Karo Pharma AB — Interim / Quarterly Report 2016

Feb 28, 2017

FULL YEAR REPORT 2016

THE FULL YEAR AND THE FOURTH QUARTER

• o Net sales amounted to MSEK 347.3 (69.1), whereof the fourth quarter MSEK 96.5 (57.4)
• o EBITDA was MSEK 51.7 (-71.7), whereof the fourth quarter MSEK 28.9 (-22.3)
• o Earnings per share amounted to SEK 1.51 (-1.46), whereof the fourth quarter SEK 1.36 (-0.46)
• o Cash and cash equivalents at period end amounted to MSEK 121.3 (76.5)
• o Acquisition of BioPhausia with a well established portfolio of drugs
• o A long term credit facility has been signed in conjunction with the acquisition of BioPhausia
• o KB9520 was outlicensed to the cancer research company Oasmia
• o Decision on a rights issue of MSEK 374

SIGNIFICANT EVENTS AFTER PERIOD END

• o The rights issue raised a total of MSEK 374 and was oversubscribed at 132 percent, of which 98.5 percent by subscription rights
• o Karo Pharma transferred from Nasdaq Stockholm Small Cap to Nasdaq Stockholm Mid Cap

AUDIOCAST TODAY AT 11.00 A.M. CET

A presentation of the report (in Swedish) will take place today at 11 a.m. The presentation can be attended through the corporate website www.karopharma.se or by telephone +46 8 505 564 74. Questions may be submitted over the internet or by the telephone.

COMMENT ON OPERATIONS

ACQUISITIONS RAISE KARO PHARMA TO THE NEXT LEVEL

In 2016, Karo Pharma continued to develop well, with rising sales and improved cash flow.

Towards the end of the year, BioPhausia with an established drug portfolio was acquired. The acquisition provides Karo Pharma further improved profitability and strengthened cash flow.

The acquisition of BioPhausia is a large and important step. Since the products are well established and fit into our range, all profitability parameters improve and our cash flow strengthens. Through the acquisition, Karo Pharma aims to achieve significant improvements in EBITDA.

Furthermore, the acquisition is strategically important because it brings us one big step closer to our vision to lead the consolidation in the Health Care sector in Sweden. Efforts to identify and evaluate various acquisition opportunities continues.

In October, we licenced our project KB 9520 to the cancer research company Oasmia. The deal provided Karo Pharma a down

payment of 3 080 000 shares in Oasmia and 20 percent of all Oasmia's future revenue from the project

Acquisitions raises Karo Pharma to a new level with stable earnings, and agreements with partners for development projects provide opportunities for milestones and royalties.

Most of the major product groups acquired in 2015, such as Mabs, Hospital supply and Allevo have during in 2016 seen strong growth of 5 to 15 percent.

We have also incurred costs in the fourth quarter in order to become even more cost efficient in 2017.

Karo Pharma is an interesting alternative for shareholders who wish to invest in the Healthcare field. We are confident of our capability to continue delivering good shareholder returns.

Anders Lönner Executive Chairman

KEY FINANCIAL DATA

(MSEK)	Full year			Oct - Dec
	2016	2015	2016	2015
Net sales	347.3	69.1	96.5	57.4
Gross earnings	148.7	28.6	39.4	22.1
Gross margin, %	42.8	41.4	40.8	38.5
Operating expenses	-119.2	-103.5	-18.6	-46.5
Earnings/Loss before tax	51.7	-71.7	28.9	-22.3
EBITDA, %	14.9	-108.4	29.9	-42.4
Earnings before tax	19.8	-75.7	14.7	-24.8
Earnings per share (SEK)	1.51	-1.46	1.36	-0.46
Cash flow from operating activities1)	-36.1	-52.2	9.6	-5.5
Cash and cash equivalents	121.3	76.5	121.3	76.5

1) Excluding settlement of current liabilities during the second quarter of MSEK 26affecting comparability, cash flow from operating activities during January to December 2016 amounted to MSEK -10

SALES AND EARNINGS

Net sales in 2016 was MSEK 347.3 (69.1), whereof the fourth quarter MSEK 96.5 (57.4). Since September 2015, net sales comprise mainly of product sales in acquired companies.

Cost of goods sold was MSEK 198.6 (40.5), whereof the fourth quarter MSEK 57.1 (41.3), resulting in gross earnings of MSEK 148.7 (28.6), whereof the fourth quarter MSEK 39.4 (22.1) and a gross margin of 42.8 (41.4) per cent for the period and 40.8 (38.5) per cent for the quarter.

Operating costs, including depreciation and excluding other operating income amounted to MSEK 148.0 (103.5), whereof the fourth quarter MSEK 47.5 (46.5). Selling expenses was MSEK 112.8 (26.7), whereof the fourth quarter MSEK 35.3 (25.7).

Research and development amounted to MSEK 5.3 (35.0), whereof the fourth quarter MSEK 0.6 (5.4). Partners continue the development of projects and assume responsibility for related costs.

Operating profit was MSEK 29.6 (-74.9), whereof the fourth quarter MSEK 20.8 (-24.7). Items affecting comparability in the form of among others relocation of inventory, and costs for restructuring in combination with currency losses of MSEK 1, have negatively impacted operating earnings during the fourth quarter with MSEK 12.8. Furthermore, the sale of KB 9520 had a positive impact of MSEK 28.9 on operating profit. Net profit amounted to MSEK 95.6 (- 78.2), and MSEK 91.4 (-24.7) respectively. Net income was positively affected by MSEK 75 million from a recognized tax receivable attributable to parent company's losses, which in part can be utilized due to acquisitions.

Earnings per share was SEK 1.51 (-1.46), whereof the fourth quarter SEK 1.36 (-0.46).

CASH FLOW AND FINANCIAL POSITION

Cash flow from operating activities, including settlement in the second quarter of short term liabilities of MSEK 26 affecting comparability, was MSEK -36.1 (-52.2),

whereof the fourth quarter MSEK 9.6 (-5.5). Cash and cash equivalents at period end amounted to MSEK 121.3 (76.5). The acquisition of BioPhausia contributed significantly to the increase in balance sheet turnover to MSEK 1 773.8 (642.5). Intangible assets amounted to MSEK 1 432.0 (475.7).

Due to the acquisition, long term debt increased to MSEK 449.5 (21.0) and short term liabilities to MSEK 546.9 (225.2).

Total shareholders' equity taking into account the period's earnings, amounted to MSEK 717.0 (364.6), translating into equity per share of SEK 11.97 (7.30). The equity ratio was 40.2 (56.7) percent.

THE PARENT COMPANY

Net sales for the Parent Company for 2016 amounted to MSEK 48.9 (3.9), whereof the fourth quarter MSEK 33.1. (1.0). Earnings after financial items was MSEK 0.9 (-61.7), whereof the fourth quarter MSEK 18.5 (- 10.8). Parent company cash and cash equivalents at period end amounted to MSEK 85.7 (68.7).

SIGNIFICANT EVENTS

At the end of the year, Karo Pharma acquired all shares in BioPhausia for MSEK 908 on a debt and cash free basis. The deal included some 10 well-known drugs, for example Mollipect, Lithionit, Citodon, Paraflex, Laxabon and Solvezink. The acquisition also included rights to license MIV-802, a project developed for the treatment of hepatitis C, in certain European markets including the Nordic region.

In October, a collaboration was entered into with the cancer research company Oasmia, regarding the cancer project KB9520 that has shown favorable effects in preclinical models in a variety of cancers.

Oasmia acquired the project from Karo Pharma for a purchase price in the form of 3,080,000 shares in Oasmia, which Karo Pharma's Board of Directors decided to propose the Annual General Meeting to distribute to shareholders. Karo Pharma is also entitled to 20 percent of all Oasmia's future revenues that may be generated from the project.

Oasmia assumes responsibility for the continued development of the project, as well as its costs.

SIGNFICANT EVENTS AFTER PERIOD END

An Extraordinary General Meeting on January 18 resolved on a rights issue of MSEK 374 before transaction costs of approx. MSEK 24, to repay part of the loan raised in connection with the acquisition of Bio-Phausia. The rights issue was oversubscribed at approximately 132 percent, with 98.5 percent of the new shares subscribed for with subscription rights. The share capital increased by SEK 7,303,599 through the issuance of 18,259,198 shares. After sounding out possible guarantors, Executive Chairman Anders Lönner agreed to underwrite 92 percent of the rights issue of MSEK 374 and will receive a fee of 5 percent of the guaranteed amount equivalent to about MSEK 17 in underwriting compensation. In addition, Anders Lönner committed in advance to without compensation subscribe to his own holding of 5 percent, which also board member Per-Anders Johansson did for his 3 percent holding.

TRANSACTIONS WITH RELATED PARTIES

During the period of Karo Pharma's subsidiary sold two products licensed from a company owned by Anders Lönner, for which

the subsidiary received commissions worth about KSEK 300.

RISKS

The Group is exposed to a number of risks and insecurities. Wrongful, delayed or missing deliveries form the Group's suppliers mean that the Group's deliveries also may be delayed, inadequate or wrong. The Group is also exposed to exchange rate fluctuations. It is not guaranteed that Group operations will not be subject to restrictions from governmental agencies or that the Group will receive necessary future authority approvals. There is a risk that the Group's ability to develop products decreases or that the products will not be launched according to set schedules. These risks may involve decreased sales and a negative effect on Group earnings.

ANNUAL GENERAL MEETING

The annual general meeting will be held in Stockholm om 11 May.

DIVIDEND

The Board has decided to propose to the AGM a dividend equivalent to the value of the shares in Oasmia that Karo Pharma received as a down payment on the sale of the company's cancer project.

ACCOUNTING AND VALUATION PRINCIPLES

This interim report has been prepared in accordance with International Accounting

Stockholm on February 28, 2017

Anders Lönner Executive Chairman Standards (IAS) 34 for interim reports and International Financial Reporting Standards IFRS as adopted by the EU. The accounting and valuation principles applied are unchanged compared to those applied in 2014.

For the parent company, this interim report has been prepared in accordance with the Swedish Annual Accounts Act and compliance with RFR 2 Accounting for legal entities. The accounting principles applied for the parent company differ from those applied for the Group only regarding accounting of leasing agreements.

AUDIOCAST

The report will be presented (in Swedish) today at. 11:00 at an audiocast with slides that can be followed on

www.karopharma.se as well as over telephone + 46 8-505564 74. Questions can be both over the Internet and over the phone.

AUDITORS REVIEW

This yearend report has not been subject for review by the company's auditors

FINANCIAL REPORTS

Annual report 2016 April 7 2017 Annual General Meeting May 11, 2017 Interim Report Jan-March May 10, 2017 Interim Report Jan-June Aug 24, 2017 Interim Report Jan-Sept Nov 2, 2017 Full-year Report 2017 Feb 22, 2018

FOR FURTHER INFORMATION, PLEASE CONTACT:

Henrik Palm, CFO, +46 70 540 4014 or henrik.palm@karopharma.se

ABOUT KARO PHARMA

Karo Pharma is a specialty pharma company that develops and markets products to pharmacies and directly to healthcare providers. The share is listed on Nasdaq Stockholm in the Mid Cap segment.

The information in this report is such that Karo Pharma is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out above, on February 28, 2017 at 8.00 a.m. CET.

	Oct – Dec		Full year
	2016	2015	2016	2015
Net sales	96 454	57 431	347 261	69 095
Cost of sales	-57 078	-35 325	-198 536	-40 494
Gross earnings	39 376	22 106	148 725	28 601
Operating expenses
Distribution costs	-35 339	-25 729	-112 787	-26 718
Administration	-10 165	-7 941	-28 689	-27 150
Research and development	-586	-5 365	-5 259	-34 957
Other operating income/expenses	27 497	-7 427	27 583	-14 639
	-18 593	-46 462	-119 152	-103 464
Operating result	20 783	-24 356	29 573	-75 297
Financial net	-6 105	-430	-9 735	-434
Earnings before Tax	14 678	-24 786	19 838	-75 297
Tax	76 741	68	75 718	-2 894
NET EARNINGS	91 419	-24 718	95 556	-78 191
Net earnings attributable to:
Shareholders in the parent company	91 367	-24 159	95 555	-77 632
Non-controlling interests	52	-559	1	-559
Earnings / loss per share (SEK) 1	1.36	-0.46	1.51	-1.46
Number of shares issued (000)	63 907	53 465	63 907	53 465

CONSOLIDATED INCOME STATEMENT SUMMARY (KSEK)

¹Taking into account the bonus element of the rights issue

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (KSEK)

	Oct – Dec		Full year
	2016	2015	2016	2015
NET EARNINGS FOR THE YEAR	91 419	-24 718	95 556	-78 191
Other comprehensive income for the year, net of tax
Exchange rate differences	58	-52	357	-315
TOTAL COMPREHENSIVE INCOME	91 477	-24 770	95 913	-78 506
Total comprehensive income attributable to:
Shareholders of the parent company	91 425	-24 211	95 911	-77 947
Non-controlling interests	52	-559	2	-559

	2016	2015
Intangible assets	1 432 012	475 655
Equipment	12 297	5 701
Other financial assets	38 801	21
Other current assets	169 742	84 670
Cash and cash equivalents	121 346	76 490
TOTAL ASSETS	1 773 198	642 537
Shareholders' equity and liabilities
Equity	717 012	364 581
Deferred tax 1)	59 723	31 740
Long term debt	449 526	21 026
Current liabilities	546 937	225 190
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	1 773 198	642 537

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (KSEK)

1) Attributable to depreciable product rights in connection with business acquisitions

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (KSEK)

	Other Non
Attributable to shareholders of	Share	contributed	Accumulated	controlling
the parent company	capital	capital	losses	interest	Total
Amount at January 1, 2015	13 525	1 079 562	-1 052 180	-	40 907
Total comprehensive income for the period	-	-	-77 947	-559	-78 506
Acquisition of non-controlling interest	-	-	-	1 683	1 683
Issue of shares at acquisition of operations	270	19 730	-	-	20 000
Issue of shares at acquisition of operations	1 020	130 820	-	-	131 840
Issue of shares related to reverse split	4	-	-	-	4
Rights issue at acquisition of operations	153	16 130	-	-	16 283
Rights issue, net of transaction costs	4 998	227 372	-	-	232 370
Amount at December 31, 2015	19 970	1 473 614	-1 130 127	1 124	364 581
Amount at January 1, 2016	19 970	1 473 614	-1 130 127	1 124	364 581
Total comprehensive income for the period	-	-	95 911	2	95 913
Acquistion of non-controlling interest	-	-	-557	-1 004	-1 561
Rights issue, net of transaction costs	5 593	251 966	-	-	257 559
Warrants	-	520	-	-	520
Amount at September 31, 2016	25 563	1 726 100	-1 034 773	122	717 012

CONSOLIDATED STATEMENT OF CASH FLOWS (KSEK)

	Oct - Dec		Full year
	2016	2015	2016	2015
Operating activities
Operating income/loss before financial items	20 783	-24 356	29 573	-74 863
Depreciation	8 067	2 056	22 110	3 153
Other items not affecting liquid assets	-26 749	8	-26 652	4 996
	2 101	-22 292	25 031	-66 714
Financial items received and paid	--13 447	-316	-17 077	-322
Cash flow from operating activities before changes in working capital	-11 346	-22 608	7 954	-67 036
Changes in working capital	20 919	17 096	-44 072	14 825
Cash flow from operating activities	9 573	-5 512	-36 118	-52 211
Investing activities
Net investment in company acquisitions	-530	-115 633	-2 087	-220 570
Net investment in intangible assets	-863 699	-	-926 183	-
Net investment in other financial instruments	-		-	-6
Net investment in equipment	-62 152	16	-67 656	-261
Cash flow from investing activities	-926 382	-115 617	-995 927	-220 837
Financing activities
Net proceeds from share issues	-	-	279 628	249 919
Transaction costs share issue 1)	-	-	-22 070	-17 545
Warrants	-60	-	460	-
Borrowings	900 000	67 055	900 000	67 055
Repayment of borrowings	-8 555	-1 500	-80 055	-1 500
Transactions with minorities	-1 561		-1 561
Cash flow from financing activities	889 824	65 555	1 076 402	297 929
Cash flow for the period	--26 985	-55 574	44 357	24 881
Cash at the beginning of the period	147 832	132 064	76 490	51 609
Currency exchange in cash	499	-	499
Cash at the end of the period	121 346	76 490	121 346	76 490

1) Comprises the portion of transaction related costs that has been paid during the period.

	Oct-Dec		Full Year
	2016	2015	2016	2015
Net sales	33 067	992	48 885	3 923
Cost of sales	-1 812	-	-12 567	-
Gross earnings	31 255	992	36 318	3 923
Operating expenses
Distribution costs	-995	-	-4 079	-
Administration	-8 013	-6 145	-20 126	-25 354
Research and development	-586	-5 364	-5 259	-34 851
Other operating income/expenses	28 939	-50	28 956	-141
	19 345	-11 559	-508	-60 346
Operating result	50 600	-10 567	35 810	-56 423
Financial net	-31 486	-277	-34 322	-5 263
Earning after financial items	18 498	-10 844	872	-61 686
Group contributions paid	-1 260	-	-1 260	-
Tax	75 000	-	75 000	-
NET EARNINGS	92 238	-10 844	74 612	-61 686

PARENT COMPANY INCOME STATEMENT SUMMARY (KSEK)

PARENT COMPANY BALANCE SHEET SUMMARY (KSEK)

	31 Dec
	2016	2015
Intangible assets	76 328	73 965
Equipment	666	1 372
Deferred tax assets	75 000
Other financial assets	28 973	21
Shares in group companies	1 308 367	397 788
Other current assets	61 283	9 301
Cash and cash equivalents	85 743	68 732
TOTAL ASSETS	1 635 744	551 179
Equity and liabilities
Total restricted equity	25 563	19 970
Total non-restricted equity	686 855	359 758
Non-current liabilities	448 450	15 341
Current liabilities	474 876	156 110
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	1 635 744	551 179

ACQUISITION

On December 15, 2016, Karo Pharma acquired all shares in the drug company Bio-Phausia AB. The acquisition includes a portfolio of 13 well-known Nordic drug brands. The brand portfolio is characterized by a long history of stable sales, strong expected cash flows and low marketing and maintenance costs.

Information on purchase price, the acquired net assets and goodwill are shown below (all amounts, unless otherwise stated, are expressed in thousands of SEK (KSEK)):

For consideration - cash outflow, see below.

The assets and liabilities arising from the acquisition are as follows:

Assets and liabilities	Real value
Product rights	479 241
Tangible fixed assets	153
Inventory	24 302
Receivables	30 745
Tax claims	1 066
Cash	764
Accounts payable	-3 785
VAT liabilities	-2 025
Deferred taxes	-85 954
Deferred costs and prepayed income	-548
Acquired identifiable net assets	443 959
Goodwill	485 005
Acquired net assets	928 964

Goodwill is attributable to the flows and processes that has arisen in BioPhausia and thereby created an excellent platform for further expansion. No part of the recognized goodwill is expected to be tax deductible.

Fair value of acquired receivables amounted to MSEK 30,7.

The acquired business contributed revenues of MSEK 8.9 and earnings after financial net of KSEK 3.5 to the Group for the period from December 15 to December 31, 2016. Had the acquisition been completed on January 1, 2016, a consolidated pro forma shows revenue and net profit at December 31, 2016, at MSEK 193.8 and earnings after financial items of MSEK 68.5. These amounts have been calculated based on the subsidiary's results, adjusted for:

• The change in depreciation that would have occurred provided the adjustment to fair value and the change in the depreciation period for product licenses had been applied from January 1, 2016 together with the related tax effects.
• The additional interest expenses for debt financing, net after proceeds from the rights issue as if the debt financing and the rights issue were completed on January 1, 2016.

Acquisition-related costs of MSEK 1 are included in other operating expenses in the income statement and in operating activities in the cash flow statement.

Consideration - cash outflow is shown in the table below:

Cash outflow to acquire subsidiaries, after de duction of acquired liq uid funds	2016 (KSEK)	2015 (KSEK)
Cash consideration	928 964	227 515
Liquid funds in acquired companies	-764	-2 390
Net outflow of liquid funds – investment ac tivities	928 200	225 125

The acquisition analysis of BioPhausia AB is preliminary until the final allocation between goodwill, product rights and other intangible assets have been established. The Company is currently evaluating the pre-acquired products' future potential and longevity. The valuation of product rights in the acquisition analysis is based on a

preliminary estimate of the various products future sales and economic life. Once this thorough analysis is completed, the acquisition analysis will be determined which may cause the breakdown between the product rights and goodwill to change. A change in the valuation of product rightswould also affect the amount of deferred tax liabilities.

The preliminary acquisition analysis for acquisitions in 2015 were established in 2016 without adjustments.