestive diseases, including cancer, are named as a primary cause of approximately 236,000 deaths in the U.S. each year. Moreover, digestive disorders, even conditions that are not immediately life-threatening, can severely affect patients’ quality of life and cause significant disability even for conditions that are not immediately life-threatening. Debilitating symptoms—such as chronic pain, discomfort, bloating, diarrhea, constipation, and incontinence, not to mention social stigma or embarrassment associated with many GI disorders can affect patients’ ability to work or engage in daily activities. Collectively, these diseases account for over $44 billion in indirect costs associated with disability and mortality each year in the U.S.

Exocrine Pancreatic Insufficiency (“EPI”) is caused by a deficiency of digestive enzymes normally produced by the pancreas and secreted into the digestive track. Pancreatic secretions primarily consist of three enzymes — lipases for the digestion of fat, proteases for the digestion of proteins and amylases for the digestion of sugars. A normally functioning human pancreas secretes eight enzymes that are required for the effective and efficient digestion and absorption of food. Scientific evidence indicates that, in addition to these eight key digestive enzymes, several coenzymes and cofactors are also required for absorption of essential nutrients. Porcine-derived pancreatic enzyme products (“PEPs”) are comparable in composition to human pancreatic secretions and apparently contain the key enzymes, coenzymes and cofactors necessary for proper digestion. If the pancreas is not able to produce and secrete sufficient amounts of these enzymes, food cannot be digested and the appropriate levels of nutrients cannot be absorbed into the bloodstream. Maldigestion and malabsorption associated with pancreatic insufficiency cause malnutrition, which can lead to impaired growth, impaired immune response and shortened life expectancy.

EPI is a condition resulting from various diseases, such as cystic fibrosis, chronic pancreatitis, pancreatic cancer, cytomegalovirus infection and HIV/AIDS. In addition, EPI can result from surgical procedures, including open gastric bypass, extensive small bowel resection and pancreatectomy. The primary users of PEPs are patients with pancreatic insufficiency secondary to cystic fibrosis and chronic pancreatitis.

Cystic fibrosis is a life-threatening genetic disease that, because of a defective gene, causes the body to produce a faulty protein that leads to abnormally thick, sticky mucus that clogs the lungs and obstructs ducts in the pancreas. When cystic fibrosis affects the pancreas, as it does in the majority of cystic fibrosis patients, the body does not absorb sufficient nutrients to grow and thrive. Cystic fibrosis is one of the most prevalent genetic diseases among Caucasians in the U.S. The disease affects an estimated 30,000 adults and children in the U.S. and some 100,000 patients worldwide, an estimated 85% to 90% of whom suffer from pancreatic insufficiency.

Chronic pancreatitis (CP) is a slow, clinically silent disease that gradually destroys the pancreas and is most often caused by excessive alcohol consumption, but may also result from other conditions such as hyperlipidemia, hyperparathyroidism, injuries or obstructions. Because CP is not necessarily characterized by inflammation or pain, it often goes undiagnosed and therefore its exact prevalence is unknown. Based on survey data reported in Medscape General Medicine, we believe chronic pancreatitis results in more than 500,000 physician visits per year in the U.S. See “Risk Factors — Risks Related to ZENPEP^® — Even though ZENPEP has received regulatory approval for marketing in the U.S., and we have met significant milestones necessary to achieve marketing authorization in several venues, we may not succeed in obtaining regulatory approval for ZENPEP from other regulatory agencies. Without regulatory approval from other regulatory agencies, we will be unable to commercialize ZENPEP to its full potential and our growth prospects will be materially impaired.”

Acquisition of Eurand

On February 11, 2011, Axcan Holdings Inc., which subsequently changed its name to Aptalis Holdings Inc. (“Aptalis Holdings”), our indirect parent, and Axcan Pharma Holding B.V., an indirect subsidiary of ours, pursuant to the 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(for a more complete description of the Transactions, see “—Transactions”). As a result of the acquisition, Eurand has become an indirect subsidiary.

Eurand utilized its proprietary pharmaceutical technologies to develop novel products that it believed had advantages over existing products or addressed unmet medical needs. Through its collaboration arrangements, Eurand has successfully applied its technologies to drug products in a diverse range of therapeutic areas, including cardiovascular, GI, pain, nutrition and respiratory. Eurand had six products approved by the FDA since 2001. Its technology platforms include bioavailability enhancement of poorly soluble drugs, custom release profiles and taste-masking/orally disintegrating tablet (ODT) formulations. Eurand was simultaneously developing and commercializing its own portfolio of therapeutic products to address conditions associated with CF and GI disorders.

Using its own sales and marketing team, Eurand commercialized a portfolio of products for CF and GI patients in the United States. On August 27, 2009, the FDA approved Eurand’s lead product EUR-1008, or ZENPEP, for sale in the United States for the treatment of individuals suffering from EPI due to CF or other conditions. Eurand launched ZENPEP (pancrelipase) Delayed-Release Capsules in the United States in the fourth quarter of 2009 and expanded and supplemented its sales force immediately prior to launch to address both the GI and CF communities.

Eurand also had manufacturing and research facilities in the United States and Italy, and a manufacturing facility in France. Eurand manufactured and supplies over 40 different products for sale in the world’s largest pharmaceutical markets. Eurand traditionally generated revenues through three primary sources: the manufacture and supply of products, development and sales of out-licensed products, and fees related to Eurand’s formulation and product development work.

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.

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, 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 our 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.

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 Axcan and Eurand, were used to repay the outstanding term loan portion amounting to $125.7 million of the our prior 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 our existing 9.25% senior secured notes due 2015.

Acquisition of Mpex

As a result of the Aeroquin Transaction, we made an initial non-contingent payment of $12.0 million on April 21, 2011. Additional consideration in relation with the Aeroquin Transaction consists of (i) remaining time-based, non-contingent payments amounting to $33.0 million and an additional $17.5 million of time-based payments will be paid in a number of installments, of which the final installment is due on April 1, 2014, plus, (ii) contingent payments of up to $195.0 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 further development of Aeroquin™ is being conducted pursuant to the terms of the Development Agreement dated April 11, 2011 among Aptalis Holdings, Merger Sub, and Mpex. Since the completion of the divestiture of assets and liabilities unrelated to Aeroquin™ (the “Divestiture”) to Rempex, Rempex has assumed all of Mpex’s obligations under the Development Agreement. Under the Development Agreement, Rempex is paid for the actual development costs of Aeroquin™ and has primary responsibility for conducting day-to-day development activities. We are required to pay in advance development costs estimated for the next three months based on a rolling three months forecast. Aptalis Holdings and Mpex 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 from November 15, 2010, to March 31, 2011, 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, were made by or on behalf of Merger Sub prior to the closing of the Aeuroquin Transaction, and are being made on behalf of Mpex since the closing of the Aeroquin Transaction.

During the year ended September 30, 2011, we expensed $65.5 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 and Merger agreements of $44.8 million (with a corresponding liability) and the payment for certain pre-agreement incurred development expenses of $8.7 million. As of September 30, 2011, $7.8 million, which reflects forecasted development costs for the next three months has been 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 our $133.1 million note receivable from our parent company.

Competitive Strengths

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

Diversified Portfolio of Branded Products. We currently market branded products in various product categories that treat a broad range of GI and CF diseases and disorders. During fiscal year 2011, two product lines, CANASA and CARAFATE, contributed 42% of our revenues, but no single product line accounted for more than 23% of our revenues. Our portfolio of products is also geographically diverse, with approximately 30% of our revenues being generated from sales outside the U.S. in fiscal year 2011.

Leading Competitive Positions in Attractive Gastroenterology Markets. We have a strong track record of leveraging a product line’s unique market position to drive performance. ZENPEP, CANASA and CARAFATE are our main products in the U.S.; ZENPEP is used to treat pancreatic insufficiency and is the second leading pancreatic enzyme replacement therapy (PERT) in the US. It is 1 of only 3 FDA approved PEPS in the US. CANASA is used to treat ulcerative proctitis and colitis and accounted for 65.0% of the U.S. market for rectally-administered mesalamine products in terms of sales in fiscal year 2011; CARAFATE is the only branded suspension-form sucralfate product in its market in the U.S. It accounted for 30.9% of the U.S. market sales for sucralfate products in fiscal year 2011. We believe that certain of our products are often the first line of treatment prescribed by physicians for these diseases and disorders. Additionally, CF and many of the GI diseases and disorders that our products are used to treat are chronic, and as a result, we believe that physicians tend to be reluctant to change a patient’s treatment program once the patient has been treated with and becomes accustomed to a particular product. As a result, we believe that our products experience a high degree of patient loyalty, allowing us to maintain leading competitive positions in the markets in which we participate.

Non-Patent Hurdles to Entry. Despite having limited long-term patent protection, we believe that our core product lines benefit from a variety of regulatory, clinical, sourcing and manufacturing hurdles to entry, including, depending upon the product line and the product, the requirement to conduct clinical trials, availability of various forms of regulatory exclusivity and the know-how required to manufacture certain dosage forms. We believe that these hurdles make it more difficult for generic competitors to introduce and market generic versions of certain of our products, including products from our ZENPEP, CANASA, CARAFATE, ULTRASE MT and VIOKASE product lines. See “Item 1A. Risk Factors—Risks Related to Our Business.”

Focused Sales Force with Market-Leading Performance. By focusing on establishing strong relationships with gastroenterologists, hepatologists and cystic fibrosis centers, we are able to effectively penetrate the gastroenterology market. As of September 30, 2011, our sales force numbers 185 representatives, located in the U.S., Canada and in the EU (including France, Germany and the UK).

Consistently High Free Cash Flow Generation. Historically, our business is characterized by strong free cash flows due to our robust operating history and minimal capital intensity. In addition, our capital expenditure requirements have historically been minimal, providing for strong free-cash-flow conversion. Since our acquisition by TPG and existing co-investors in 2008, we have generated cumulative free cash flow, defined as Adjusted EBITDA less capital expenditures, of approximately $639 million. We expect the sales growth of higher margin products such as ZENPEP and the realization of meaningful synergies from the combination with Eurand to enhance our free cash flows. For information regarding the risks we and our business face, please see “Item 1A. Risk Factors.”

Proven Track Record in Acquiring Products and Building Market Share. Our business development effort is focused on expanding our product portfolio by capitalizing on our core knowledge of the GI and CF markets. Our experienced business development team uses a rigorous and disciplined approach to identify and acquire products that can be grown by our sales force using the strong relationships we have with GI practitioners and CF centers. We have a strong record of acquiring and developing products, including ZENPEP and AEROQUIN this year, and growing their market share, as evidenced by our leading position in a number of the markets in which we participate. We plan to leverage this expertise to help grow ZENPEP in the U.S., launch ZENPEP and PYLERA in European markets, complete the development and launch AEROQUIN in both the U.S. and European markets.

Strong Research and Development Capabilities. We have strong R&D capabilities with a track record of developing and gaining regulatory marketing approvals. With the acquisition of Eurand, we added a broad portfolio of proprietary pharmaceutical technologies to our R&D capabilities as a result of the Eurand acquisition, including three primary technology platforms with eight distinct technologies. All of these primary technology platforms have resulted in the development and commercialization of marketed products. We are using these technologies to develop and expand its own internal pipeline of product candidates and to secure additional co-development agreements with third party pharmaceutical and biopharmaceutical companies. These technologies can be used to improve or develop enhanced formulations that have improved efficacy and safety profiles or that are more convenient for patients, leading to improved patient compliance. The three primary technology platforms consist of:

•

Custom release technologies to reduce daily dosing requirements and time the release of drugs in the body either to increase efficacy or to reduce side effects;

•

Tastemasking and Orally Disintegrating Tablets (“ODTs”) technologies to increase patient compliance through more convenient dosage forms such as orally disintegrating tablets and taste-masked drugs; and

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Bioavailability enhancement technology to improve drug absorption, resulting in dose reduction and improved onset of action and improved bioavailability.

Experienced and Dedicated Management Team. We have a highly experienced management team at both the corporate and operational levels. Our team is led by President and Chief Executive Officer Frank Verwiel, M.D., formerly of Merck & Co., Inc., who has over 20 years’ experience in the health-care industry. Dr. Verwiel joined Aptalis Pharma as President and CEO in July 2005. David Mims, formerly with Scandipharm, Inc., is our President, U.S. Specialty Pharma. He joined Aptalis Pharma in February 2000, when we acquired Scandipharm, Inc. Mr. Mims has over 23 years of experience in the pharmaceutical industry. Jean Louis Anspach, formerly with Solvay (now Abbott), is our President, International Specialty Pharmaceuticals. He joined Aptalis Pharma in 2008, originally with Eurand. Mr. Anspach has more than 25 years of experience in the pharmaceutical industry. John Fraher is President, Pharmaceutical Technologies. He joined Aptalis Pharma in 1995, originally with Eurand, formerly with American Home Products and Wyeth. Mr. Fraher has more than 22 years in the health-care industry. Steve Gannon, our Senior Vice President and Chief Financial Officer, joined Aptalis Pharma in that capacity in April 2006, having previously served as CFO of CryoCath Technologies Inc. and held various senior financial positions at AstraZeneca and Mallinckrodt over the past 22 years. Ruth Thieroff-Ekerdt, M.D., formerly with Bayer, joined Aptalis Pharma in 2008, originally with Eurand, as Chief Medical Officer. Dr. Thieroff-Ekerdt has more than 25 years of experience in the health-care industry. Robert Becker, Ph.D. joined Aptalis Pharma in 2009, originally with Eurand, as Chief Scientific Officer, having held various positions at Boehringer-Ingelheim and Eli Lilly. Dr. Becker has more than 20 years of experience in the health-care industry. Theresa Stevens is Senior Vice President and Chief Corporate Development Officer, and joined Aptalis Pharma in June 2009, having previously served in executive positions within the industry, most recently with Novartis Pharmaceuticals as Executive Committee member and Vice President, Business Development and Licensing. Ms. Stevens has more than 25 years of experience in the health-care industry. Richard DeVleeschouwer is our Senior Vice President, Chief Human Resources Officer, joining the Company in March 2010, having served a number of senior human resources roles at Schering-Plough, Pharmacia and Monsanto. Mr. DeVleeschouwer has more than 23 years of experience as a Human Resources professional and more than 14 years of experience in the health-care industry.

Business Strategy

Our objective is to be a leader in the development, manufacturing, licensing and commercialization of innovative specialty pharmaceutical and biopharmaceutical products. The primary components of our strategy include the following:

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

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

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

successfully grown a number of product lines that we acquired or developed to become leaders in their markets. The acquisition of Eurand and its pharmaceutical technologies platform has created additional growth opportunities to in-license or acquire complementary products.

Pursue Growth Opportunities Through Developing Pipeline. We continue to invest in R&D to develop the next generation of products to address unmet medical needs in the gastroenterology and cystic fibrosis markets. Our internal development efforts focus primarily on clinical development, which includes life-cycle management and medical market access initiatives. Our objective is to contribute in establishing a valid value proposition for all our products across their life-cycle. With the addition of the pharmaceutical technologies capabilities, we expect to continue to identify product development opportunities since we believe a large number of marketed and development-stage pharmaceuticals have less than optimal safety and efficacy profiles. Through the application of formulation technologies and development and manufacturing expertise, we believe that ZENPEP has overcome a number of the challenges facing current other PEPS and that it has satisfied the requirements established by the FDA for such products.

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

Products

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

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

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

With the exception of ZENPEP and PYLERA, most of our products that we market do not benefit from any patent protection. We believe, however, that certain of our products benefit from other hurdles to the entry of competitors or generics. Our products nevertheless remain subject to brand competition and generic product entry. Competition from generic products which are typically sold at a significant discount from branded products could significantly and negatively affect our revenues. As of September 30, 2011, our main product lines are ZENPEP, CANASA, CARAFATE, and PYLERA in the U.S., SALOFALK, URSO and URSO DS in Canada, and DELURSAN, PANZYTRAT and LACTEOL in the EU.

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

Pancreatic Enzyme Products

ZENPEP and AG

ZENPEP is a proprietary porcine-derived PEP developed under the 2004 FDA guidance on pancreatic enzyme replacement therapies. It has been approved for the treatment of EPI due to CF or other conditions. We are marketing ZENPEP to the approximately 220 CF centers (including 115 Cystic Fibrosis Foundation (“CFF”), accredited centers, satellite offices for the accredited centers and some centers which are not accredited by the CFF) across the United States and to the GI market segment. ZENPEP is one of three branded PEPS that have been approved by the FDA and which are marketed in the United States. ZENPEP competes directly with the other two branded products, CREON (Abbott Laboratories) and PANCREAZE (Johnson & Johnson).

Clinical trials of ZENPEP demonstrated safety and efficacy in both adults and children. In addition to receiving five years of regulatory exclusivity as a new chemical entity (“NCE”), we have filed a number of patent applications that include claims intended to provide market exclusivity for certain commercial aspects of ZENPEP. On February 16, 2010, we were issued U.S. Patent No. 7,658,918, titled “STABLE DIGESTIVE ENZYME COMPOSITIONS,” which covers ZENPEP and is not scheduled to expire until February 20, 2028.

In the fourth quarter 2009, PANCRELIPASE (pancrelipase) Delayed-Release Capsules, was introduced as an authorized generic, or AG, to the 5000 unit dose of ZENPEP. The AG, which is marketed by X-GEN Pharmaceuticals, Inc. (“X-GEN”), complements our direct selling efforts in the CF and CP segments of the PEP market. Both the 5000 unit dose of ZENPEP and the AG are available to physicians, patients and pharmacies.

According to IMS data, the ZENPEP franchise had successfully captured approximately 23% of the U.S. pancrelipase unit market share as of September 30, 2011. For the year ending September 30, 2011, we reported revenues of $62.7 million for the ZENPEP franchise.

ULTRASE

In the U.S., we were marketing as ULTRASE pancreatic enzyme microsphere (ULTRASE MS) and mini-tablet (ULTRASE MT) products, indicated for patients with partial or complete exocrine pancreatic insufficiency caused by CF, CP, and other diseases.

We ceased distributing our ULTRASE product lines in the U.S. effective April 28, 2010. This action was taken because we did not receive FDA approval for ULTRASE MT by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products to remain on the market. We also interrupted shipments of ULTRASE MT from the U.S. to Canada and export markets to allow time for the FDA to review our request confirming that applicable export requirements were being met. As of September 30, 2011, we have not resumed distribution of our ULTRASE MT product.

The NDA for ULTRASE MT was filed in 2007 and FDA Complete Responses were received on the following dates: July 1, 2008 (approvable letter), September 9, 2009, May 5, 2010 and the latest on November 28, 2010. The last letter requires that unresolved deficiencies raised with respect to the manufacturing and control processes (including those identified in an FDA inspection) at the manufacturer of the active ingredient for ULTRASE MT be addressed before approval can be granted. On September 1, 2011, we filed our response to the FDA’s Complete Response letter. We have a PDUFA date of March 1, 2012. We are in ongoing discussions with the FDA regarding ULTRASE MT and continue to work with the manufacturer of the active pharmaceutical ingredient to address any issues identified by the FDA as soon as possible. However, no additional clinical studies are required.

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

VIOKASE

In the U.S., we were marketing as VIOKASE uncoated immediate release pancreatic enzyme products for the treatment of exocrine pancreatic insufficiency. We ceased distributing VIOKASE in the U.S. effective April 28, 2010. This action was taken because we did not receive FDA approval for VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products to remain on the market.

VIOKASE, although not actively promoted, is still sold in Canada. Our Canadian sales of VIOKASE are immaterial.

The VIOKASE NDA rolling submission was completed in the first quarter of fiscal 2010 and a FDA Complete Responses was received on November 28, 2010. The letter required that unresolved deficiencies raised with respect to the manufacturing and control processes (including those identified in a FDA inspection) at the manufacturer of the active ingredient for VIOKASE be addressed before approval can be granted. On September 1, 2011we filed our response to the FDA’s Complete Response letter. We have a PDUFA date of March 1, 2012. We are in ongoing discussions with the FDA regarding VIOKASE and continue to work with the manufacturer of the active pharmaceutical ingredient to address any issues identified by the FDA, as soon as possible. However, no additional clinical studies are required.

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

PANZYTRAT

PANZYTRAT consists of enteric-coated microtablets for use in the treatment of exocrine pancreatic insufficiency and pancreatic enzyme deficiency. PANZYTRAT is marketed in several countries, mainly Germany, the Netherlands and Switzerland, as well as a several Eastern European markets. We reported net sales of $14.9 million, $14.8 million and $14.2 million for PANZYTRAT in fiscal years 2011, 2010 and 2009, respectively. In local currency, net sales of PANZYTRAT, were €10.6 million, €10.9 million and €10.6 million in fiscal years 2011, 2010 and 2009, respectively.

The main competitor for PANZYTRAT in Germany and the Netherlands is KREON^® (Abbott Laboratories).

PANZYTRAT does not benefit from any patent protection, nor any other form of regulatory exclusivity in the main countries in which it is marketed, namely Germany and the Netherlands. On July 7, 2010, we entered into a distribution agreement with PharmaSwiss S.A., for the distribution of PANZYTRAT, in various Central and East European countries.

Mesalamine

CANASA

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

We reported net sales of $94.0 million, $80.9 million and $84.7 million for CANASA in fiscal years 2011, 2010 and 2009, respectively. The increase in sales in fiscal year 2011 as compared to fiscal year 2010 is due to the combined effect of price increases and sales volume, which in turn was driven mainly by prescription growth. The decline in sales in fiscal year 2010 as compared to fiscal year 2009 resulted from temporary changes in wholesaler shipping patterns experienced in fiscal year 2010, as well as increased promotional activity by Shire US Inc., following the launch of LIALDA^®, a new oral mesalamine products in the U.S. market that was partially offset by price increases announced during fiscal year 2009.

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

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

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

In a July 2010 posting on clinicaltrial.gov that was updated in November 2010, Sandoz Inc. disclosed that it had initiated in June 2010 a clinical trial to establish therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA rectal suppositories, for the treatment of mild to moderate ulcerative proctitis. The disclosure states that the trial is being conducted in India and has an estimated duration of 18 months. No further data or information has been found about these studies. Cadila Healthcare Inc. also recently disclosed that it is conducting a similar clinical study in India to establish therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA.

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

SALOFALK

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

We reported net sales of $23.7 million, $19.8 million and $18.9 million for SALOFALK in fiscal years 2011, 2010 and 2009, respectively. The increase in sales in fiscal year 2011 as compared to fiscal year 2010 is due to the combined effect of price increases and the positive impact of currency fluctuations compared to the preceding fiscal year, as the value of the Canadian dollar appreciated against the U.S. dollar by approximately 6.5%.

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

SALOFALK has no patent protection, or regulatory exclusivity.

Sucralfate

CARAFATE and SULCRATE

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

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

We reported combined net sales of $108.6million, $86.5 million and $68.5 million for CARAFATE and SULCRATE in fiscal years 2011, 2010 and 2009, respectively. The increase in sales from fiscal year 2009 to fiscal year 2010 as well as from fiscal year 2010 to fiscal year 2011 mainly resulted from increases in prescription volumes and from price increases.

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

There are no generic versions of CARAFATE and SULCRATE oral suspension that are commercially available in the U.S. or Canada. However, we are aware that a third party has filed an Abbreviated New Drug Application, or ANDA, for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension, the active pharmaceutical ingredient in our CARAFATE product. If a generic version of CARAFATE was to be launched, it could have a significant negative impact on sales of CARAFATE oral suspension in the U.S.

Ursodiol

URSO 250 and URSO FORTE (U.S.)

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

We reported net sales of $14.9 million, $18.7 million and $50.0 million for URSO 250/ URSO FORTE in the U.S. in fiscal years 2011, 2010 and 2009, respectively. The decrease in sales in fiscal years 2011 and 2010 as compared to fiscal year 2009 resulted from the entry of generic versions of URSO 250 and URSO FORTE on the U.S. market, following approval by the Office of Generic Drugs on May 13, 2009. This decrease was partially offset by price increases announced on our URSO 250 and URSO FORTE branded products, and by sales generated from the launch of an authorized generic version of our ursodiol products. On July 2, 2009, we announced that we had entered into an agreement with Prasco Laboratories under which Prasco markets and sells an authorized generic of URSO 250 and URSO FORTE in the U.S. Despite measures taken to defend our URSO franchise in this market, we expect future sales to continue to decline.

URSO and URSO DS (Canada)

In Canada, we market URSO, a 250-mg ursodiol tablet and URSO DS, a 500-mg ursodiol tablet for the treatment of cholestatic liver diseases, which include PBC and primary sclerosing cholangitis (PSC). URSO and URSO DS were covered by a patent relating to the use of ursodiol for the treatment of PBC in Canada, which was to expire in 2011. However, in 2006, the generic product manufacturer, Pharmascience Inc., successfully challenged the validity of this patent under Health Canada’s Notice of Compliance Regulation procedures. In May 2006, generic versions of URSO and URSO DS received approval for sale in Canada and were launched in fiscal year 2007. The launch of these generic products has had a negative impact on sales of URSO and URSO DS since fiscal year 2007.

We reported net sales of $2.7 million, $2.5 million and $3.0 million for URSO/URSO DS in Canada for fiscal years 2011, 2010 and 2009, respectively.

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

DELURSAN

DELURSAN, is a 250mg ursodiol tablet marketed in France and indicated for the treatment of cholestatic liver diseases, including PBC, PSC and liver disorders related to cystic fibrosis. On November 28, 2011, we received approval for the marketing authorization for Delursan 500mg.

We reported net sales of $26.2 million, $23.4 million and $20.8 million for DELURSAN, in fiscal years 2011, 2010 and 2009, respectively. In local currency, net sales of DELURSAN, were €18.7 million, €17.3 million and €15.4 million in fiscal years 2011, 2010 and 2009, respectively.

DELURSAN mainly competes with URSOLVAN^® (Sanofi-Aventis S.A.). However, we expect another branded competitor to be launched in France in 2012. A request for marketing approval was submitted by Mayoli Spindler for CHOLURSO^® 250mg and 500mg, based on well-established use. Additionally, on December 1, we learned that a generic UDCA (ursodeoxycholic acid) 250mg was being assessed by Afssaps (Agence francaise de securite sanitaire des produits de santé).

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

Helicobacter pylori eradication

PYLERA

PYLERA is a three-in-one capsule therapy marketed for the eradication of Helicobacter pylori, a bacterium recognized as being the main cause of gastric and duodenal ulcers.

We reported net sales in the United States of $13.0 million, $10.5 million and $8.2 million for PYLERA in fiscal years 2011, 2010 and 2009, respectively.

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

In 2011, Pylera received regulatory approvals in the UK, Ireland, Germany, France and Belgium; approvals in other European countries (Poland, Portugal, Spain and Italy) are expected in the next few months. We expect to launch the product Europe in 2012, either ourselves in countries like France and Germany, or via partnerships.

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

Other Products

LACTEOL

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

We reported net sales of $16.0 million, $15.9 million and $23.6 million for LACTEOL in fiscal years 2011, 2010 and 2009, respectively including $10.1 million, $9.5 million and $16.5 million outside of France. The decline in sales fiscal year 2010 as compared to fiscal year 2009 is a result of LACTEOL no longer being reimbursed in Germany, since February 2010.

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

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

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

On April 22, 2010, we entered into an agreement with Norgine Pharmaceuticals for the distribution and promotion of our LACTEOL product line in Australia. On August 10, 2011, we entered into an agreement with G. Pohl Boskamp GmbH for the distribution and co-promotion of our LACTEOL product line in Germany.

PHOTOFRIN/PHOTOBARR

PHOTOFRIN/PHOTOBARR is a photo-sensitizer approved for use in photodynamic therapy, an innovative medical therapy based on the use of light-activated drugs. PHOTOFRIN/PHOTOBARR has received regulatory approval in a number of countries, including approval for the treatment of high-grade dysplasia associated with Barrett’s esophagus, obstructing esophageal cancer and non-small-cell lung cancer, as well as certain types of gastric cancers and cervical dysplasia.

On March 28, 2011, we entered into a definitive agreement with Pinnacle Biologics, Inc., who acquired all global assets and rights related to PHOTOFRIN/PHOTOBARR, including all marketing authorizations, 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, we will be paid royalties on annual net sales of PHOTOFRIN/PHOTOBARR.

During the fiscal year ended September 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 us will be recorded as a gain in the period in which they are received. We reported net sales of $2.7 million, $3.9 million and $4.9 million for PHOTOFRIN/PHOTOBARR in fiscal years 2011, 2010 and 2009, respectively. The decline in sales resulted from the continued loss of supply of the balloon centering catheter as it was discontinued. That balloon centering catheter is required for the treatment of high-grade dysplasia associated with Barrett’s esophagus.

FLEET PHOSPHO-SODA and CITRAFLEET

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

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

We started promoting FLEET PHOSPHO-SODA on January 1, 2010 and CITRAFLEET on September 15, 2010. We reported net sales of $4.7 million and $2.2 million for FLEET PHOSPHO-SODA and CITRAFLEET in fiscal year 2011 and 2010, respectively.

Products in Development

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

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

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

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

Our pipeline products are in various stages of development. Despite the reduced risk profile of our pipeline programs (relative to new chemical entities), they do carry potential development risks, and as such, we do not anticipate the commercialization of all of these products. From time to time, we review our portfolio of products under development to set priorities for the various development programs underway and to ensure that internal and budgeted resources are allocated accordingly. As a result of these reviews, the contents of certain development programs and related timelines may be modified or certain programs terminated. This is normal practice in the pharmaceutical industry.

Given that the successful development of any pipeline program is dependent on a number of variables, it is difficult to accurately predict timelines for regulatory approval and thus clinical development expenses. In fiscal year 2011, our R&D expenses were approximately $58.0 million or 12.3% of our total revenue ($31.7 million, or 8.9% of revenue in fiscal year 2010 and $36.0 million, or 8.8% of revenue in fiscal year 2009).

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

Mesalamine

As a result of the post-merger project portfolio consolidation, we terminated our MAX-002 Phase III clinical program, seeking approval of a new patented mesalamine suppository formulation characterized by its smaller size and lower melting temperature after having enrolled about 50% of the intended patients. We have ongoing life cycle management initiatives with respect to our CANASA franchise. AN FDA postmarketing requirement to conduct a study in pediatric patients with ulcerative proctitis is on track to be met.

Sucralfate

We have ongoing life cycle management initiatives with respect to our CARAFATE franchise. On March 14, 2011, we entered into an agreement with a third-party to jointly develop a new combination product including Sucralfate. Under the terms of this agreement, we will pay a series of contingent and non-contingent milestone based payments. Upon commercialization of the new product, we will pay the third party to the arrangement a single digit royalty on net sales of the new product. Additionally, we will pay the third party a single digit royalty on net sales of CARAFATE, beginning on January 1, 2013, until December 31, 2019.

Ursodiol

URSO

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

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

Results confirmed that high-dose ursodiol is safe and well tolerated in patients with NASH. They also demonstrated a significant and marked biochemical response to high-dose ursodiol. Results of this study were published in the October 2011 edition of the “Journal of Hepatology.”

Helicobacter pylori eradication

PYLERA

Pylera (bismuth subcitrate potassium, metronidazole and tetracycline hydrochloride) is a fixed combination treatment for eradication of Heliobacter pylori in patients with H.pylori infection and duodenal ulcer disease. Pylera was approved in the U.S. in 2006 and received an approvable letter from BfArM in July 2011; local approvals are granted in the UK, Ireland, Germany, France and Belgium; approvals in other European countries are expected in the next months. Several studies will be initiated in France as part of the European risk management plan, including a pharmacokinetic study to investigate the exposure of patients to bismuth in a real world setting; the profile of H.pylori resistance to commonly used antibiotics; and a drug utilization study.

Pancreatic Enzyme Products

ZENPEP

ZENPEP is a proprietary porcine-derived PEP developed under the 2004 FDA guidance on PEPs. It has been approved for the treatment of EPI due to CF or other conditions in Aug 2010. Clinical trials of ZENPEP demonstrated safety and efficacy in both adults and children. Two new dosage strengths (3000 and 25000) of Zenpep were approved by the FDA in June and July 2011, respectively, making ZENPEP the only PEP marketed in the US available in 6 dosage strengths. ZENPEP, as the other FDA-approved PEPs currently marketed in the US (PANCREAZE, Johnson and Johnson, and CREON, Abbott), has postmarketing requirements. We believe we are on track to meet these postmarketing commitments. EPI in CF typically requires treatment at a very early age. The safety of ZENPEP in children with EPI due to CF under one year was confirmed in a clinical study, expanding the data for ZENPEP in the pediatric population.

We are also seeking a Market Authorization in the EU under the centralized procedure and are conducting a development program, including clinical studies, in the EU to generate data in support of a filing. The development program is ongoing.

ULTRASE and VIOKASE

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

We are in ongoing discussions with the FDA regarding both ULTRASE MT and VIOKASE and continue to work with the manufacturer of the active pharmaceutical ingredient to address any issues identified by the FDA, as soon as possible. However, no additional clinical studies are required. If ULTRASE MT and VIOKASE are not approved, it may continue to adversely affect our financial position, cash flows or overall trends in results of operations.

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

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

PANZYTRAT

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

Others

AEROQUIN

Aeroquin™, a proprietary aerosol formulation of levofloxacin, acquired with the MPEX transaction, is currently in Phase 3 clinical trials for the treatment of chronic pulmonary infections in patients with cystic fibrosis (CF). Chronic pulmonary infections in CF patients are currently treated with Tobi^® (tobramycin inhalation solution) and Cayston^® (aztreonam solution for inhalation). However, CF patients experience pulmonary exacerbations impacting quality of life and overall survival. Levofloxacin belongs to a different class of broad spectrum antibiotics that are currently used to treat pulmonary exacerbations by oral or intravenous route. Aeroquin is a novel formulation of the fluoroquinolone, levofloxacin, that has been optimized for aerosol delivery and can be delivered rapidly and efficiently using a customized PARI investigational configuration of the eFlow^® nebulizer system. Upon approval, Aeroquin should add to the armentarium for managing chronic pulmonary infections in CF patients by enabling administration of levofloxacin as nebulized inhaled antibiotic, taking advantage of the local application to expose the target organ to high concentrations of levofloxacin far exceeding the local concentration achieved with systemic administration. Two phase 3 studies are ongoing, aiming to enroll approximately 600 patients and collect safety data, demonstrate reduction of exacerbation episodes compared to placebo, and compare Aeroquin to Tobi in its ability to maintain pulmonary function.

EUR-1100

We entered in to clinical development of EUR- 1100 for treatment of eosinophilic esophagitis, a rare gastrointestinal disease. No treatments are currently licensed in the U.S. for this indication, EUR-1100 was granted orphan drug status in the U.S. A follow-on candidate for EUR-1100 in the same indication is in early development.

Sales and Marketing

In the U.S., we sell our products to most major wholesale drug companies and distributors, which in turn distribute our products to chain and independent pharmacies, hospitals and mail-order pharmacies. At September 30, 2011, the previous legacy Axcan and legacy Eurand sales forces were fully integrated into one sales force with 100 representatives promoting ZENPEP, CANASA and PYLERA. As of September 30, 2011, in the U.S. we had 11 regional sales managers and 2 zone directors, managed by a VP of sales, and 6 commercial/governmental account managers in our managed markets group. This sales team calls on high-volume prescribing gastroenterology physicians, cystic fibrosis centers, as well as third-party payors, clinical pharmacists and formulary administrators. Since the launch of PYLERA, in May 2007, sales representatives have also been visiting a small number of general practitioners known to be high-volume prescribers of Helicobacter pylori eradication therapies.

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

In France, we sell our products to distributors, which in turn distribute them to wholesale drug companies, which in turn distribute them to pharmacies. As of September 30, 2011, in France we had 42 sales representatives who, under the supervision of 5 regional sales directors, regularly visit high-volume prescribing physicians and pharmacies to promote our local prescription products. In addition as of September 30, 2011, in Germany, we have an exclusive contracted sales force consisting of 32 sales representatives under the supervision of four regional sales managers. We also have a partnership agreement with an over-the-counter distributor and marketer to co-promote LACTEOL in French pharmacies.

Customers

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

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

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


For the fiscal years ended September 30,
	2011			2010			2009
Customer A		26.3	%		29.9	%		30.4	%
Customer B		25.5	%		28.1	%		37.4	%
Customer C		10.0	%		12.2	%		11.7	%

Total		61.8	%		70.2	%		79.5	%

In addition to the above, we participate in high-level international medical meetings on topics related to GI and CF areas. These events are recognized by leading institutions. In North America, attendees earn continuing medical education (CME) credits. Thus, we believe that we are recognized not only as a supplier of quality products, but also as an important link in the continuous medical education process.

Manufacturing and Supply

The manufacturing supply chain for our products is supported by our manufacturing facilities located in the United States and Europe and by third parties. We manufacture ZENPEP at one of our facilities in Italy, LACTEOL at our facility in France, SALOFALK at our facility in Canada and other Pharmaceutical Technology products in the United States and Italy. We outsource aspects of the manufacturing of our other products. We intend to continue outsourcing the manufacturing and distribution of certain of our products for the foreseeable future.

Our internal and third party manufacturing operations are subject to extensive government regulations as prescribed by regulatory authorities in and outside the U.S., including in Canada and the EU. For example, the FDA requires that the drug product be manufactured, packaged and labeled in conformity with current good manufacturing practices, or cGMP. In complying with cGMP

regulations, manufacturers must continue to invest time, money and effort in manufacturing and quality control and quality assurance to ensure that their products meet applicable specifications and regulatory requirements. The same applies to our manufacturers outside of the U.S. We depend on our third-party suppliers and manufacturers for continued compliance with cGMP requirements and other applicable regulations and standards.

With the exception of LACTEOL, we rely on third parties to supply the active pharmaceutical ingredients used in our finished products. While we believe there are alternative sources of supply for the active pharmaceutical ingredients and raw materials required for the manufacturing of our products, APIs for certain of our products, for example, ZENPEP, are sourced from single suppliers. Should any of our current suppliers be unable to meet our business needs, there is possibility we could not be able to qualify alternative suppliers in a timely manner, or obtain the required materials under favorable terms. For some of our marketed products the finished dosage manufacturer also packages the product, while for others we use a separate third-party packaging company. Supply agreements are in place with most third parties and typically have three to five-year terms; our current contracts will expire at various dates over the next three to five years. We believe, but cannot guarantee, that we will be able to renew these agreements under satisfactory terms and conditions as they expire or we shall be able to find suitable alternate suppliers and manufacturers. Should we be unable to renew these agreements under favorable terms and conditions or find suitable alternatives, our business may be adversely affected.

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

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

With the exception of the manufacturers of CANASA, and CARAFATE, our manufacturers and suppliers are not prevented from supplying similar product to third parties. Our suppliers of mesalamine and the manufacturer of CANASA have each agreed not to supply similar or same mesalamine active ingredient or mesalamine product to a third-party in the U.S. or Canada. Our supplier of CARAFATE has agreed not to supply a suspension formulation of sucralfate, the active pharmaceutical ingredient in CARAFATE, to a third-party in the U.S.

Government Regulation

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

U.S. Regulations

New Drug Application

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

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

Abbreviated New Drug Application

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

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

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

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

505(b)(2) Application Process

Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA but a third alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of an approved product, or published literature, in support of its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. A 505(b)(2) application allows the applicant to file an application where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon the FDA’s findings with respect to particular preclinical studies or clinical trials conducted for an approved product, although the FDA may also require companies to perform additional studies or measurements to support the change from the approved product.

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

Data Exclusivity

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

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

Canadian Regulations

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

European Economic Area

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

Centralized Procedure

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

Mutual Recognition and Decentralized Procedures

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

Mutual Recognition

Mutual recognition is used if the medicinal product has already been authorized in one member state. In this case, the holder of this marketing authorization requests the member state where the authorization has been granted to act as reference member state by preparing an updated assessment report that is then used to facilitate mutual recognition of the existing authorization in the other

member states in which approval is sought (the so-called concerned member states). The reference member state must prepare an updated assessment report which, together with the approved Summary of Product Characteristics, or SmPC (which sets out the conditions of use of the product), and a labeling and package leaflet are sent to the concerned member states for their consideration. The concerned member states are required to make an approval decision on the assessment report, the SmPC, and the labeling and package leaflet within 90 days of receipt of these documents.

Decentralized Procedure

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

International Regulations

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

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

Trademarks and Patents

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

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

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

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

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

We also depend upon the skills, knowledge and experience of our scientific and technical staff, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require our employees, consultants, advisors and certain other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions pertinent to our business. Additionally, these confidentiality agreements require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third-party’s proprietary technology.

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

ULTRASE and VIOKASE

We own the trademark ULTRASE and we market certain pancreatic enzyme-based microspheres and mini-tablets under the ULTRASE brand in North and Latin America.

There are currently no issued U.S. patents covering ULTRASE. However, we have over twenty (20) pending patent applications in the U.S. with claims related to pancrelipase products. The patent applications include claims intended to provide market exclusivity for certain technological and commercial aspects of pancrelipase products, their manufacture and characterization.

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

Ursodiol

URSO

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

For the U.S., we licensed the rights to a patent covering the use of ursodiol in the treatment of PBC, which expired on November 19, 2007. On May 13, 2009, the Office of Generic Drugs approved a generic version of our ursodiol tablet products, which was launched by a third-party shortly thereafter. On July 2, 2009, we announced that we had entered into an agreement with Prasco Laboratories under which Prasco will market and sell an authorized generic of URSO 250 and URSO FORTE in the U.S. For Canada, we acquired full ownership of the patent relating to the use of ursodiol for the treatment of PBC, which expired in June 2011. However, in May 2006, the Canadian PBC patent was held to be invalid for the purposes of opposing the issuance of a Notice of Compliance for a generic version of URSO, under proceedings pursuant to the Canadian Patented Medicines (Notice of Compliance) Regulations.

PANZYTRAT

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

PYLERA

In January 2000, we entered into a worldwide (excluding Australia and New Zealand) licensing agreement (which was amended in November 2000 and August 2001) with Exomed Australia Pty Ltd, Gastro Services Pty Ltd, Ostapat Pty Ltd, and Capability Services Pty Ltd. This agreement, as amended, provided us with exclusive rights in a number of countries, including Canada and the U.S., to a series of patents covering triple and quadruple therapies for Helicobacter pylori eradication. These patents cover the treatment of duodenal ulcer disease (and in some countries reflux esophagitis and gastric ulcer) through the eradication of Helicobacter pylori using a bismuth compound together with two or more antibiotics. We paid approximately $1.64 million cash for the license and will pay a 5.5% royalty based on sales. The expiry dates of these licensed patents vary depending on the jurisdiction. In the U.S., the patents expired in March 2011 and in other territories, the last patent expired in July 2011, thus no further royalty payments are owed.

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

LACTEOL

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

exclusive rights to commercialize these new products. We will continue to own all other rights related to the active ingredient, including the right to use the active ingredient and develop, manufacture and commercialize non-food products containing the active ingredient, including pharmaceutical products. For the fiscal year ended September 30, 2009, we recorded as revenue milestones that we are entitled to receive under the agreements in the amount of $7.1 million.

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

Employees

As of September 30, 2011, we had 875 full time regular employees. Of these employees, 360 were located in the U.S., 113 were located in Canada and 402 were located in the EU, specifically 130 in France and 272 in Italy. In Canada, we were to a party to a collective bargaining agreement that expired March 24, 2011. We are currently negotiating a contract renewal with the Union. As of September 30, 2011, there were 30 employees in this bargaining unit. All of our employees in Europe, with the exception of our executive management, are represented by one of a number of trade unions, national labor councils or their equivalents. We believe that relations with both our unionized and non-unionized employees are good.

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

ITEM 1A.

RISK FACTORS

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

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

RISKS RELATED TO OUR BUSINESS

We currently depend on four categories of products for a large portion of our revenues; any material decline in the sales of any of them would have an adverse impact on our business.

Any factor that adversely affects the sale or price of our key products could significantly decrease our sales and profits. Pancreatic Enzyme Replacement Therapies (ZENPEP and PANZYTRAT) accounted for 17.8 % of our net product sales for fiscal year 2011. Ursodiol products (URSO, URSO 250, URSO DS, URSO FORTE and DELURSAN), mesalamine products (CANASA and SALOFALK) and sucralfate products (CARAFATE and SULCRATE) accounted for 12.6%, 28.4% and 24.4%, respectively, of our net product sales for fiscal year 2010 and for 9.5%, 25.5% and 23.5%, respectively, of our net product sales for fiscal year 2011. With the exception of ursodiol products that now face generic competition both in the U.S. and Canada, we believe that sales of other groups of products will continue to constitute a significant portion of our total revenues until we launch additional products. Any significant setback with respect to any one of these products, including shipping, manufacturing, regulatory issues, product safety, marketing, government licenses and approvals, intellectual property rights problems, or generic or other forms of competition, could have a material adverse effect on our financial position, cash flows or overall trends in results of operations.

ZENPEP competes with currently marketed PEPs and our competitors may have more resources available to them than us.

ZENPEP competes with currently marketed products for exocrine pancreatic insufficiency. This competition, and the increased competition should ULTRASE MT and/or VIOKASE be approved by the FDA and relaunched into the market, could affect the market acceptance of ZENPEP or require us to lower the price of ZENPEP, which would negatively impact our margin and our ability to achieve profitability of the ZENPEP franchise. Other companies with existing PEPs include Solvay Pharmaceuticals acquired by Abbott Laboratories or Solvay/Abbott; and McNeil Consumer Healthcare, a subsidiary of Johnson & Johnson. In addition, we understand that other commercial entities have or have had synthetic product candidates in clinical development that could compete with ZENPEP. These and other companies may have greater resources available than we do to support their products.

Solvay/Abbott’s CREON (approved in May 2009) and Johnson & Johnson’s PANCREAZE (approved in April 2010) compete with ZENPEP. In addition, if SOLPURA (liprotamase), Eli Lilly’s lead candidate for the treatment of exocrine pancreatic insufficiency associated with CF and pancreatectomy, or if PANCRECARB, Digestive Care’s PEP, are approved by the FDA, the competition ZENPEP faces will significantly increase.

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

CANASA

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

CARAFATE

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

There are no generic versions of the CARAFATE oral suspension product that are commercially available in the U.S. or Canada. However, we are aware that a third party has filed an Abbreviated New Drug Application, or ANDA, for the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension, the active pharmaceutical ingredient in our CARAFATE oral suspension product. If a generic version of CARAFATE oral suspension was to be launched, it could have a significant negative impact on sales of CARAFATE oral suspension in the U.S.

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

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

We reported net sales of $26.2 million, $23.4 million and $20.8 million for DELURSAN in fiscals 2011, 2010, and 2009, respectively. (In local currency, net sales of DELURSAN were €18.7 million, €17.3 million and €15.4 million in fiscal years 2011, 2009 and 2008, respectively).

DELURSAN mainly competes with URSOLVAN^® (Sanofi-Aventis S.A.). However, we expect another branded competitor to be launched in France in 2012. A request for marketing approval was submitted by Mayoli Spindler for CHOLURSO^® 250mg and 500mg, based on well-established use. Additionally, on December 1, 2011, we learned that a generic UDCA (ursodeoxycholic acid) 250mg was being assessed by Afssaps (Agence francaise de securite sanitaire des produits de santé). If these other ursodiol products are launched, they could have a significant negative impact on sales of DELURSAN in France.

Branded and generic competition to DELURSAN, which made up approximately 5.7% of our net product sales in fiscal year 2011, could have a material adverse effect on our results of operations and financial condition.

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

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

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

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

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

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the timing of regulatory approvals and product launches by us or competitors, and any generic or over-the-counter competitors;

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perceptions by physicians and other members of the health-care community regarding the safety and efficacy of the products;

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price increases, and the price of our products relative to other drugs or competing treatments;

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patient and physician demand;

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adverse side effects or unfavorable publicity regarding our products or other drugs in our class;

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the results of product development efforts for new indications;

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the scope and timing of additional marketing approvals and favorable reimbursement programs for expanded uses;

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availability of sufficient commercial quantities of the products; and

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our success in getting other companies to distribute our products outside our target markets.

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

The majority of our sales are to a small number of pharmaceutical wholesale distributors, which in turn sell our products primarily to retail pharmacies, which ultimately dispense our products to the end consumers. In fiscal year 2011, sales to our main customer, Customer A, accounted for 26.3% of our net product sales, sales to Customer B accounted for 25.5% of our net product sales, and sales to Customer C accounted for 10.0% of our net product sales.

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

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

Since fiscal year 2005, some wholesalers have changed their business model from one depending on drug price inflation to a fee-for-service arrangement, whereby manufacturers pay wholesalers a fee for inventory management and other services. These fees typically are a percentage of the wholesaler’s purchases from the manufacturer or a fixed charge per item or per unit. The fee-for-service approach results in wholesalers’ compensation being more stable and volume-based as opposed to price-increase-based. As a result of the move to a fee-for-service business model, many wholesalers are no longer investing in inventory ahead of anticipated price increases and have reduced their inventories from their historical levels. Under the new model, the consequence of manufacturers using wholesalers is that they now realize the benefit of price increases more rapidly in return for paying wholesalers for the services they provide, on a fee-for-service basis. Fees resulting from distribution service agreements, or DSAs, are deducted from gross sales. We have DSAs with our three largest U.S. wholesalers, which provide that these wholesalers will maintain the levels of inventory of our products that they carry within specific agreed upon target levels. A reduction in inventory levels by a pharmaceutical wholesale distributor would result in a reduction in our sales to that wholesale distributor for the period during which the reduction occurs, and would have a negative effect on our results of operations for the period.

We deduct DSA fees, which totaled approximately $5.6 million and $9.0 million for fiscal year 2010 and fiscal year 2011, respectively, from our total revenues. If we enter into DSAs with additional wholesalers, we will likely have to pay them DSA fees, which will further reduce our revenue in future periods.

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

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

We manufacture the finished product for ZENPEP, SALOFALK, ULTRASE, and LACTEOL and other Pharmaceutical Technology products. With the exception for products manufactured by us, or products developed by us for collaborators using our pharmaceutical technologies platforms, we do not expect to engage directly in the manufacturing of products, but will continue to contract with third-party organizations. There are a limited number of manufacturers capable of manufacturing our marketed products and our product candidates. We could fail to contract or renew contracts with the relevant manufacturers or could contract with manufacturers under terms and conditions that may not be entirely acceptable to us.

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

Reliance on third-party manufacturers entails risks, without being limited to, the following:

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Manufacturing of products may be difficult to scale up when required, which could result in delays, inefficiencies and poor or low yields of quality products.

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Some of our contracts contain purchase commitments that require us to make minimum purchases that might exceed needs or limit the ability to negotiate with other manufacturers, which might increase costs.

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Cost involved in manufacturing certain products may lead to such products being prohibitively expensive.

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Delays in site transfers or scale-up to commercial quantities and any difficulty in manufacturing could delay clinical studies, regulatory submissions, approval and commercialization or continued commercialization of our products.

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In the event of a manufacturing change, the FDA and other comparable country regulators require testing and compliance inspections; new manufacturers may have to be educated to our products’ production process, which requires time.

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There are a limited number of manufacturers that operate under current good manufacturing practices (“cGMP”) regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture and/or test a product for commercial sale or for our clinical trials were to cease to continue to do so for any reason, we could experience delays in obtaining sufficient quantities of our products for us to meet commercial demand or in advancing production of our commercial products or our clinical trials while we identify and qualify replacement suppliers.

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

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

For example, the deficiencies raised by the FDA with respect to ULTRASE MT and VIOKASE were with respect to the manufacturing and control processes at a third party manufacturer of the active ingredient for these products. See “—Risks Related to Our Pancreatic Enzyme Products” below for information on deficiencies raised by the FDA with respect to the manufacturer of the active ingredient in ULTRASE MT and VIOKASE.

In September 2010, one of our subsidiaries, and our indirect parent, received notice of Sanofi-Aventis U.S. LLC’s (“SA”) complaint filed with the Superior Court of New Jersey, Somerset County, requesting certain remedies in connection with SA’s stated intention to close its Kansas City facility where CARAFATE product is currently manufactured. The supply agreement with SA, as amended, provides that the CARAFATE product’s manufacturing site may not be changed without our subsidiary’s prior written consent. Pursuant to the complaint filed, SA was seeking an order for specific performance compelling the defendants to consent to the transfer of the manufacturing site of CARAFATE product to an alleged SA facility located in Laval, Canada and to execute related documentation, and for a declaration that SA will not be liable, including for lost profits, for any interruption in supply by reason of the current site’s closure or by reason of a site transfer to Laval. Our subsidiary removed the case to the United States District Court for the District of New Jersey; SA had moved to remand the case back to the Superior Court of New Jersey. The defendants believe that SA’s claims lack merit, and that under the supply agreement as amended, our subsidiary is entitled to have CARAFATE product continue to be manufactured at the Kansas City site until the expiry of that agreement, as amended, which, assuming our subsidiary exercises its option to extend the term, as amended, will be in August 2016. Later, SA decided to transfer the manufacturing of CARAFATE to a different site other than the Laval site. On June 13, 2011 SA filed a notice of voluntary dismissal with the Court, which automatically effectuates that dismissal. Subsequently, we were notified that SA will be keeping the Kansas City facility open to manufacture CARAFATE at least through the expiry of the supply agreement.

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

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

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

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fines;

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injunctions;

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civil penalties;

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failure of regulatory authorities to grant marketing approval of our product candidates;

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delays, suspension or withdrawal of approvals;

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suspension of manufacturing operations;

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license revocation;

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seizures or recalls of products or product candidates;

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operating restrictions; and

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criminal prosecutions.

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

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

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

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

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

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

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restrictions on the products, manufacturers or manufacturing processes;

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warning letters and untitled letters;

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civil penalties and criminal prosecutions and penalties;

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fines;

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injunctions;

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product seizures or detentions;

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import or export bans or restrictions;

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voluntary or mandatory product recalls and related publicity requirements;

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suspension or withdrawal of regulatory approvals;

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total or partial suspension of production; and

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refusal to approve pending applications for marketing approval of new products or of supplements to approved applications.

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

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

We may not realize the benefits of the acquisition, including anticipated cost-savings, and will incur significant costs in connection with the integration of Axcan and Eurand into a single business.

The acquisition of Eurand involved the integration of two companies that have previously operated independently. The acquisition of Eurand diversifies the business in which we operate (including with respect to pharmaceutical technologies) and expands the number of products under development, as well as increases the number of collaborations and partnerships we will need to manage, the number of our employees and the number of our facilities and the regions in which we operate, thereby presents us with significant challenges as we work to manage the substantial increases in scale resulting from the acquisition. We can give no assurance that the acquisition will perform in accordance with our expectations or that our expectations with respect to integration and synergies as a result of the acquisition will materialize.

The integration of Axcan and Eurand is expected to result in financial and operational benefits, including increased revenues and a substantial amount of synergies from cost-savings and other financial and operational benefits. We do not expect to achieve the full amount of such synergies in the year following the transactions, and there can be no assurance regarding when or the extent to which we will be able to realize these increased revenues, cost-savings or other benefits. This integration may also be difficult, unpredictable, and subject to delay. The acquisition is the most complex that we have tried to integrate and, as a result, we must integrate a large number of systems, platforms, technologies, functions and processes, which could prove to be more difficult than we anticipate. Difficulties associated with integrating the two companies could have a material adverse effect on us. The focus on integration may place a significant burden on our management and internal resources, and the diversion of management attention and any difficulties encountered in the transition and integration process could harm our businesses, financial conditions and operating results. In addition, events outside of our control, including but not limited to regulatory changes or developments, could also adversely affect our ability to realize the anticipated benefits and synergies from the acquisition.

We have incurred and expect to continue to incur significant costs in connection with integrating our operations, products and personnel. These costs may include costs for employee redeployment, relocation or severance, reorganization or closure of facilities, outside consulting fees related to integration, rebranding as well as combination of research and development functions and integration of information systems. We expect to incur a majority of such costs in advance of achieving expected synergies and cost-savings. Additional unanticipated costs may also be incurred in the integration. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit will not be achieved in the near term, and may not be achieved at all. There can be no assurance that we will be successful in these integration efforts.

Uncertainty related to the acquisition could harm our business.

We are highly dependent on the continuing efforts of its management team and key personnel. As a result of the integration, current employees could experience uncertainty about their future roles. This uncertainty may adversely affect our ability to attract and retain key management, sales, marketing and R&D personnel. Uncertainty about the effect of the acquisition by customers and suppliers could also have an adverse effect on us. These uncertainties could cause customers, suppliers and others who deal with us to seek to change existing business relationships.

We may not realize the benefits of, and will incur significant costs in connection with, the acquisition of MPEX and AEROQUIN.

The acquisition of MPEX involved the investment to date of $81 million. The acquisition of MPEX and AEROQUIN will help to further diversify our portfolio and expands the number of products under development, but will require the additional investment for clinical studies, and marketing and sales costs. We can give no assurance that the acquisition will perform in accordance with our expectations or AEROQUIN will be approved by the various regulatory agencies.

We intend to continue to pursue additional acquisitions in the future as part of our strategy, which will present certain risks to us.

A significant component of our strategy will continue to be growth through acquisitions of products or businesses. However, we cannot be certain that we will be able to identify appropriate acquisition candidates. Even if an acquisition candidate is identified, there can be no assurance we will be able to successfully negotiate any such acquisition on favorable terms or at all, finance such an acquisition or integrate such an acquired product or business into our existing business. We face significant competition from other pharmaceutical companies for acquisition candidates, which makes it more difficult to find attractive transaction opportunities for

products or companies on acceptable terms. Furthermore, the negotiation of potential acquisitions and the integration of such acquired products or businesses could divert management’s time and resources and require significant financial resources to consummate. To consummate any acquisition, we may need to incur additional debt or issue additional equity securities and, depending on market conditions, we may not be able to obtain necessary financing for any acquisitions on terms acceptable to us, or at all. We may also be required to pay external costs such as legal advisory, market research consultancy and due diligence fees related to our pursuit and evaluation of potential acquisitions, even if the acquisitions are never consummated. Failure to acquire new products may diminish our rate of growth and adversely affect our competitive position.

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

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

Certain of our products are sold and marketed by third parties and collaboration or co-development partners. Such third-party arrangements may not be successfully negotiated in the future. Any such arrangements may not be available on commercially reasonable terms. Even if acceptable and timely marketing arrangements are available, the products we develop may not be accepted in the marketplace, and even if such products are initially accepted, sales may thereafter decline. Additionally, our clients or marketing partners may make important marketing and other commercialization decisions with respect to products we develop that are not within our control. Our clients or marketing partners could also merge with or be acquired by another company, or experience financial or other setbacks unrelated to our arrangement that could affect their ability to perform their obligations under their agreement with us. As a result, many of the variables that may affect our revenues, cash flows and net income are not exclusively within our control. Furthermore, disputes may arise between us and a customer, licensee or marketing collaborator and may involve the issue of the obligations of the customer, licensee or marketing collaborator to continue to purchase our products and pay royalties on the sale of our products. Such a dispute could result in expensive arbitration or litigation, which may not be resolved in our favor.

The success of our strategic investments, partnerships or development alliances and collaborators, particularly those involving our pharmaceutical technologies, depends upon the performance of the companies in which we invest, or with which we partner or co-develop products.

Our arrangements with collaboration partners and licensees are critical to our success in bringing certain of our products and product candidates to market. In particular, we have invested and expect to continue investing significant time and financial resources in the development of our co-development products. We depend on our collaboration partners to conduct preclinical studies and clinical trials, as may be necessary, and to provide funding for our development of these product candidates. Furthermore, in most instances, we rely on collaborators to commercialize our co-development products. If we or a significant number of our collaborators are unable to commercialize our co-development products or experience significant delays in such commercialization, our growth prospects will be materially harmed. The successful commercialization of a product or product candidate will depend on numerous events or factors, including:

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successfully completing preclinical studies and clinical trials and any additional trials and tests required by the FDA, the European Marketing Authority (“EMA”) or other applicable regulatory authorities;

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receiving marketing approvals, to the extent required, from the FDA, the EMA or other applicable regulatory authorities; and

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obtaining commercial acceptance, if approved, from the medical community and third-party payors.

We cannot control our collaborators’ or licensees’ performance or the resources they devote to our projects, and some of our collaborators can terminate their agreements with us for no reason and on limited notice. If a collaborator fails to perform as expected, we may have to use funds, personnel, laboratories and other resources that we have not budgeted for, or we may not be able to continue the particular project affected.

We generally expect a number of the new co-development agreements we enter into to terminate without significant development activity. A collaboration partner may choose to use its own or one of our competitors’ technologies to develop a way to reformulate its drug and thus withdraw its support of our product candidate. Alternatively, we may develop a proprietary product candidate that competes directly with products that we currently manufacture for a collaboration partner. In addition, a collaboration partner could merge with or be acquired by another company, or experience financial or other setbacks unrelated to our collaboration that could jeopardize the co-development project. The loss of collaborators or projects could materially adversely affect our business, growth prospects and financial condition.

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

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the ability of these companies to successfully develop, manufacture and obtain necessary governmental approvals for the products that serve as the basis for our investments in, or relationship with, such companies;

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the ability of competitors of these companies to develop similar or more effective products, making the drugs developed by these companies difficult or impossible to market;

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the ability of these companies to adequately secure patents for their products and protect their proprietary information;

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the ability of these companies to enter the marketplace without infringing upon competitors’ patents;

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the ability of these companies to finance their operations;

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the ability of these companies to remain technologically competitive; and

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the dependence of these companies upon key scientific and managerial personnel.

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

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

Our quarterly results may fluctuate.

Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future. Factors that could cause quarterly operating results to decline, many of which are not within our control, include, for example, the size and timing of product orders, which can be affected by customer budgeting and buying patterns, or the size and timing of expenses associated with our development and marketing programs and the fluctuation in the timing of certain integration expenses. As a result, if customer buying patterns cause revenue shifts from one fiscal quarter to another, or if the development and marketing of our products causes our expenses to change from one fiscal quarter to another, our net quarterly income may fluctuate. In particular, revenue from the pharmaceutical technologies business is based on completion of relevant milestones and, therefore, is prone to a significant fluctuation over time, which may have an adverse effect on our results of operations.

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

Much of our success to date has resulted from the skills of certain of our officers, scientific personnel and sales force. High demand exists for senior management and other key personnel in the pharmaceutical industry. The loss of any of these people may negatively impact our ability to manage our company effectively and to carry out our business plan. If these individuals were no longer employed by us, we might not be able to attract or retain employees with similar skills or carry out our business plan. In particular, we rely on the contributions of our senior management team, and their continued service is critical to our success. Our senior management team is responsible for the development and implementation of our business strategy. The loss of service of any member of our senior

management team or key personnel could delay or prevent the successful completion of our planned clinical trials or the commercialization of our product candidates. Of our senior management team, only five have employment agreements. Such employee retention may be challenging as employees may experience uncertainty about their future roles until, or even after, strategies with regard to the combined company are announced or implemented. If, despite retention efforts, key employees depart because of issues relating to the uncertainty and difficulty of integration, our ongoing business could be harmed. Additionally, the potential distraction of the integration may adversely affect our ability to attract, motivate and retain executives and other key employees and keep them focused on corporate strategies and goals, which could have an adverse impact on our business.

We could face labor disruptions that would interfere with our operations, as we are subject to collective bargaining or other labor agreements or arrangements.

Certain of our employees located in Canada, Italy and France are represented by collective bargaining or other labor agreements or arrangements that may provide greater bargaining or other rights to employees than do the laws of the United States. Such employment rights require us to expend greater time and expense in making changes to employees’ terms of employment or carrying out staff reductions. In addition, national strikes occur, and our employees may strike even if they do not have a grievance against us. While we believe that our relations with our employees are satisfactory, worker disruption on a local or national level or a significant dispute with our employees (including those resulting from or related to integration) could have a material adverse effect on our business, financial position, results of operations and cash flows.

RISKS RELATED TO OUR PANCREATIC ENZYME PRODUCTS (PEPs)

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

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

If ULTRASE MT and VIOKASE are approved and relaunched, competition in the PEP market at that time could be more intense than at the time when we ceased their distribution or at present.

If approved and relaunched, the level of competition that ULTRASE MT and VIOKASE will face in the United States will be more intense than before April 28, 2010, when we ceased distributing these products, or at present. In addition to ZENPEP, other branded PEPs have been approved and are currently marketed in the United States: CREON (Solvay/Abbott) and PANCREAZE (McNeil Pharmaceutical, Inc.). To relaunch ULTRASE MT and VIOKASE, we will need to re-establish the market position for these products and succeed in having customers using other marketed products start or restart using our products, which may prove difficult or impractical. These efforts will likely result in increased marketing and other expenses. If we are not successful, this would have a material adverse effect on our business and our financial results.

Furthermore, the relaunch of ULTRASE MT and VIOKASE, directly or indirectly, also could lead to a decrease in sales of ZENPEP, which would compete with ULTRASE MT and VIOKASE in the PEP market. If such a decrease cannot be offset by increased sales of ULTRASE MT or VIOKASE, it could have a material adverse effect on our business and results of operations.

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

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

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

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

Additional Risks Related Pharmaceutical Technology and Manufacturing Operations

In addition to the risk factors described elsewhere in this section, we are subject to additional risks relating to the Pharmaceutical Technology operations, including those described below.

We may not achieve or maintain profitability of Pharmaceutical Technology operations.

Eurand had incurred significant net losses since its formation in 1999, when it was established as a company independent of American Home Products, now Pfizer. Even if developing and commercializing one or more of the PT product candidates is successful, PT operations may not contribute to our overall profitability. Maintaining operating profitability of PT and achieving its profitability in the future will depend on our ability to generate revenues that exceed expenses. Even if achieved, profitability of PT may not be sustained or increased on a quarterly or annual basis or at all.

Any difficulties with, or interruptions of, our manufacturing operations could delay our output of products and harm our relationships with our collaborators. If we are unable to continue to manufacture our existing products, our results of operations and future prospects will suffer.

Any difficulties with or interruptions of our acquired manufacturing operations could delay our output of products and harm our relationships with our collaborators. We manufacture several products at facilities in Milan, Italy, Houdan, France, Mont St. Hilaire Canada and Dayton, Ohio. Due to regulatory and technical requirements, we will have limited ability to shift production among our facilities or to outsource any part of our manufacturing activities to third parties. Damage to any of our manufacturing facilities caused by human error, physical or electronic security breaches, power loss or other failures or circumstances beyond our control, including acts of God, fire, explosion, flood, war, insurrection or civil disorder, acts of, or authorized by, any government, terrorism, accident, labor trouble or shortage, or inability to obtain material, equipment or transportation, could interrupt or delay our manufacturing or other operations. Furthermore, all of our employees in Europe are subject to collective bargaining agreements, and national labor disputes could result in a work stoppage or strike by employees that could delay or interrupt our output of products. Due to the nature of these collective bargaining agreements, we will have no control over such work stoppages or strikes by our employees in Europe, and a strike may occur even if our employees do not have any grievances against us. Any interruption in manufacturing, whether due to limitations in manufacturing capacity or arising from factors outside our control, could result in delays in meeting contractual obligations and could have a material adverse effect on our relationships with our collaborators and on our revenues.

The FDA, the EMA and other applicable authorities periodically inspect our manufacturing facilities to ensure compliance with various regulations, including those relating to current good manufacturing practice, or cGMP. In addition, the U.S. Drug Enforcement Administration, or DEA, applicable EU authorities and other applicable regulatory authorities must approve our facilities and processes for handling controlled substances. Those agencies may monitor our use of controlled substances and we may be subject to inspections evaluating our compliance with the use and handling of controlled substances. Our failure to comply with such requirements and standards of these agencies could result in the suspension of our manufacturing or closure of our facilities, which could have a material adverse effect on our business. In addition, we currently manufacture for commercial distribution a number of drugs that are the subject of NDAs that have been approved or other applicable regulatory approval held by our collaborators and licensees. We also use third-party suppliers to provide bulk active drugs used in its products and the testing of those products. Because our customers and suppliers will continue to be subject to FDA regulation, our continued development and manufacturing of these products will continue to depend not only on our own compliance with FDA requirements but also on the compliance of customers and suppliers over whom we have no control.

Our competitors may develop products that are less expensive, safer or more effective than, and may diminish or prevent the commercial success of, any product candidates that we may bring to market.

We face intense competition from pharmaceutical and biotechnology companies, including other drug formulation companies, contract research organizations, academic institutions and government agencies. Some of these competitors are also its collaboration partners.

Our competitors may be able to use alternative technologies that do not infringe upon its patents to formulate the active materials in its products. If successful, products derived from alternative technologies will compete against our products and product candidates. Examples of competing technologies include the multiple particle systems of Watson, Biovail and Elan; the controlled-release tablet technologies of Elan and SkyePharma; and the solubility-enhancement technologies of Elan, SkyePharma and Soliqs, a division of Solvay/Abbott. The products derived from these technologies may be safer or more efficacious than some of our products and product candidates.

Potential products being tested in the United States and Europe of which we are not currently aware may also compete with product candidates using its drug formulation systems. Our collaboration partners could choose a competing drug formulation system to use with their drugs instead of our. In addition, our collaboration partners themselves face competition with other major pharmaceutical companies on products using our drug formulation technologies, which could adversely impact the potential for our technologies and co-development products, as well as our royalty revenues and business and financial condition.

Many of our competitors have greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than we have. In addition, their success in obtaining patents may make it difficult or impossible for us to compete with them.

Major technological changes can happen quickly in the drug formulation and pharmaceutical industries. Our development of technologically improved or different products may make its technologies and product candidates obsolete or noncompetitive.

In addition, with respect to products that we develop and manufactures for our collaborators, we face the risk that such products or our collaborators’ other products may compete with our proprietary products. Some of these products may target the same diseases and conditions that are the focus of our drug development programs.

The failure to maintain our existing co-development relationships on acceptable terms, or the failure to develop and maintain new co-development relationships using our formulation technologies, could adversely affect our ability to develop and commercialize our product candidates and impair our future growth prospects.

Co-development agreements utilized to create relationships for the purpose of exploring development opportunities with collaboration partners will continue to be important for the business of the combined companies. By way of example, in 2010, we entered into four co-development agreements with various collaborators and we expect to continue to negotiate additional co-development agreements. In general, co-development agreements involve feasibility studies and early-stage development activities whereby an hourly service fee is paid for research and development and, in some instances, additional milestone payments may be made based on the achievement of certain development goals within specified timeframes. Accordingly, our receipt of revenue in a given period during the development phase is dictated in part by the speed at which development goals are met and the time and resources that a collaboration partner wishes to dedicate to development in such period. In some instances, we and our collaboration partner decide to negotiate and include provisions in a co-development agreement that will govern their relationship from development through commercialization. In other instances, we and our collaboration partner elect to define their relationship for the development phases and, if development is promising, may elect to enter into a subsequent agreement that further defines their relationship for subsequent periods of a product’s or product candidate’s life. The likelihood of completing development or progressing past development is highly uncertain notwithstanding the inclusion of provisions that govern the relationship through commercialization. Thus, the existence of such provisions, which could provide for the payment of royalties and sales milestones based on the success of the product, is not indicative of the likelihood that we will receive such payments. We believe that we will not be substantially dependent on any co-development agreements individually; however, the maintenance of such relationships will be important to our growth prospects because of the potential that a co-development relationship could evolve into a licensing and supply relationship that could generate significant revenue from licensing fees, product sales, sales milestone payments and/or royalties.

Our obligations under our co-development agreements can include performance of development activities, such as feasibility studies, formulation optimization, stability testing and scale-up of the manufacturing process, supply of the product to the collaborator for clinical testing, assistance in the preparation of regulatory filings by our collaborator and supply of the product for sale by our collaborator. If we fail to meet certain of these obligations, we may lose our rights to certain development fees and future royalty and milestone payments, and our collaboration partners may have the right to terminate the agreement. In addition, many of our agreements allow for the collaboration partner to terminate the agreement with limited notice and without penalty or in the event the collaborator reasonably determines that the product does not justify continued development or commercialization. We have completed work under some of these agreements without developing a commercial product and, based on past experience, it is likely that a number of these agreements will not progress to the stage where the product is actually commercialized. In addition, even if our collaborators choose not to terminate an agreement, the risk still remains that the collaborator could decide not to launch a particular product. The loss of a collaboration partner, as a result of either our failure to meet our obligations or early termination by the collaboration partner could affect our results of operations and future growth prospects.

Furthermore, our success is in part based upon a reputation that we are an attractive collaborator for leading pharmaceutical companies seeking to enhance existing products or to develop new products. For example, one of our co-development products, EUR-1000, is being developed in collaboration with GlaxoSmithKline, or GSK (acquired Reliant Pharmaceuticals in December 2007), and AMRIX is being commercialized in the United States by Cephalon, Inc. (acquired rights to AMRIX from ECR Pharmaceuticals in August 2007). If we fail to meet our obligations under these and other existing co-development agreements, we may diminish our reputation and decrease our potential future co-development opportunities.

Finally, the process of establishing new co-development relationships is difficult, time-consuming and involves significant uncertainty. We face, and will continue to face, significant competition in seeking appropriate collaboration partners. Moreover, if we do establish co-development relationships, our collaborators may fail to fulfill their responsibilities or may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical results, a change in business strategy, a change of control or other reasons. In many cases, our collaborators may terminate their relationships with us with limited notice and without penalty or in the event the collaborator reasonably determines that the product does not justify continued development or commercialization. If we are unable to establish and maintain co-development arrangements on acceptable terms, we may have to delay or discontinue further development of one or more of our product candidates, seek regulatory approval or undertake commercialization activities at our own expense or find alternative sources of funding, and our growth prospects will be materially harmed.

RISKS RELATED TO REGULATORY MATTERS

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

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

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Our products are shown not to be effective.

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We are unable to demonstrate that a product candidate’s benefits outweigh its risks.

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We are unable to demonstrate that a product candidate presents an advantage over existing products.

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We do not comply with requirements concerning the investigational NDAs, biologic license applications (BLAs) or new drug submissions (NDSs), for the protection of the rights and welfare of human subjects.

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The FDA, the EMA or other applicable regulatory authorities may require additional or expanded trials or may disagree with the manner in which the results from preclinical studies or clinical trials are interpreted.

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We may experience delays in obtaining, or the inability to obtain or maintain, required approvals from institutional review boards, or IRBs, or other reviewing entities at clinical sites selected for participation in our clinical trials.

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Patients experience unacceptable side effects or die during clinical trials.

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Patients do not enroll in the studies at the rate we expect.

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A drug is modified during testing.

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Product supplies are delayed or are not sufficient to treat the patients participating in the studies.

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Failure by our manufacturers or suppliers to comply with any of the FDA’s or other relevant foreign counterparts continuing regulations.

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A change in the approval policies or regulations of the FDA, EMA or other applicable regulatory authorities, or a change in the laws governing the approval process.

If we cannot obtain regulatory approvals for the products we are developing or may seek to develop in the future, our sales and competitive position will suffer. This risk is most acute for products that are currently in the development of the final formulation. There is no guarantee that we would obtain regulatory approval, even if our clinical trials are successful. With respect to ULTRASE MT and VIOKASE, for which we need to comply with the FDA’s requirements in order to return to market, we face the risk of not being able to obtain the FDA’s approval on a timely basis or at all. In addition, we are currently in discussions with the EMA with respect to the regulatory process and filing requirements relating to ZENPEP in the EU. There can be no assurance that the regulatory approval of ZENPEP by the EMA will be obtained on a timely basis or at all.

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

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

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delays, warning letters and fines;

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product recalls or seizures and injunctions on sales;

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refusal to review pending applications;

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total or partial suspension of production;

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withdrawals of previously approved marketing applications; and

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civil penalties and criminal prosecutions.

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

Sales of our products outside the United States and any of our product candidates that are commercialized are subject to the regulatory requirements of each country in which the products are sold. Accordingly, the introduction of our products and product candidates in markets outside the United States will be subject to regulatory clearances in those jurisdictions. Approval and other regulatory requirements vary by jurisdiction and may differ from the United States requirements. We may be required to perform additional preclinical or clinical studies even if FDA approval has been obtained. In addition, failures in European preclinical or clinical studies could impact our filings in the United States. Many countries also impose product standards, packaging and labeling requirements and import restrictions on our products. The approval by government authorities outside of the United States is unpredictable and uncertain and can be expensive. Our ability to market our approved products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances.

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

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

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demonstration of clinical safety and efficacy compared to other products;

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the relative convenience and ease of administration;

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the prevalence and severity of any adverse side effects;

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limitations or warnings contained in a product’s FDA, TPD or EMA approved labeling;

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availability of alternative treatments for the indications we target;

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pricing and cost effectiveness compared to competing products, particularly generic products;

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the effectiveness of our or any future collaborators’ sales and marketing strategies;

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the effectiveness of our manufacturing and distribution plans;

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our ability to obtain sufficient third-party coverage or reimbursement; and

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the willingness of patients to pay out-of-pocket in the absence of third-party coverage.

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

Our business is subject to limitations imposed by government regulations.

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

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

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

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

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

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

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

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

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

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

Following receipt of regulatory approval, any products that we market continue to be subject to extensive regulation. These regulations affect many aspects of our operations, including the manufacture, labeling, packaging, adverse-event reporting, storage, distribution, advertising, promotion and record keeping related to the products. The FDA also frequently requires post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. We must also comply with the Prescription Drug Marketing Act, or PDMA, which governs the distribution of prescription drug samples to healthcare practitioners since, as part of our commercialization efforts, we provide physicians with samples. Among other things, the PDMA prohibits the sale, purchase or trade of prescription drug samples. It also sets out record keeping and other requirements for distributing samples to licensed healthcare providers. In addition, we must comply with the Medicaid Rebate Program, the Veterans’ Health Care Act of 1992 and the Deficit Reduction Act of 2005. These laws governs product pricing for government reimbursement and sets forth detailed formulas for how we must calculate and report the pricing of our products so as to ensure that the federally funded programs will get the best price. Further, the subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, significant disbursements, operating restrictions and criminal prosecution.

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

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

Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

Development of pharmaceutical products is expensive, time-consuming and subject to uncertainties, and we may not realize a return on our investment in product development for a significant period of time, if at all.

Developing pharmaceutical products is expensive, and there is typically a significant amount of time prior to realizing a return on an investment in product development, if a return is realized at all. To obtain regulatory approval for the sale of any product candidates, extensive clinical trials must demonstrate that our products are safe and effective for use in humans. Clinical trial costs are included in our research and development expenses and may take years to complete. We cannot be sure that we or our collaboration partners will complete clinical testing within the time we anticipate or that we or they will be able to do so without requiring significant resources or expertise in excess of what we anticipate. Completion of clinical trials depends on various factors, including the indication and size of the patient population and its proximity to clinical sites, the nature of the clinical protocol, the eligibility of the criteria for trial, competition for trial patients, availability of sufficient quantities of a product candidate, the assistance of third parties, regulatory compliance and adequate financial resources.

Our future plans include significant investments in research and development, including clinical trials, and related product opportunities. We believe that we must continue to dedicate a significant amount of financial and operational resources to our research and development efforts to grow our business and maintain our competitive position. However, we do not expect to receive significant revenues from these investments for several years, if at all.

Pricing pressures from, and other measures taken by, third-party payors, including managed care organizations, government sponsored health-care systems and regulations relating to Medicare and Medicaid, Health Care and Education Reconciliation Act of 2011, pharmaceutical reimbursements and pricing in general could decrease our revenues.

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

Third-party payors are increasingly challenging the pricing of pharmaceutical products. In addition, the trend toward managed health-care in the U.S., the growth of organizations such as HMOs and MCOs, and the recently enacted Health Care and Education Reconciliation Act of 2011, could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. One way in which MCOs and government sponsored health-care systems seek to control their costs is by developing formularies to encourage plan beneficiaries to use preferred products for which the plans have negotiated favorable terms. Exclusion of a product from a formulary, or placement of a product on a disfavored formulary tier, can lead to sharply reduced usage in the patient population covered by the applicable MCO or government-sponsored health-care system. If our products are not included in an adequate number of formularies or if adequate reimbursement levels are not provided, or if reimbursement policies increasingly favor generic products, our market share and business could be negatively affected.

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

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

In some countries, particularly those of the European Economic Area, the pricing of prescription pharmaceuticals can be subject to government control, often resulting in lower pricing or reimbursement rates than in the U.S. market. In these countries, pricing negotiations with governmental authorities can take considerable time and delay the placing of a product on the market. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares cost-effectiveness of our product candidate with other available products. If reimbursement of our product is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

The Patient Protection and Affordable Care Act of 2011 and the Health Care and Education Reconciliation Act of 2011, known together as the Affordable Care Act, enacted in the U.S in March 2011 contain several provisions that could impact our business.

Although many provisions of the new legislation do not take effect immediately, several provisions became effective during fiscal year 2011. These include (1) an increase in the minimum Medicaid rebate to States participating in the Medicaid program on our branded prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and. (3) the expansion of the 340B Public Health Service Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain children’s hospitals, free standing cancer hospitals, critical access hospitals, and rural referral centers.

during the previous year. The aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. The IRS has issued guidance for calculating preliminary fees, but there is still uncertainty as to final implementation, since the IRS has requested public comment and may make changes in response. The new law also imposes a 2.3% excise tax on sales of certain taxable medical devices that are made after December 31, 2012, including our FLUTTER mucus clearance device. Further, effective March 31, 2013, the law requires pharmaceutical, medical device, biological, and medical supply manufacturers to begin reporting to the federal government the payments they make to physicians and teaching hospitals, and physician ownership interests in those entities. The law also provides for the creation of an abbreviated regulatory pathway for FDA approval of biosimilars and interchangeable biosimilar products. While creation of the biosimilars program is authorized as of passage of the legislation in 2010, the process of creating the regulatory pathway for approval of biosimilars will likely be lengthy, and the FDA is in the process of soliciting public input.

The impact in terms of additional reserves recorded has been $4.5 million for the fiscal year ended September 30, 2011 compared to $0.5 million for the corresponding period of the preceding fiscal year.

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

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

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

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

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The federal health-care anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal health-care programs such as Medicare and Medicaid.

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The federal False Claims Act imposes criminal and civil penalties, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.

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The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for health-care benefits, items or services.

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Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving health-care items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.

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There are similar laws in countries outside the U.S.

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

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

Private civil litigation may be instituted against us in connection with alleged violation of the federal or state laws and regulations discussed above, under a number of different theories. Such litigation can result in significant expense and management distraction, as well as potential monetary damages or equitable relief.

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

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

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

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

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

In general, and subject to the terms of each specific agreement, we have agreed to indemnify our licensors, distributors and certain of our contract manufacturers for product liability claims and there is a risk that we will be subject to product liability claims and

claims for indemnification under these agreements. A substantial portion of our revenues are derived and will continue to be derived from activities in the United States, where pharmaceutical companies are exposed to a higher risk of litigation than in other jurisdictions. For example, under the Drug Price Competition and Patent Restoration Act of 1984, when a drug developer files an ANDA for a generic drug, it must certify to the FDA that it believes its product will not infringe on any unexpired patent that a patent holder has listed with the FDA as covering that brand-name product, or that any such patent is invalid or unenforceable. The drug developer must also provide such certification to the patent holder, who may challenge the developer’s certification of non-infringement, invalidity or unenforceability by filing a suit for patent infringement. Such a patent challenge within the first 45 days of notice of the ANDA certification can result in a 30-month stay of approval by FDA of the ANDA. Certain of our collaboration partners may have or develop generic versions of existing or then existing drugs. Our development of any such generic versions of drugs will be subject to this process. Should a patent holder commence a lawsuit against us with respect to alleged patent infringement, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. Litigation over patents could result in delays in obtaining FDA approval to market our product candidates and diversion of management resources and the costs resulting therefrom. Similar risks of the delay in obtaining approvals in other applicable jurisdictions could result from patent related litigation.

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

One of our subsidiaries, Axcan Scandipharm (now Aptalis Pharma US, Inc.), has been a party to several legal proceedings related to the product line it previously sold under the trademark ULTRASE and, in particular, with respect to certain dosage strengths. Axcan Scandipharm’s insurance carriers have defended the lawsuits to date and we expect them to continue to defend Axcan Scandipharm (to the extent of its product liability insurance) should other lawsuits be filed in the future.

Exposure relating to product liability claims may harm our business.

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

We deal with hazardous materials and must comply with environmental, health and safety laws and regulations, which can be expensive, restrict how we do business and/or give rise to significant liabilities.

We are subject to various environmental, health and safety laws and regulations, including those governing air emissions, including greenhouse gases, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials and wastes, and the cleanup of contaminated sites. The cost of compliance with these laws and regulations could be significant. In the event of a violation of these laws and regulations, including from accidental contamination or injury, we could be held liable for damages exceeding our available financial resources. We could be subject to monetary fines, penalties or third-party damage claims as a result of violations of such laws and regulations or noncompliance with environmental permits required at our facilities. As an owner and operator of real property and a generator of hazardous materials and wastes, we also could be subject to environmental cleanup liability, in some cases without regard to fault or whether we were aware of the conditions giving rise to such liability. In addition, we may be subject to liability and may be required to comply with new or existing environmental laws regulating pharmaceuticals in the environment. Environmental laws or regulations (or their interpretation) may become more stringent in the future. If any such future changes to environmental laws and regulations require significant changes in our operations, or if we engage in the development and manufacturing of new products or otherwise expand our operations requiring new or different environmental controls, we will have to dedicate additional management resources and incur additional expenses to comply with such laws and regulations.

In the event of an accident, applicable authorities may curtail our use of hazardous materials and interrupt our business operations. In addition, with respect to our manufacturing facilities, we may incur substantial costs to comply with environmental laws and regulations and may become subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process.

We maintain limited insurance coverage for the foregoing types of risks. In the event of environmental discharge, contamination or accident, we may be held liable for any resulting damages, and any liability could exceed our resources.

RISKS RELATED TO INTELLECTUAL PROPERTY

The four categories of products on which we have depended in the past two fiscal years for the majority of our revenues are not covered by any issued patents.

Other than limited patent protection relating to ZENPEP, we have no issued patents covering our PEPs (ULTRASE, VIOKASE and PANZYTRAT), ursodiol products (URSO, URSO 250, URSO DS, URSO FORTE and DELURSAN), mesalmine products (CANASA and SALOFALK) or sucralfate products (CARAFATE and SULCRATE). These four categories of products accounted collectively for a substantial portion of our revenues in fiscal years 2010 and 2011. While we believe that these product lines benefit from a variety of regulatory, clinical, sourcing and manufacturing hurdles to competitive entry, our current patents do not present any such hurdle, and there can be no assurance that any future patent that may issue to us would provide any meaningful protection.

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

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

To protect our intellectual property, we have historically relied on patents, trademarks and trade secrets, know-how and other proprietary information, as well as requiring our employees and vendors, suppliers and collaboration partners to sign confidentiality agreements prohibiting them from taking proprietary information and technology or from using or disclosing proprietary information to third parties except in specified circumstances. However, confidentiality agreements may be breached despite all precautions taken, and we may not have adequate remedies for any breach. Third parties may gain access to our proprietary information or may independently develop substantially equivalent proprietary information. Furthermore, the strength of patents and other intellectual property rights in the pharmaceutical industry involves complex legal and scientific questions and can be uncertain. We have filed and/or licensed patent applications related to certain of our products (including with respect to certain co-development products and product candidates), but such applications may fail to be granted, or, even if granted, may be challenged or invalidated or may fail to provide us with any competitive advantages. Additionally, patent applications in the United States and most other countries are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, we cannot be certain that we were the first to conceive inventions covered by our patents and pending patent applications or that we were the first to file patent applications for such inventions. Our inability to protect and maintain intellectual property rights in our products may impair our competitive position and adversely affect our sales and growth.

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

Our commercial success depends upon our ability to develop and market products without infringing the proprietary rights of third parties. As the pharmaceutical industry expands and more patents are issued, the risk increases that our products or product candidates may give rise to claims of infringement of the patent rights of others. Third-party patents (now or in the future) may cover

the materials or methods of treatment related to our products, and third parties may make allegations of infringement, regardless of merit. Because patent applications can take many years to issue, there may be currently pending applications which may later result in issued patents that our products may infringe. We cannot provide any assurances that our products or activities, or those of our licensors, will not infringe patents or other intellectual property owned by third parties. We have been (and from time to time we may be) notified that third parties consider their patents or other intellectual property infringed by, or otherwise relevant to, our products.

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

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

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

In October 2008, Eurand and 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. In May 2011, the U.S. District Court in Delaware rendered a decision against Eurand and Cephalon. An expedited appeal of the decision was filed in the Court of Appeals for the Federal Circuit and the appeal was held in September 2011. There is currently an injunction in place against the sale of generic Amrix by Mylan, and Anchen has agreed to be preliminarily enjoined from launching a generic form of Amrix while awaiting the ruling from the Federal Circuit. A ruling is expected in Spring 2012. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays FDA approval of each ANDA until the earlier of a district court judgment in favor of the ANDA holder or 30 months from the date of the plaintiff’s receipt of the respective Paragraph IV certification letter.

On October 7, 2010, both Eurand and Anesta AG (“Anesta”), an indirect wholly owned subsidiary of Cephalon, reached an agreement to settle the pending patent infringement litigation over AMRIX with Impax. Under terms of the settlement, both Eurand and Anesta will grant to Impax a non-exclusive, royalty-bearing license to market and sell a generic version of AMRIX in the United States beginning one year prior to expiration of the ‘793 Patent, which is expected to expire in February 2025, or earlier under certain circumstances. The settlement does not affect the status of the patent litigation with the other defendants set forth above. Cephalon is bearing the bulk of the expenses associated with the litigation. We intend to continue to work with Cephalon and Anesta to defend the AMRIX intellectual property rights, but there can be no assurance that these efforts will be successful.

Based on information available to us, GSK received a Paragraph IV certification letter from a generic drug manufacturer regarding an ANDA for a generic version of LAMICTAL ODT and claiming that the U.S. Patent No. 7,815,937 (the “‘937 Patent”) does not bar such a generic. The ‘937 Patent is not owned by us, and we believe that the patent does not cover the LAMICTAL product developed by us. We are not involved with any patent infringement lawsuit regarding GSK’s LAMICTAL ODT product and do not have any opinion on the validity or strength of the ‘937 Patent. However, if a generic version of LAMICTAL ODT is approved, it could have a material adverse effect on the revenue we derive from GSK based on the LAMICTAL product.

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

The intellectual property rights protecting our products might not afford us with meaningful protection from generic and other competition. The laws of certain foreign countries do not protect intellectual property rights to the same extent as the United States, which may render our protection and enforcement of such rights difficult or impossible in such foreign jurisdictions. In addition, because our strategy is to in-license or acquire pharmaceutical products that typically have been discovered and initially researched by others, future products might have limited or no remaining patent protection due to the time elapsed since their discovery. Competitors could also design around any of our intellectual property or otherwise design competitive products that do not infringe our intellectual property.

We also rely on trade secrets, proprietary know-how and technological advances, which we seek to protect, in part, through confidentiality agreements with collaborative partners, employees and consultants. These agreements might be breached and we might not have adequate remedies for any such breach. In addition, our trade secrets and proprietary know-how might otherwise become known or be independently developed by others. Any litigation that we become involved in to enforce intellectual property rights could result in substantial cost to us. In addition, claims by others that we infringe their intellectual property rights could be costly. Our patent or other proprietary rights related to our products might conflict with the current or future intellectual property rights of others. Litigation or patent interference proceedings, either of which could result in substantial cost to us, might be necessary to defend any patents to which we have rights and our other proprietary rights or to determine the scope and validity of other parties’ proprietary rights. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during any such litigation. The defense of patent and intellectual property claims is both costly and time consuming, even if the outcome is favorable. Any adverse outcome could subject us to significant liabilities to third parties, result in the narrowing of our intellectual property rights (including a ruling that a patent of ours is not valid or is unenforceable), require disputed rights to be licensed from third parties, or require us to cease selling one or more of our products. We might not be able to obtain a license to any third-party technology that we require to conduct our business, or, if obtainable, that technology might not be available at a reasonable cost.

RISKS RELATED TO GENERAL ECONOMIC AND FINANCIAL CONDITIONS

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

We have operations in several different countries. For the fiscal years ended September 30, 2009, 2010 and 2011, approximately 24.5%, 27.9% and 30.0% of our revenues, respectively, were derived from sources outside the U.S. We are therefore exposed to risks inherent in international operations. These risks include, but are not limited to

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changes in general economic, social and political conditions;

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adverse tax consequences;

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the difficulty of enforcing agreements and collecting receivables through certain legal systems;

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inadequate protection of intellectual property;

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required compliance with a variety of laws and regulations of jurisdictions outside of the U.S., including labor and tax laws;

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customers outside of the U.S. may have longer payment cycles;

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changes in laws and regulations of jurisdictions outside of the U.S.; and

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terrorist acts and natural disasters.

In addition, we face several risks relating to compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws which also prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Given the high level of complexity of these laws and regulations, however, there is a risk that some provisions may be inadvertently breached, for example through fraudulent or negligent behavior of individual employees or our partners, our failure to comply with certain formal documentation requirements or otherwise. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, our partners or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties.

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

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

We operate internationally, but a majority of our revenue and expense activities, including our debt service obligations, and capital expenditures are denominated in U.S. dollars. The other currencies in which we engage in significant transactions are Canadian dollars and Euros. As a consequence, we are exposed to currency fluctuations from purchases of goods, services and equipment and investments in other countries, and funding denominated in the currencies of other countries. In particular, we are exposed to the fluctuations in the exchange rate between the U.S. dollar, the euro and the Canadian dollar. During fiscal year 2011, approximately 17.8% of our revenues was denominated in Euros, 9.0% of our revenue was denominated in Canadian dollar, while the remainder was denominated in U.S. dollars.

Fluctuations in currency exchange rates may affect the results of our operations and the value of our assets and revenues, and increase our liabilities and costs, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. For example, in 2011, we experienced a positive foreign exchange effect on revenues of approximately 0.8%. Changes in currency exchange rates may affect the relative prices at which we and our competitors sell products in the same market. Changes in the value of the relevant currencies also may affect the cost of goods, services and equipment required in our operations.

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

A 1% change in the value of foreign currencies as compared the U.S. dollar to in which we had sales, income or expense in 2011 would have increased or decreased the translation of foreign sales by $0.9 million and income by $0.1 million.

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

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

We are currently unable to accurately predict what our short-term and long-term effective tax rates will be in the future.

We are subject to taxes in the United States and the various other jurisdictions in which we operate, and will become subject to taxes in additional jurisdictions. Significant judgment is required in determining our worldwide provision for taxes and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by changes in the mix of earnings (losses) in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or changes in tax laws, as well as other factors. Our judgments may be subject to audits or reviews by local tax authorities in each of these jurisdictions, which could adversely affect our tax provisions.

RISKS RELATED TO OUR INDEBTEDNESS

We may need additional capital.

We believe that our current cash and cash equivalents, together with cash generated from the sale of our products will be sufficient to fund our operations for fiscal year 2012. Our future capital requirements will depend on many factors, including but not limited to:

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any impact on us of current conditions and uncertainties in the economy;

•

patient and physician demand for our products;

•

the status of competitive products, including current and potential generics;

•

the results, costs and timing of our research and development activities, regulatory approvals and product launches;

•

our ability to reduce our costs in the event product demand is less than expected, or regulatory approvals are delayed or more expensive than expected;

•

the number of products and/or companies we acquire or in-license;

•

the actual amounts of returns we receive compared to our current estimates;

•

our ability to maintain our current credit facility;

•

the cost of future bank borrowing; and

•

our ability to realize and maintain future integration savings.

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

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

We have a substantial amount of indebtedness. As of September 30, 2011, our total indebtedness was $976.9 million and we had an additional $147.0 million of borrowing capacity available under our senior secured revolving credit facility. The following chart shows our level of indebtedness as of September 30, 2011.


	($ in millions of dollars)
Debt:
Senior secured term loan facility(1)	$	741.1
Senior secured revolving credit facility		0
Senior Notes(2)		233.4
Unsecured loan		2.4

Total	$	976.9

(1)	Represents the net proceeds received on our $750.0 million senior secured term loan facility after the unamortized portion of the original issuance discount.

(2)	Represents the net proceeds received on $235.0 million aggregate principal amount of senior notes after original issue discount.

In addition, we have significant other commitments, including milestone and royalty payments. See Note 22 in “Notes to Consolidated Financial Statements.” As of September 30, 2011, we had outstanding approximately $750.0 million in aggregate principal amount of indebtedness under our senior secured credit facilities that would bear interest at a floating rate. Although we may enter into interest rate swap agreements, we are exposed to interest rate increases on the floating portion of our senior secured credit facility that is not covered by interest rate swaps. On April 4, 2011, we 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 our 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 our 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 September 30, 2011, we 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%. Absent any such interest rate swap agreements, a change of 1/8% in floating rates would affect our annual interest expense on the senior secured borrowings by approximately $0.9 million. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk.”

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

•

make it more difficult for us to satisfy our obligations with respect to our indebtedness, including the senior notes, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the indenture governing the senior notes and the agreements governing such other indebtedness;

•

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other purposes;

•

increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

•

limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes; and

•

prevent us from raising the funds necessary to buy back all notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indenture governing the senior notes.

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

Subject to the restrictions in our senior secured credit facilities and the indenture governing the senior notes, we, including our subsidiaries, may incur significant additional indebtedness. As of September 30, 2011:

•

we had $741.1 million of borrowings under our senior secured credit facilities;

•

we had $233.4 million of senior unsecured indebtedness under the senior notes; and

•

we had approximately $147.0 million available for borrowing under our senior secured revolving credit facilities, which, if borrowed, would be senior secured indebtedness.

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

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

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

•

incur or guarantee additional indebtedness;

•

pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness;

•

make investments, loans, advances and acquisitions;

•

create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries;

•

engage in transactions with our affiliates;

•

sell assets, including capital stock of our subsidiaries;

•

consolidate or merge; and

•

create liens.

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

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

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

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

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

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

As of September 30, 2011, we had secured indebtedness consisting of:

•

$741.1 million of senior secured debt under our senior secured credit facilities; and

•

an additional $147.0 million of borrowing capacity under our senior secured revolving credit facility, which, if borrowed, would be senior secured indebtedness.

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

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

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

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

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

For fiscal year 2011, our non-guarantor subsidiaries accounted for approximately $103.1 million, or 21.9% of our consolidated revenue. As of September 30, 2011, our non-guarantor subsidiaries accounted for approximately $1,529.0 million, or 121.6% of our consolidated total assets and $363.2 million, or 28.3% of our consolidated total liabilities. All amounts are presented after giving effect to intercompany eliminations. The indenture governing the senior notes permit these subsidiaries to incur certain additional debt and do not limit, or will not limit, their ability to incur other liabilities that are not considered indebtedness under the indenture.

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

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

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

Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the senior notes and substantially decrease the market value of the senior notes. If we are

unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness (including covenants in our senior secured credit facilities and the indenture governing the senior notes), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facilities and the indenture governing the senior notes. In the event of such default:

•

the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;

•

the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and

•

we could be forced into bankruptcy or liquidation.

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

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

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

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

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

•

We or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the senior notes or the incurrence of the guarantees or subsequently become insolvent for other reasons.

•

The issuance of the senior notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business.

•

We or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay such debts as they mature.

•

We or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

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

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

•

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;

•

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

•

it could not pay its debts as they become due.

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

Although each guarantee entered into by a guarantor will contain a provision intended to limit that guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer or conveyance laws, or may reduce that guarantor’s obligation to an amount that effectively makes its guarantee worthless.

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

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

We are a U.S. company incorporated in the state of Delaware. The senior notes are guaranteed by all of our significant U.S. subsidiaries and certain of our foreign subsidiaries in Canada, the Netherlands and Luxembourg. In the event of bankruptcy, insolvency or a similar event, proceedings could be initiated in any of these jurisdictions and in the jurisdiction of organization of any

future guarantor of the senior notes. Our note holders’ rights under the senior notes and the guarantees will thus be subject to the laws of several jurisdictions, and they may not be able to effectively enforce our note holders’ rights in multiple bankruptcies, insolvency and other similar proceedings. Moreover, such multi jurisdictional proceedings are typically complex and costly for creditors and often result in substantial uncertainty and delay in the enforcement of creditors’ rights.

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

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

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

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

We own and operate two facilities near Milan, Italy. The main facility, which houses administrative, research, production and warehouse activities, is approximately 151,000 total square feet in size and was built in 1996. The laboratory and office space were expanded in 2001 and the office space was expanded again in 2008, adding an additional 3,700 square feet. We acquired the second facility in 2000 through the acquisition of Pharmatec International S.r.l. This approximately 60,000 square-foot production facility was completely renovated in 2003.

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

We also own a manufacturing facility of approximately 22,000 square feet in Nogent-Oise, France. This facility was constructed in 1977 and was upgraded and renovated a number of times over the years, most recently in 2005, when we renovated certain testing and quality control laboratory areas in the facility. We have ceased operations at this facility.

Our U.S. manufacturing operations are based near Dayton, Ohio, where we own a facility of approximately 101,000 square feet, which houses our administrative, research, production and warehouse operations in the U.S. This facility was built in 1985 and completely renovated and expanded in 2001. In 2008, we completed a construction project which included the renovation of approximately 13,000 square feet of our existing building, as well as a 13,000 square-foot addition. In addition, adjacent to the facility, we lease approximately 5,000 square feet of office space that houses certain administrative personnel.

All our manufacturing facilities are operated in compliance with cGMPs and GLPs and are periodically audited by the relevant authorities and customers. We believe that all of our present facilities are suitable for their intended purposes. We believe our current manufacturing capabilities in our existing facilities are sufficient for our present and future operations, and we currently have no material expansion plans. We believe, however, that we have the ability to expand our manufacturing capacity in our existing facilities, if needed.

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

We lease approximately 19,715 square feet of office space in Bridgewater, New Jersey, (U.S.A.). On September 12, 2011, we amended the agreement to lease an additional 12,029 square feet of space on the same floor for a total of 31,744 square feet in Bridgewater, New Jersey and extended the term for an additional five (5) years.

We believe that we have sufficient facilities to conduct our operations during fiscal year 2012 and that our facilities are in satisfactory condition and are suitable for their intended use, although investments to improve and expand our manufacturing and other related facilities are contemplated, as our business requires.

ITEM 3.

LEGAL PROCEEDINGS

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

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

In May 2006, the second application seeking a prohibition order was dismissed as our Canadian PBC use patent was held to be invalid for purposes of the Regulations. PMS has since filed a claim against us pursuant to section 8 of the Regulations seeking recovery of alleged damages sustained by reason of the delay to commercialize its product due to our opposition. In 2011, this claim was settled out of court for a non-material amount.

In October 2008, Eurand and 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. In May 2011, the U.S. District Court in Delaware rendered a

decision against Eurand and Cephalon. An expedited appeal of the decision was filed in the Court of Appeals for the Federal Circuit and the appeal was held in September 2011. There is currently an injunction in place against the sale of generic Amrix by Mylan, and Anchen has agreed to be preliminarily enjoined from launching a generic form of Amrix while awaiting the ruling from the Federal Circuit. A ruling is expected in Spring 2012. Under the provisions of the Hatch-Waxman Act, the filing of these lawsuits stays FDA approval of each ANDA until the earlier of a district court judgment in favor of the ANDA holder or 30 months from the date of the plaintiff’s receipt of the respective Paragraph IV certification letter.

In September 2010, one of our subsidiaries, and our indirect parent, received notice of Sanofi-Aventis U.S. LLC’s (“SA”) complaint filed with the Superior Court of New Jersey, Somerset County, requesting certain remedies in connection with SA’s stated intention to close its Kansas City facility where CARAFATE product is currently manufactured. The supply agreement with SA, as amended, provides that the CARAFATE product’s manufacturing site may not be changed without our subsidiary’s prior written consent. Pursuant to the complaint filed, SA was seeking an order for specific performance compelling the defendants to consent to the transfer of the manufacturing site of CARAFATE product to an alleged SA facility located in Laval, Canada and to execute related documentation, and for a declaration that SA will not be liable, including for lost profits, for any interruption in supply by reason of the current site’s closure or by reason of a site transfer to Laval. Our subsidiary removed the case to the United States District Court for the District of New Jersey; SA had moved to remand the case back to the Superior Court of New Jersey. The defendants believe that SA’s claims lack merit, and that under the supply agreement as amended, our subsidiary is entitled to have CARAFATE product continue to be manufactured at the Kansas City site until the expiry of that agreement as amended which, assuming our subsidiary exercises its option to extend the term as amended, will be in August 2016. Later, SA decided to transfer the manufacturing of CARAFATE to a different site other than the Laval site. On June 13, 2011 SA filed a notice of voluntary dismissal with the Court, which automatically effectuates that dismissal. Subsequently, we were notified that SA will be keeping the Kansas City facility open to manufacture CARAFATE at least through the expiry of the supply agreement, that is through August 2016.

ITEM 4.

(REMOVED AND RESERVED)

PART II

ITEM 5.

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

Market and other information

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

Holders

As of December 16, 2011, Aptalis MidCo Inc. was the sole holder of our common stock, Aptalis Holdings was the sole holder of the common stock of Aptalis MiCo Inc., and there were 55 holders of Aptalis Holdings’ common stock. See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for additional information about the ownership of Aptalis Holdings’ common stock.

Dividends

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

ITEM 6.

SELECTED FINANCIAL DATA

Financial Information

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

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


	Successor												Predecessor
	Fiscal Year Ended September 30, 2011			Fiscal Year Ended September 30, 2010			Fiscal Year Ended September 30, 2009			February 26, 2008 through September 30, 2008			October 1, 2007 through February 25, 2008			Fiscal Year Ended September 30, 2007
	($ in thousands)												($ in thousands)
Statement of Operations Data:
Net product sales	$	461,430		$	354,587		$	409,826		$	223,179		$	158,579		$	348,947
Other Revenue		8,954			—			7,113			—			—			—

Total Revenue	$	470,384		$	354,587		$	416,939		$	223,179		$	158,579		$	348,947
Cost of goods sold(1)		135,439			130,915			103,023			77,227			38,739			83,683
Selling and administrative expenses(1)(2)		143,103			113,963			122,942			88,246			76,198			101,273
Management Fees		3,607			4,412			5,351			99			—			—
Research and development expenses(1)		57,991			31,715			36,037			17,768			10,256			28,655
Acquired in-process research		65,540			7,948			—			272,400			—			10,000
Depreciation and amortization		72,829			61,011			60,305			35,579			9,595			22,494
Loss on disposal of product line		7,365			—			—			—			—			—
Transaction, restructuring and integration costs		50,912			1,070			—			—			—			—
Impairment of intangible assets and goodwill		—			107,158			55,665			—			—			—

Operating Income (loss)		(66,402	)		(103,605	)		33,616			(268,140	)		23,791			102,842
Financial expenses		89,495			64,956			69,809			41,513			262			4,825
Loss on extinguishment of debt		28,311			—			—			—			—			—
Other interest income		(461	)		(688	)		(389	)		(808	)		(5,440	)		(11,367	)
Other income		—			(9,704	)		(3,500	)		—			—			—
Loss (gain) on foreign currencies		112			1,247			(328	)		(1,841	)		(198	)		2,352
Income (loss) before income taxes		(183,859	)		(159,416	)		(31,976	)		(307,004	)		29,167			107,032
Income taxes		4,025			10,950			(24,082	)		(17,740	)		12,042			35,567

Net income (loss)	$	(187,884	)	$	(170,366	)	$	(7,894	)	$	(289,264	)	$	17,125		$	71,465

Balance Sheet Data (at period end):
Cash and cash equivalents	$	126,509		$	161,503		$	126,435		$	56,105		$	348,791		$	179,672
Short-term investments, available for sale		—			—			—			—			—			129,958
Total current assets		272,321			226,749			250,682			176,980			471,170			402,127
Total assets		1,257,860			713,177			914,602			944,812			902,384			832,611
Total short-term borrowings		8,511			13,163			30,708			10,938			373			527
Total debt		976,939			594,475			613,294			622,184			441			649
Total current liabilities		177,654			111,329			121,022			99,300			166,456			104,737
Total liabilities		1,285,234			734,209			750,838			779,142			206,903			142,414
Total shareholders’ equity(3)		(27,374	)		(21,032	)		163,764			165,670			695,401			690,197
Statement of Cash Flows Data:
Net cash from (used in):
Operating activities	$	(49,010	)	$	63,120		$	92,382		$	(47,512	)	$	73,245		$	136,102
Investing activities		(530,008	)		(6,058	)		(10,600	)		(961,556	)		126,630			(19,415	)
Financing activities		542,960			(21,338	)		(11,594	)		1,066,053			(31,243	)		6,553
Other Financial Data:
EBITDA(4)		(21,996	)		(34,137	)		97,749			(230,720	)		33,584			122,984
Adjusted EBITDA(4)		176,276			162,397			172,828			84,539			70,119			141,407

(1)	Exclusive of depreciation and amortization.

(2)

Amounts shown for the five-month period ended February 25, 2008, seven-month period ended September 30, 2008, and for the fiscal year ended September 30, 2009 include expenses related to the February 2008 Transactions. Amount shown for the fiscal year ended September 30, 2011 includes certain reorganization, special projects and due diligence costs.

(3)

A portion of our common stock was issued to our parent company, Aptalis MidCo Inc., in the February 2008 Transactions in exchange for a note receivable amounting to $133,154,405. Pursuant to U.S. GAAP, we report the principal amount as a separate balance offset against shareholders’ equity. Furthermore, we do not recognize interest income related to this note receivable due from Aptalis MidCo Inc. in our income statement.

(4)

EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are presented in this report because our management considers them important supplemental measures of our performance and believes that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income before financial expenses, interest income, income taxes and depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. We believe that EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items and other adjustments set forth below. Adjusted EBITDA is calculated in the same manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indentures governing our notes and Credit Facility further described in the section “Liquidity and Capital Resources—Long-term Debt and New Senior Secured Credit Facility”. We believe that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in 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.


	Successor												Predecessor
	Fiscal Year Ended September 30, 2011			Fiscal Year Ended September 30, 2010			Fiscal Year Ended September 30, 2009			February 26, 2008 through September 30, 2008			October 1, 2007 through February 25, 2008			Fiscal Year Ended September 30, 2007
	Fiscal Year Ended September 30, 2011			Fiscal Year Ended September 30, 2010			Fiscal Year Ended September 30, 2009									Fiscal Year Ended September 30, 2007
	($ in thousands)												($ in thousands)
Net income to EBITDA:
Net income (loss)	$	(187,884	)	$	(170,366	)	$	(7,894	)	$	(289,264	)	$	17,125		$	71,465
Financial expenses		89,495			64,956			69,809			41,513			262			4,825
Interest income		(461	)		(688	)		(389	)		(808	)		(5,440	)		(11,367	)
Income taxes expense (benefit)		4,025			10,950			(24,082	)		(17,740	)		12,042			35,567
Depreciation and amortization		72,829			61,011			60,305			35,579			9,595			22,494

EBITDA	$	(21,996	)	$	(34,137	)	$	97,749		$	(230,720	)	$	33,584		$	122,984

EBITDA to Adjusted EBITDA:
EBITDA	$	(21,996	)	$	(34,137	)	$	97,749		$	(230,720	)	$	33,584		$	122,984
Transaction, integration refinancing costs and other payments to third parties(a)		53,577			9,058			7,891			12,603			26,489			—
Management Fees(b)		3,607			4,412			5,351			99			—			—
Unrestricted subsidiary(c)		16,000
Stock-based compensation expense excluding impact of the unapproved PEPs event(d)		7,873			4,540			6,172			7,443			10,046			4,548
Impairment of intangible assets and goodwill related to the unapproved PEPs event(e)		—			107,158			—			—			—			—
Other adjustments related to the unapproved PEPs event(f)		(3,064	)		63,418			—			—			—			—
Loss on extinguishment of debt		28,311			—			—			—			—			—
Loss on disposal of product line and write-down of assets(g)		7,365
Inventories stepped-up value expensed(h)		19,063			—			—			22,714			—			—
Acquired in-process research(i)		65,540			7,948			—			272,400			—			10,000
Partial write-down of intangible assets(j)		—			—			55,665			—			—			3,875

Adjusted EBITDA(k)	$	176,276		$	162,397		$	172,828		$	84,539		$	70,119		$	141,407

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, certain 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 EBITDA generated by MPEX Pharmaceuticals Inc., an unrestricted subsidiary, with the exception of Acquired in-process research charges.

d)	Represents stock-based employee compensation expense under the provisions of FASB guidance, excluding the impact of the unapproved PEPs event.

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

Other Adjustments and other write-downs related to the unapproved PEPs event, including a reduction of $3.1 million to the sales returns reserve during the fiscal year ended September 30, 2011 (additional returns provision of $23.4 million, inventory write-down and accrual for purchases and other materials and supply commitments of $44.9 million and a stock-based compensation recovery of $4.9 million during the fiscal year ended September 30, 2010).

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

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 has been recorded as charge to cost of goods sold as acquired inventory was sold, until acquired inventory was sold off.

Represents 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 $44.8 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.

j)	Partial write-down of intangible assets related to URSO products.

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 a similar manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indenture governing our senior 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 indenture 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;

•

Adjusted EBITDA reflects additional adjustments as provided in the indenture governing our 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.

ITEM 7.

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 “Item 6. Selected Financial Data” and the historical audited consolidated financial statements and related notes included elsewhere in this Report. The results of operations for the fiscal years ended September 30, 2011, and September 30, 2010, and September 30, 2009, 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”, “Eurand”, “Aptalis”, “Company”, “we”, “us” and “our” refer to Aptalis Pharma Inc. and its consolidated subsidiaries.

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

OVERVIEW

Our Business

We are a 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^®, PYLERA^®, 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. We 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, we also formulate and clinically develop 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.

Business Environment

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 ULTRASE MT and VIOKASE, effective April 28, 2010, in response to U.S Food and Drug Administration (“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.

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

On February 11, 2011 (or the “Acquisition Date”), Axcan Holdings Inc., which subsequently changed its name to Aptalis Holdings, Inc., our indirect parent (“Aptalis Holdings”), and Axcan Pharma Holding B.V. (“Axcan Acquisition Co”), an indirect subsidiary of ours, 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. As a result of the acquisition, Eurand has become an indirect subsidiary of ours.

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 our business and expand our geographic and manufacturing footprint.

Fair value of consideration transferred

The table below details the consideration transferred to acquire Eurand:

Conversion
Calculation

Fair Value

Form of
Consideration

(in millions of U.S. $)

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

(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.

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 Axcan and Eurand, were used to repay the outstanding term loan portion amounting to $125.7 million of our prior 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 our 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. 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.

Assets acquired and liabilities assumed

A preliminary purchase price allocation had been made as of the Acquisition Date. We finalized our purchase price allocation during the fourth quarter of fiscal year ended September 30, 2011 resulting in no retrospective adjustments to the provisional amounts recognized at the Acquisition Date.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date.


(in millions of U.S. dollars)	Book value as at February 11, 2011			Step-up to fair value			Amounts recognized as of 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

^(a)	As of the 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.

^(b)	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.

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

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


(in millions of U.S. dollars)	Amounts recognized as of acquisition date		Weighted average useful 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.

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

^(f)	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.

^(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 our operations with Eurand and intangible assets that do not qualify for separate recognition. We do not expect any portion of this goodwill to be deductible for tax purposes.

^(h)	Prior to the acquisition, we 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 us and Eurand as a result of this acquisition.

Transaction related costs

During the fiscal year ended September 30, 2011, we have expensed $11.9 million (an additional $1.1 million had been 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 Consolidated Statements of Operations.

Actual and proforma information

The revenue derived from the Eurand entities for the period from the Acquisition Date to September 30, 2011 were $121.9 million and loss before income taxes was $39.6 million.

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


	Year Ended September,
	2011			2010
	$			$
Total revenue		534.5			504.0
Loss before income taxes		(94.6	)		(160.7	)
Net loss		(108.1	)		(164.3	)

The pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of us 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 us and Eurand.

The pro forma information is not necessarily indicative of what our 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 our operations. The pro forma information reflects primarily the following pro forma adjustments:

•

elimination of product sales and royalties between Eurand and us, an elimination of our 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 us 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 $19.1 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 our 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.

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

On April 11, 2011, Aptalis Holdings and Axcan Lone Star Inc. (“Merger Sub”), affiliates of ours, 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). Subsequently on August 31, 2011, under the terms of these agreements, Aptalis Holdings and Merger Sub acquired all of Mpex’s assets related to Aeroquin™ in a merger of Mpex with and into Merger Sub, with Mpex being the surviving corporation and a direct, wholly-owned subsidiary of us. Prior to the merger, Mpex transferred all of its assets that are not related to Aeroquin™ to Rempex Pharmaceuticals, Inc. (“Rempex”), a newly formed company that is owned primarily by the previous Mpex stockholders. As a result of the Aeroquin Transaction, we made an initial non-contingent payment of $12.0 million on April 21, 2011. Additional consideration in relation with the Aeroquin Transaction consists of (i) remaining time-based, non-contingent payments amounting to $33.0 million and an additional $17.5 million of time-based payments will be paid in a number of installments, of which the final installment is due on April 1, 2014, plus, (ii) contingent payments of up to $195.0 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.

During the year ended September 30, 2011, we expensed $15.8 million as research and development and $65.5 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 and Merger agreements of $44.8 million (with a corresponding liability) and the payment for certain pre-agreement incurred development expenses of $8.7 million. As of September 30, 2011, $7.8 million reflecting forecasted development costs for the next three months is included in prepaid expenses and other current assets. As of September 30, 2011, $45.7 million represents the amount accrued for the non-contingent payments payable under the Option and Merger agreements with $32.5 million included in other long term liabilities and the balance included in accounts payable and accrued liabilities.

Equity investment in Aptalis Holdings

FINANCIAL OVERVIEW FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2011

This discussion and analysis is based on 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, see the section entitled “Business Products”.

For the fiscal year ended September 30, 2011, total revenue was $470.4 million ($354.6 million in fiscal year 2010 and $416.9 million in fiscal year 2009), operating loss was $66.4 million (operating loss of $103.6 million in fiscal year 2010 and operating income of $33.6 million in fiscal year 2009) and net loss was $187.9 million ($170.4 million in fiscal year 2010 and $7.9 million in fiscal year 2009).

In the United States, total revenue was $337.7 million (71.8% of total revenue) for the fiscal year ended September 30, 2011, compared to $259.0 million (73.0% of total revenue) in fiscal year 2010 and $319.6 million (76.7% of total revenue) in fiscal year 2009. In the European Union, total revenue was $95.5 million (20.3% of total revenue) for the fiscal year ended September 30, 2011, compared to $63.2 million (17.8% of total revenue) in fiscal year 2010 and $65.8 million (15.8% of total revenue) in fiscal year 2009. In Canada, total revenue was $37.2 million (7.9% of total revenue) for the fiscal year ended September 30, 2011, compared to $32.4 million (9.1% of total revenue) in fiscal year 2010 and 30.9 million (7.4% of total revenue) in fiscal year 2009.

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.

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 FDA 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 September 30, 2011, this interruption of shipments was still in place.

On September 1, 2011 we filed our response to the FDA’s Complete Response letters dated November 28, 2010 for the VIOKASE and ULTRASE NDAs. We have a PDFA date of March 1^st, 2012. We continue to work with the manufacturer of the active pharmaceutical ingredient to address any open issues identified by the FDA. However, we do not believe additional clinical studies will be required at this time.

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 $23.5 million sales deduction reserve for the fiscal year ended September 30, 2010. This additional reserve was an estimate of our liability for ULTRASE MT and VIOKASE that may be returned by the original purchaser under our DSAs or applicable return policies as well as other incremental sales deductions that may be incurred in addition to those previously recorded for ULTRASE MT and VIOKASE prior to the PEPs event. The cease distribution order issued by the FDA was not considered as a product recall. This reserve was based on management estimates of ULTRASE MT and VIOKASE inventory in the distribution channel, assumptions on related expiration dates of this inventory as well as estimated erosion of ULTRASE MT and VIOKASE demand, based on competition from approved PEPs and the resulting estimated sell-through of ULTRASE MT and VIOKASE, actual return activity and other factors.

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 remaining reserve related to the PEPs event, was $3.1 million at September 30, 2011, ($11.0 million at September 30, 2010). This reserve was affected by a reversal of $3.1 million in the fiscal year ended September 30, 2011 to reflect the sell-through of inventory in the distribution channel as well as the estimated sales value of the remaining inventory in the distribution channel as of September 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.

Financial highlights


(in millions of U.S. dollars)	September 30, 2011			September 30, 2010
	$			$
Total assets		1,257.9			713.2
Long-term debt ^(a)		976.9			594.5
Shareholder’s deficiency		(27.4	)		(21.0	)

^(a)	Including the current portion


	Year Ended September 30,
(in millions of U.S. dollars)	2011			2010			2009
	$			$			$
Total revenue		470.4			354.6			416.9
EBITDA ⁽¹⁾		(22.0	)		(34.1	)		97.7
Adjusted EBITDA ⁽¹⁾		176.3			162.4			172.8
Net loss		(187.9	)		(170.4	)		(7.9	)

⁽¹⁾	A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA to Adjusted EBITDA (a non-U.S. GAAP measure) for the fiscal year ended September 30, 2011, 2010 and 2009 are as follows:


	Year Ended September 30,
(in millions of U.S. dollars)	2011			2010			2009
	$			$			$
Net loss		(187.9	)		(170.4	)		(7.9	)
Financial expenses		89.5			65.0			69.8
Interest income		(0.4	)		(0.7	)		(0.4	)
Income tax expense (benefit)		4.0			11.0			(24.1	)
Depreciation and amortization		72.8			61.0			60.3

EBITDA ⁱ⁾		(22.0	)		(34.1	)		97.7
Transaction, integration, refinancing costs and other payments to third parties ^a)		53.7			9.0			7.8
Management fees ^b)		3.6			4.4			5.4
Unrestricted subsidiary^c)		16.0			—			—


Stock-based compensation expense excluding impact of the unapproved PEPs event^d)	7.8		4.5	6.2
Impairment of intangible assets and goodwill related to the unapproved PEPs event ^e)	—		107.2	—
Other Adjustments related to the unapproved PEPs event ^f)	(3.1	)	63.4	—
Loss on extinguishment of debt	28.3		—	—
Loss on disposal of product line and write-down of assets ^g)	7.4		—	—
Inventory stepped-up value expenses ^h)	19.1		—	—
Acquired in-process research ⁱ⁾	65.5		8.0	—
Partial write-down of intangible assets ^j)	—		—	55.7

Adjusted EBITDA ^k)	176.3		162.4	172.8

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

c)	Represents EBITDA generated by MPEX Pharmaceuticals Inc., an unrestricted subsidiary, with the exception of Acquired in-process research charges.

d)	Represents stock-based employee compensation expense under the provisions of FASB guidance, excluding the impact of the unapproved PEPs event.

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

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

j)	Partial write-down of intangible assets related to URSO products.

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 a similar manner as “EBITDA” and “Consolidated EBITDA” as those terms are defined under the indenture governing our senior 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 indenture 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;

•

Adjusted EBITDA reflects additional adjustments as provided in the indenture governing our 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.

Fiscal year ended September 30, 2011, compared to the fiscal year ended September 30, 2010

Overview of results of operations


	Year Ended September 30,
(in millions of U.S. dollars)	2011		2010		Change
	$		$		$		%
Net product sales ^b)		461.4		354.6		106.8		30.1
Other revenue		9.0		—		9.0		100.0


Total revenue	470.4		354.6		115.8		32.7

Cost of goods sold ^{a) b)}	135.4		130.9		4.5		3.4
Selling and administration expenses ^{a) b)}	143.2		113.9		29.3		25.7
Management fees	3.6		4.4		(0.8	)	(18.2	)
Research and development expenses^a)	58.0		31.7		26.3		83.0
Acquired in-process research	65.5		8.0		57.5		718.8
Depreciation and amortization	72.8		61.0		11.8		19.3
Loss on disposal of product line	7.4		—		7.4		100.0
Transaction, restructuring and integration costs	50.9		1.1		49.8		4,527.3
Impairment of intangible assets and goodwill ^b)	—		107.2		(107.2	)	(100.0	)

Total operating expenses	536.8		458.2		78.6		17.2

Operating loss	(66.4	)	(103.6	)	37.2		35.9

Financial expenses	89.5		65.0		24.5		37.7
Loss on extinguishment of debt	28.3		—		28.3		100.0
Interest income	(0.4	)	(0.7	)	0.3		42.9
Other income	—		(9.7	)	9.7		100.0
Loss on foreign currencies	0.1		1.2		(1.1	)	(91.7	)

Total other expenses	117.5		55.8		61.7		110.6

Loss before income taxes	(183.9	)	(159.4	)	(24.5	)	(15.4	)
Income taxes expense (benefit) ^b)	4.0		11.0		(7.0	)	(63.6	)

Net Loss	(187.9	)	(170.4	)	(17.5	)	(10.3	)

^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. increased $71.0 million (27.4%), to $330.0 million for the fiscal year ended September 30, 2011, compared to $259.0 million for the corresponding period of the preceding fiscal year. The increase in sales in U.S. is mainly due to the inclusion of post-acquisition sales of legacy Eurand products amounting to $86.1 million and due to the sales returns provision related to the PEPs event for the fiscal year ended September 30, 2011, compared to the previous year, which amounted to $20.3 million (additional $23.4 million sales deduction reserve in the fiscal year ended September 30, 2010 and reversal of $3.1 million in the fiscal year ended September 30, 2011). The increase in net product sales for the fiscal year ended September 30, 2011 is partially offset by the absence of ULTRASE and VIOKASE product sales which amounted to $49.6 million in the fiscal year ended September 30, 2010. Wholesaler inventory fluctuations have also favourably impacted our U.S. net sales by approximately $8.0 million overall.

Net product sales in the European Union increased $31.3 million (49.5%), to $94.5 million for the the fiscal year ended September 30, 2011, compared to $63.2 million for the corresponding period of the preceding fiscal year. The increase is mostly due to the inclusion of post-acquisition sales of legacy Eurand products amounting to $27.2 million for the fiscal year ended September 30, 2011.

Net product sales in Canada increased $4.5 million (13.9%), to $36.9 million for the the fiscal year ended September 30, 2011, compared to $32.4 million for the corresponding period of the preceding fiscal year. 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 6.1%.

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:


	Year Ended September,
(in millions of U.S. dollars)	2011			2010		Change
	$			$		$			%
Gross product sales		579.3			474.6		104.7			22.1

Gross-to-net product sales adjustments
Product returns		11.6			9.3		2.3			24.7
Product returns related to unapproved PEPs event		(3.1	)		23.4		(26.5	)		(113.2	)
Chargebacks		42.6			37.3		5.3			14.2
Contract rebates		48.3			36.3		12.0			33.1
DSA fees		9.0			5.6		3.4			60.7
Discounts and other allowances		9.5			8.1		1.4			17.3

Total gross-to-net product sales adjustments		117.9			120.0		(2.1	)		(1.8	)

Total net product sales		461.4			354.6		106.8			30.1

Product returns, contract rebates, DSA fees, discounts and other allowances totalled $117.9 million (20.4% of gross product sales) for the fiscal year ended September 30, 2011, compared to $120.0 million (25.3% 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 taking $23.4 million during the fiscal year ended September 30, 2010 as a result of the PEPS event partially offset by a reversal of the provision amounting to $3.1 million during the fiscal year ended September 30, 2011).

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 did 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 are assessed on all branded prescription drug manufacturers and importers. This fee is 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.

Performance of our main product lines

Variations in sales performance in fiscal year 2011 versus the preceding fiscal year were the result of a combination of changes in sales volume as well as price increases.

Key sales figures for our main product lines for the fiscal year 2011 are as follows:

•

Sales of pancreatic enzyme products (ULTRASE, PANZYTRAT, VIOKASE and ZENPEP) increased $13.9 million (20.3%) to $82.2 million from $68.3 million for the preceding fiscal year mainly due to combination of the integration of Zenpep following the acquisition of Eurand, which was partially offset by the continued impact of the PEP event in fiscal year 2011.

•

Sales of ursodiol products (URSO, URSO 250, URSO FORTE, URSO DS and DELURSAN) decreased $0.9 million (2.0%) to $43.7 million from $44.6 million for the preceding fiscal year.

•

Sales of mesalamine products (CANASA and SALOFALK) increased $17.1 million (17.0%) to $117.8 million from $100.7 million for the preceding fiscal year. The increase mainly resulted from increases in net selling price and to a lesser extent, increases in sales volume.

•

Sales of sucralfate products (CARAFATE and SULCRATE) increased $22.1 million (25.6%) to $108.6 million from $86.5 million for the preceding fiscal year. The increase mainly resulted from an increase in sales volume and to a lesser extent, to an increase in net selling price.

•

Sales of other specialty pharmaceutical products increased $5.6 million (10.3%) to $60.1 million from $54.5 million for the preceding fiscal year.

•

Sales of our various pharmaceutical technologies products were $49.0 million in 2011 ($0 in 2010) due to the acquisition of Eurand.

Other Revenue

Other revenue consists of development fees, royalties and other revenue. Development fees amounted to $3.6 million for the fiscal year ended September 30, 2011. 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.

We apply our proprietary pharmaceutical technologies in one of two ways — either to develop products on behalf of our collaborators or as internal programs. In both situations, we are involved in all stages of the formulation development process and perform largely

the same types of work although, in general, we only perform 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.

Royalties amounted to $5.0 million for the fiscal year ended September 30, 2011, and resulted from the inclusion of legacy Eurand’s business in the post-acquisition period. We earn royalty revenues from its collaborators equal to a percentage of their sales of the products on 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 fiscal year ended September 30, 2011, cost of goods sold increased $4.5 million (3.4 %) to $135.4 million from $130.9 for the corresponding period of the preceding fiscal year. As a percentage of net product sales, cost of goods sold for the fiscal year ended September 30, 2011 decreased compared to the corresponding period of the preceding fiscal year to 29.3% from 36.9% primarily due to the unfavourable impact from the provisions taken as a result of the unapproved PEPs event in the fiscal year ended September 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 the Acquisition Date. The stepped-up value has been recorded as charge to cost of goods sold as acquired inventory is sold, until the acquired inventory is sold off. The total stepped-up value was expensed during the fiscal year ended September 30, 2011.

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 25.4% compared to 22.8% for the fiscal year ended September 30, 2010.

Selling and administrative expenses

Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other costs associated with our sales force and marketing activities. For the fiscal year ended September 30, 2011, selling and administrative expenses increased $29.3 million (25.7%) to $143.2 million from $113.9 million for the corresponding period of the preceding fiscal year. The increase is resulting from the inclusion of legacy Eurand’s business in the post-acquisition period amounting to $35.6 million for the fiscal year ended September 30, 2011. The increase was partially offset by a reduction of ULTRASE and VIOKASE products marketing expenses and patient programs.

During the fiscal year ended September 30, 2011, we 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 reporting periods.

Management fees

Management fees consist of fees and other charges associated with the Management Services Agreement with TPG. For the fiscal year ended September 30, 2011, management fees decreased $0.8 million (18.2%) to $3.6 million from $4.4 million for the corresponding period of the preceding fiscal year.

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 fiscal year ended September 30, 2011, research and development expenses increased $26.3 million (83.0 %) to $58.0 million, from $31.7 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 $15.7 million for the fiscal year ended September 30, 2011 and (ii) expenses of $15.8 million for the fiscal year ended September 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 fiscal year ended September 30, 2011.

During the fiscal year ended September 30, 2011, we 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 reporting periods. We will also continue to incur ongoing development costs of Aeroquin under the Mpex Development Agreement.

On March 14, 2011, we entered into an agreement with a third-party to jointly develop a new combination product including Sucralfate. Under the terms of this agreement, we will pay a series of contingent and non-contingent milestone based payments. Upon commercialization of the new product, we will pay the third party to the arrangement a single digit royalty on net sales of the new product. Additionally, we will pay the third party a single digit royalty on net sales of Carafate, beginning on January 1, 2013, until December 31, 2019.

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™ is being 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 year ended September 30, 2011, we expensed $15.8 million as research and development, $65.5 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 and Merger agreements of $44.8 million (with a corresponding liability) and the payment for certain pre-agreement incurred development expenses of $8.7 million. As of September 30, 2011, $7.8 million reflecting forecasted development costs for the next three months is included in prepaid expenses and other current assets. As of September 30, 2011, $45.7 million represents the amount accrued for the non-contingent payments payable under the Option and Merger agreements with $32.5 million included in other long term liabilities and the balance included in accounts payable and accrued liabilities.

During the fiscal year ended September 30, 2010, we entered into an asset purchase and license agreement to acquire rights in and to the intellectual property, assigned contracts, permits and inventories related to a compound to be used in the development of an undisclosed product in the field of gastroenterology. Certain other rights were licensed under the agreement. Pursuant to the agreement, we made an upfront payment of $8.0 million on closing and 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 $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, we will be paid royalties on annual net sales of PHOTOFRIN/PHOTOBARR.

Depreciation and amortization

Depreciation and amortization consists principally of the amortization of intangible assets with a finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For the fiscal year ended September 30, 2011, depreciation and amortization increased $11.8 million (19.3%) to $72.8 million from $61.0 million for the corresponding period of the preceding fiscal year. This increase is mainly due to additional depreciation and amortization of intangible assets recognized on the acquisition of Eurand.

Transaction, restructuring and integration costs

During the fiscal year ended September 30, 2011, we have expensed $11.9 million ($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 Consolidated Statements of 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.

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.

During the fiscal year ended September 30, 2011, we recorded a restructuring expense of $16.0 million related to plan 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 $0.9 million and $1.5 million, primarily consisting of severance costs. The restructuring actions taken thus far are expected to be substantially completed by the end of fiscal 2012.

Through the fiscal year ended September 30, 2011, we have incurred integration costs of $23.0 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 fiscal year ended September 30, 2010, reflecting charges of $91.4 million for the goodwill allocated to our U.S. reporting unit and of $15.8 million related to finite life intangible assets.

Financial expenses

Financial expenses consist principally of interest and fees paid in connection with funds borrowed primarily for the Eurand acquisition and for our acquisition by TPG Capital in February 2008. For the fiscal year ended September 30, 2011, financial expenses increased $24.5 million (37.7%) to $89.5 million from $65.0 million for the corresponding period of the preceding fiscal year. For the fiscal year ended September 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 fiscal year ended September 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 fiscal year ended September 30, 2011, total interest income decreased to $0.4 million from $0.7 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 fiscal year ended September 30, 2010, an amount of $9.7 million was paid to us pursuant to settlement arrangements entered into with the defendants in these matters.

Income taxes

For the fiscal year ended September 30, 2011, income tax expense amounted to $4.0 million compared to income tax expense of $11.0 million for the preceding fiscal year. The effective tax rate was minus 2.2% for the fiscal year ended September 30, 2011, compared to minus 6.9% for the preceding fiscal year. The effective tax rate for the fiscal year ended September 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 $54.3 million during the fiscal year ended September 30, 2011 mainly against our net deferred tax assets generated in the U.S. and France. 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:


	Year Ended September,
(in millions of US dollars)	2011						2010
	%			$			%			$
Combined statutory rate applied to pre-tax loss		35.00			(64.3	)		35.00			(55.8	)
Increase (decrease) in taxes resulting from:
Change in promulgated rates		(0.03	)		0.1			0.01			0.0
Difference with foreign tax rates		(0.71	)		1.3			1.70			(2.7	)
Tax benefit arising from a financing structure		7.72			(14.2	)		11.18			(17.8	)
Non-deductible items		(13.61	)		25.0			(21.89	)		34.9
Investment tax credits		0.54			(1.0	)		0.96			(1.5	)
State taxes		(0.19	)		0.3			1.95			(3.1	)
Change in valuation allowance		(29.54	)		54.3			(36.09	)		57.5
Other		(1.37	)		2.5			0.31			(0.5	)

		(2.19	)		4.0			(6.87	)		11.0

Net income

For the fiscal year ended September 30, 2011, net loss increased $17.5 million (10.3%) to $187.9 million from net loss of $170.4 million for the corresponding period of the preceding fiscal year. For the fiscal year ended September 30, 2011, the net loss is mainly due to the acquired-in process research charge amounting to $65.5 million and the development expenses amounting to $15.8 million related to the Aeroquin Transaction combined with the transaction, integration and restructuring costs amounting to $50.9 million and the loss on extinguishment of debt amounting to $28.3 million. For the fiscal year ended September 30, 2010, the net loss is mainly due to the additional charges related to the unapproved PEPs event amounting to $196.7 million.

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

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


(in millions of U.S. dollars)	September 30, 2011			September 30, 2010			Change
	$			$			$			%
Cash and cash equivalents		126.5			161.5			(35.0	)		(21.7	)
Current assets		272.3			226.7			45.6			20.1
Total assets		1,257.9			713.2			544.7			76.4
Current liabilities		177.7			111.3			66.4			59.7
Long-term debt		968.4			581.3			387.1			66.6
Total liabilities		1,285.2			734.2			551.0			75.0

Shareholder’s equity (deficiency)		(27.4	)		(21.0	)		(6.4	)		(30.4	)
Working capital		94.7			115.4			(20.7	)		(17.9	)

Working capital decreased by $20.7 million (17.9%) to $94.7 million as of September 30, 2011, from $115.4 million as of September 30, 2010.

Total assets increased $544.7million (76.1%) to $1,257.9 million as of September 30, 2011, from $713.2 million as of September 30, 2010. This increase was mainly due to the total assets acquired with the Eurand Acquisition amounting to $606.7 million.

Long-term debt increased $387.1 million (66.6%) to $968.4 million as of September 30, 2011, from $581.3 million as at September 30, 2010. 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.

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

Overview of results of operations


(in millions of U.S. dollars)	September 30, 2010			September 30, 2009			Change
	$			$			$			%
Net product sales ^b)		354.6			409.8			(55.2	)		(13.5	)
Other revenue		—			7.1			(7.1	)		(100.0	)

Total revenue		354.6			416.9			(62.3	)		(14.9	)

Cost of goods sold ^{a) b)}		130.9			103.0			27.9			27.1
Selling and administration expenses ^{a) b)}		115.0			122.9			(7.9	)		(6.4	)
Management fees		4.4			5.4			(1.0	)		(18.5	)
Research and development expenses^a)		31.7			36.0			(4.3	)		(11.9	)
Acquired in-process research		8.0			—			8.0			—
Depreciation and amortization		61.0			60.3			0.7			1.2
Impairment of intangible assets and goodwill ^b)		107.2			55.7			51.5			92.5

Total operating expenses		458.2			383.3			74.9			19.5

Operating income (loss)		(103.6	)		33.6			(137.2	)		(408.3	)

Financial expenses		65.0			69.8			(4.8	)		(6.9	)
Interest income		(0.7	)		(0.4	)		(0.3	)		(75.0	)
Other income		(9.7	)		(3.5	)		(6.2	)		(177.1	)
Loss (gain) on foreign currencies		1.2			(0.3	)		1.5			500.0

Total other expenses		55.8			65.6			(9.8	)		(14.9	)

Income (loss) before income taxes		(159.4	)		(32.0	)		(127.4	)		(398.1	)
Income taxes expense (benefit) ^b)		11.0			(24.1	)		35.1			145.6

Net income (loss)		(170.4	)		(7.9	)		(162.5	)		(2,057.0	)

a)	Exclusive of depreciation and amortization

b)	2010 includes charges related to the unapproved PEPs event

Net product sales

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

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

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

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


(in millions of U.S. dollars)	September 30, 2010		September 30, 2009		Change
	$		$		$			%
Gross product sales		474.6		503.1		(28.5	)		(5.7	)

Gross-to-net product sales adjustments
Product returns		9.3		10.7		(1.4	)		(13.1	)
Chargebacks		37.3		33.7		3.6			10.7
Contract rebates		36.3		36.5		(0.2	)		(0.5	)
DSA fees		5.6		3.6		2.0			55.6
Discounts and other allowances		8.1		8.8		(0.7	)		(8.0	)
Provisions related to the unapproved PEPs event		23.4		—		23.4			—

Total gross-to-net product sales adjustments		120.0		93.3		26.7			28.6

Total net product sales		354.6		409.8		(55.2	)		(13.5	)

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

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

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

Affordable Care Act

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

Performance of our main product lines

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

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

•

Sales of pancreatic enzyme products (ULTRASE, PANZYTRAT and VIOKASE) decreased $44.5 million (39.5%) to $68.3 million from $112.8 million for the preceding fiscal year mainly due to decreases in sales volume as a result of the unapproved PEPs event.

•

Sales of ursodiol products (URSO, URSO 250, URSO FORTE, URSO DS and DELURSAN) decreased $29.3 million (39.6%) to $44.6 million from $73.9 million for the preceding fiscal year. This decrease resulted mainly in sales volume from the entry of generic versions of URSO 250 and URSO FORTE on the U.S. market, approved by the Office of Generic Drugs on May 13, 2009.

•

Sales of mesalamine products (CANASA and SALOFALK) decreased $3.0 million (2.9%) to $100.7 million from $103.7 million for the preceding fiscal year.

•

Sales of sucralfate products (CARAFATE and SULCRATE) increased $18.0 million (26.3%) to $86.5 million from $68.5 million for the preceding fiscal year. The increase mainly resulted from price increases announced during the preceding fiscal year and, to a lesser extent, from an increase in prescription volumes.

•

Sales of other products increased $3.6 million (7.1%) to $54.5 million from $50.9 million for the preceding fiscal year.

Other revenue

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

Cost of goods sold

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

Selling and administrative expenses

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

Management fees

Management fees consist of fees and other charges associated with the Management Services Agreement with TPG. For the fiscal year ended September 30, 2010, management fees decreased $1.0 million (18.5%) to $4.4 million from $5.4 million for the preceding fiscal year. The variance was due to the fact that historically, these fees were previously not allocated to the subsidiaries of Aptalis Holdings, the indirect parent company of Aptalis Pharma Inc. In the fiscal year ended September 30, 2009, they were allocated to the subsidiaries based on revenue.

Research and development expenses

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

Acquired in-process research

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

Depreciation and amortization

Impairment of intangible assets and goodwill

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

Financial expenses

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

Interest income

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

Other income

We initiated claims in damages under the U.S. Lanham Act against a number of defendants alleging they falsely advertised their products to be similar or equivalent to ULTRASE. During the fiscal year ended September 30, 2009, a settlement arrangement with respect to these claims was entered into with certain of these defendants and in the second quarter of fiscal 2010, another settlement agreement was entered into with the remaining defendants. Pursuant to each of the agreements, the settling defendants agreed to pay a

confidential global amount in one or several installments; all of which have now been paid. Additionally, in the fourth quarter of fiscal year 2010, pursuant to the settlement of another matter in which we were a defendant, we received compensation for legal fees incurred by reason of having to defend against unfounded claims made by the plaintiff. A total amount of $9.7 million was paid to us during the fiscal year ended September 30, 2010, ($3.5 million during the fiscal year ended September 30, 2009) in respect of these settlement agreements. These amounts were recorded as Other income in the Consolidated Statements of Operations.

Income taxes

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

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


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

		(6.87	)		11.0			75.31			(24.1	)

Net loss

For the fiscal year ended September 30, 2010, net loss increased $162.5 million to $170.4 million from $7.9 million for the preceding fiscal year. The increase in net loss for is mainly due to the impacts of the unapproved PEPs event amounting to $196.7 million for the fiscal year ended September 30, 2010. This increase in net loss was partially offset by the partial write-down of intangible assets related to our URSO products amounting to $55.7 million which was recorded during the fiscal year ended September 30, 2009.

Balance sheets as of September 30, 2010, and September 30, 2009

The following table summarizes balance sheet information as of September 30, 2010, compared to September 30, 2009.


(in millions of U.S. dollars)	September 30, 2010			September 30, 2009		Change
	$			$		$			%
Cash and cash equivalents		161.5			126.4		35.1			27.8
Current assets		226.7			250.7		(24.0	)		(9.6	)
Total assets		713.2			914.6		(201.4	)		(22.0	)
Current liabilities		111.3			121.0		(9.7	)		(8.0	)
Long-term debt		581.3			582.6		(1.3	)		(0.2	)
Total liabilities		734.2			750.8		(16.6	)		(2.2	)
Shareholder’s equity (deficiency)		(21.0	)		163.8		(184.8	)		(112.8	)
Working capital		115.4			129.7		(14.3	)		(11.0	)

Working capital decreased by $14.3 million (11.0%) to $115.4 million as of September 30, 2010, from $129.7 million as of September 30, 2009. This decrease was mainly due to net working capital adjustments of $59.6 million related to the unapproved PEPs event. This decrease was partially offset by an increase in cash and cash equivalents of $35.1 million from operating activities and the reduction in installments on long-term debt. Pursuant to our credit agreement we are required to annually prepay amounts equal to a portion of our annual excess cash flow, as defined under our credit agreement. For fiscal year 2010, we will be required to offer to prepay $13.2 million of outstanding term loans in the first quarter of fiscal year 2011 ($17.6 million for the fiscal year ended September 30, 2009, was paid in the first quarter of fiscal year 2010). As allowed by the credit agreement, the prepayment is applied to the remaining scheduled installments of principal in direct order of maturity and the current portion of long-term debt was reduced accordingly.

Total assets decreased $201.4 million (22.0%) to $713.2 million as of September 30, 2010, from $914.6 million as of September 30, 2009. This decrease was mainly due to the adjustments related to the unapproved PEPs event amounting to $165.9 million. Long-term debt decreased $1.3 million (0.2%) to $581.3 million as of September 30, 2010, from $582.6 million as of September 30, 2009.

Selected quarterly financial data

The following tables present selected quarterly financial data for the fiscal years ended September 30, 2011, and 2010 and should be read in conjunction with our historical audited consolidated financial statements and related notes contained elsewhere in this Annual Report. Our operating results for any quarter are not necessarily indicative of results for any future quarter or for a full fiscal year.

For the quarters ended

(in millions of U.S. dollars)

September 30,
2011

June 30,
2011

March 31,
2011

December 31,
2010

Net product sales ^b)

139.0

126.7

109.8

85.9

Other revenue

2.9

4.5

1.6

—

Total revenue

141.9

131.2

111.4

85.9

Cost of goods sold ^a)

37.6

48.5

31.9

17.4

Selling and administration expenses ^a)

39.8

39.3

38.9

25.2

Management fees

1.1

0.9

0.8

Research and development expenses ^a)

18.1

21.1

11.8

7.0

Acquired in-process research

15.3

50.2

—

Depreciation and amortization

19.8

21.0

18.4

13.6

Loss on disposal of product line

—

7.4

—

Transaction, restructuring and integration costs

15.9

12.7

19.3

3.0

Total operating expenses

147.6

193.7

128.5

67.0

Operating income (loss)

(5.7

)

(62.5

)

(17.1

)

18.9

Financial expenses

22.4

20.7

30.2

16.2

Loss on extinguishment of debt

—

28.3

—

Interest income

—

(0.1

)

(0.1

)

(0.2

)

Loss (gain) on foreign currencies

(0.5

)

(0.3

)

0.6

0.3

Total other expenses

21.9

20.3

59.0

16.3

Income (loss) before income taxes

(27.6

)

(82.8

)

(76.1

)

2.6

Income taxes expense (benefit)

9.2

(2.0

)

(4.4

)

1.2

Net income (loss)

(36.8

)

(80.8

)

(71.7

)

1.4

EBITDA ^c)

14.6

(41.2

)

(27.6

)

32.2

Adjusted EBITDA ^(c)

57.6

46.0

35.9

36.8


	For the quarters ended
(in millions of U.S. dollars)	September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009
	$			$			$			$
Net product sales ^b)		69.6			80.5			94.4			110.1

Total revenue		69.6			80.5			94.4			110.1

Cost of goods sold ^{a) b)}		15.3			20.8			68.2			26.6
Selling and administration expenses ^{a) b)}		25.9			27.4			28.4			32.2
Management fees		1.9			0.6			1.0			0.9
Research and development expenses ^a)		7.0			8.6			7.7			8.4
Acquired in-process research		—			8.0			—			—
Depreciation and amortization		15.2			15.1			14.0			16.7
Transaction, restructuring and integration costs		1.1			—			—			—
Impairment of intangible assets and goodwill ^b)		—			—			107.2			—

Total operating expenses		66.4			80.5			226.5			84.8

Operating income (loss)		3.2			—			(132.1	)		25.3

Financial expenses		16.2			16.3			16.3			16.2
Interest income		(0.2	)		(0.2	)		(0.2	)		(0.1	)
Other income		(2.0	)		—			(7.7	)		—
Loss (gain) on foreign currencies		0.6			(0.8	)		1.4			—

Total other expenses		14.6			15.3			9.8			16.1

Income (loss) before income taxes		(11.4	)		(15.3	)		(141.9	)		9.2
Income taxes expense (benefit)		(5.2	)		(5.4	)		21.8			(0.2	)

Net income (loss)		(6.2	)		(9.9	)		(163.7	)		9.4

EBITDA ^c)		19.8			15.9			(111.8	)		42.0
Adjusted EBITDA ^c)		24.5			41.7			50.0			46.2

^a)	Exclusive of depreciation and amortization

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

^c)	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 each of the quarters ended in 2011 and 2010 is as follows:

For the quarters ended

(in millions of U.S. dollars)

September 30,
2011

June 30,
2011

March 31,
2011

December 31,
2010

Net income (loss)

(36.8

)

(80.8

)

(71.7

)

1.4

Financial expenses

22.4

20.7

30.2

16.2

Interest income

—

(0.1

)

(0.1

)

(0.2

)

Income taxes expense (benefit)

9.2

(2.0

)

(4.4

)

1.2

Depreciation and amortization

19.8

21.0

18.4

13.6

EBITDA ⁱ⁾

14.6

(41.2

)

(27.6

)

32.2

Transaction, integration, refinancing costs and payments to third parties ^a)

22.9

22.5

21.0

3.3


Management fees ^b)		1.1			0.9			0.8			0.8
Stock-based compensation expense ^c)		1.4			0.6			5.3			0.5
Other Adjustments related to the unapproved PEP event ^e)		0.6			—			(3.7	)		—
Loss on extinguishment of debt		—			—			28.3			—
Loss on disposal of product line and write-down of assets^f)		—			—			7.4			—
Inventory stepped-up value expenses^g)		1.7			13.0			4.4
Acquired in-process research ^h)		15.3			50.2			—			—

Adjusted EBITDA ⁱ⁾		57.6			46.0			35.9			36.8


	For the quarters ended
(in millions of U.S. dollars)	September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009
	$			$			$			$
Net income (loss)		(6.2	)		(9.9	)		(163.7	)		9.4
Financial expenses		16.2			16.3			16.3			16.2
Interest income		(0.2	)		(0.2	)		(0.2	)		(0.1	)
Income taxes expense (benefit)		(5.2	)		(5.4	)		21.8			(0.2	)
Depreciation and amortization		15.2			15.1			14.0			16.7

EBITDA ⁱ⁾		19.8			15.9			(111.8	)		42.0

Transaction, integration, refinancing costs and payments to third parties ^a)		3.5			1.1			2.6			1.8
Management fees ^b)		1.9			0.6			1.0			0.9
Stock-based compensation expense excluding impact of the unapproved PEPs event ^c)		(0.7	)		1.2			2.5			1.5
Impairment of intangible assets and goodwill related to the unapproved PEPs event^d)		—			—			107.2			—
Other adjustments related to the unapproved PEP event ^e)		—			14.9			48.5			—
Acquired in-process research ^h)		—			8.0			—			—

Adjusted EBITDA ⁱ⁾		24.5			41.7			50.0			46.2

^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 under the provisions of FASB guidance, excluding the impact of the unapproved PEPs event.

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

^e)

Other Adjustments and other write-downs related to the unapproved PEPs event, including a reduction of $3.1 million to the sales returns reserve during the fiscal year ended September 30, 2011 (additional returns provision of $23.4 million, inventory write- down and accrual for purchases and other materials and supply commitments of $44.9 million and a stock-based compensation recovery of $4.9 million during the fiscal year ended September 30, 2010).

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

^g)

^h)

Represents 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 $44.8 million and the payment towards certain pre-agreement incurred development expenses of $8.7 million related to the Aeroquin Transaction during the fiscal year ended September 30, 2011 as described in Acquired-in-Process Research section above.

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 indenture governing our senior 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 indenture 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;

•

Adjusted EBITDA reflects additional adjustments as provided in the indenture governing our 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.

Liquidity and Capital Resources

Cash requirements

As of September 30, 2011, working capital was approximately $94.7 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 our amended and restated credit agreement and related security and other agreements and cash on hand from Axcan and Eurand. The amended and restated credit agr

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