Karo Pharma AB — Interim / Quarterly Report 2018

Apr 26, 2018

KARO PHARMA DOUBLES SALES AND EARNINGS IN THE FIRST QUARTER

INTERIM REPORT JANUARY – MARCH 2018

• ^o Net sales amounted to MSEK 267.1 (139.3), equivalent to an increase of 91.7%. Growth was mainly due to acquisitions.
• ^o Organic growth was +10.7%, whereof pharmaceuticals +18.8% and other products +4%
• ^o The gross margin was 56.8% (53.7%) for the period.
• ^o EBITDA amounted to MSEK 88.7 (43.7), which corresponds to a margin of 33.3% (31.4%)
• ^o Earnings per share was SEK 0.45 (0.27)
• ^o Cash and other short-term investments amounted to MSEK 295.2 (166.1) at the end of the period.
• ^o A rights issue to partly finance the acquisition of Weifa was completed during January.

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EVENTS AFTER THE FIRST QUARTER

• ^o Karo Pharma completed the acquisition of the LEO operations from the Danish pharmaceutical company LEO Pharma A/S for MEUR 260, effective from 4 of April 2018.
• ^o The product portfolio has had a stable sales and profitability. The operations from LEO Pharma had a turnover in 2017 of 679 MSEK, whereof 49 percent in the Nordic region, 42 percent in other Europe and 9 percent in the rest of the world.
• ^o The products may improve the company's total gross margin by approximately ten percentage points
• ^o LEO has committed to manage the portfolio for a commission at market rate until Karo Pharma has taken over the products
• ^o The LEO operations is an asset purchase transaction, that includes products and platform for further development. This means that Karo Pharma can utilize existing tax losses (SEK 2.6 billion) from its period as a research company and thereby reduce the Company's tax.
• ^o Karo Pharma's Board of Directors resolved on a fully underwritten rights issue, subject to AGM approval

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^o The rights issue proposed by the Board is subject approval by the AGM on 3 May 2018. The rights issue is fully covered by subscriptions and underwriting commitments from existing shareholders and is expected to raise approx. SEK 1.3 billion before transaction costs. The terms of the rights issue will be published on 30 April.

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

We have changed the focus of Karo Pharma into becoming a Specialty Pharma company. During the first quarter of 2018, operations continued to develop positively, with sales and profitability almost doubling. Organic growth was double-digit, which is beyond expectations. We have been working intensively to integrate Weifa as well as to begin working on integrating the acquisition of the LEO operations. The acquired product portfolio strengthens Karo Pharma's existing operations very well and consists of ten prescription and non-prescription drugs with strong brand names. The acquisition is an important step towards becoming a pure Specialty Pharma company. Due to our increased focus on pharmaceuticals, which will represent more than 80 percent of

the Company's sales, the Company has good potential to further improve profitability. In addition to Karo Pharma's strong position in the Nordic region, the company can now also expand into Europe. The acquisition of Leo Operations includes a number of products well established in the European market, enabling the company to profitably establish itself in key European markets. After the acquisition the organization will hence be strengthened in both the pharmaceutical and geographic areas. The acquisition will positively impact sales and profitability from the second quarter of this year.

Through its nature of being an asset purchase transaction, future tax burden will be reduced. This means that the company will be able to utilize existing tax losses from

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the time as a research company and thereby reduce its tax.

We are in a positive situation with our product portfolio with several new products. This requires creative thinking as well as a strict and correct prioritization in the marketing of the products. An interesting new product from the acquisition of Weifa AS is the drug combination of paracetamol and ibuprofen for the treatment of moderate pain. The drug is approved in the Nordic countries and will be launched in 2018.

With the aim to strengthen the Company's financial and operational capacity as well as to partly finance the acquisition of the operations, the Board has decided to implement a rights issue.

Karo Pharma is an interesting option for shareholders who want to invest in a leading Specialty Pharma company. We have a long-term perspective in a business that is not cyclical. We follow our plan and look forward to a very interesting future for the company's shareholders.

Anders Lönner

Chairman

KEY FINANCIAL DATA

	January - March		Full year
(MSEK)	2017	2016	2016
Net sales	267.1	139.3	657.6
Gross earnings	151.6	74.8	341.9
Operating expenses	-88.0	-43.4	-262.0
Earnings before tax and non-recurring items	88'7	43.7	169.3
EBITDA, %	33.3%	31.4%	25.7%
Earnings before tax	48.3	19.4	20.9
Earnings per share (SEK)	0.45	0.27	0.17
Cash flow from operating activities	41.5	34.9	33.5
Cash	295.2	166.1	838.6

¹ Taking into account the bonus element in the rights issue and that outstanding warrants do not imply any dilution. A recalculation has been made of 2017 earnings.

SALES AND EARNINGS

Net sales in the first quarter 2018 increased to MSEK 267.1 (139.3).

Cost of goods sold amounted to MSEK 115.5 (64.5). This resulted in a gross profit of MSEK 151.6 (74.8) and a gross margin of 56.8 (53.7) percent for the period.

Operating costs, including depreciation and amortization of other operating income, amounted to MSEK 88.0 (43.4). Sales expenses amounted to MSEK 74.0 (34.7). The increase in sales costs comes primarily from the newly added operations in Norway.

Operating profit amounted to MSEK 63.6 (31.4).

Earnings per share amounted to SEK 0.45 (0.27).

CASH FLOW AND FINANCIAL POSITION

Cash flow from operating activities amounted to MSEK 41.5 (34.9). Group cash amounted to MSEK 295.2 (166.1) at the end of the period. Cash flow during the period was MSEK -551.1 (-5.1). The largest single change from the first quarter last year is larger repayment of loans during the first quarter 2018. At 31 March, total assets amounted to MSEK 3 674.8 (1 787.9), where Intangible assets accounted for MSEK 2 976.1 (1 420.2) of the balance sheet total. The change from the previous

year relate primarily to intangible assets from the acquisition of Weifa (MSEK 1 594).

During the period, a short-term bridge loan of MSEK 700 raised in connection with the acquisition of Weifa was repaid. As a result, the Group's short-term liabilities decreased during the period with MSEK 754.8. The acquisition resulted in an increase of Group long-term liabilities compared with the corresponding period last year to MSEK 1 456.4 (505.5). Short-term liabilities increased to MSEK 258.3 (120.6).

Group equity increased to MSEK 1 876.7 (1 104.4), which, after taking into account the profit for the period, corresponded to SEK 17.13 (13.44) per share. The equity ratio was 51.1 (61.8) percent.

PARENT COMPANY

The parent company's net sales in the first quarter of 2018 amounted to MSEK 2.1 (6.8). Profit after financial items amounted to MSEK -18.0 (-11.6). The Parent Company's cash and other short-term investments amounted to MSEK

165.3 (106.0) at the end of the period.

IMPORTANT EVENTS

The rights issue initiated in December 2017 was completed and registered in January 2018. After the issue, share capital amounts to 43 821 713 SEK and the number of shares amounts to 109 555 188 shares.

On 1 March, the company announced that the acquisition of the LEO pharmaceutical operations would be completed on 4 April. The consideration amounted to MEUR 260.

IMPORTANT EVENTS AFTER THE REPORTING PERIOD

On 4 April, the acquisition of the LEO operations from the Danish pharmaceutical company LEO Pharma A/S for MEUR 260 was completed.

TRANSACTIONS WITH RELATED PARTIES

A company owned by Anders Lönner's has transferred a trademark (Viruseptin) to Karo Pharma for a compensation equal to the paid registration costs only.

Karo Pharma's acquisition of the company Medcore included two smaller products licensed to a company owned by Anders Lönner for more than 10 years. Karo Pharma receives the same commission on sales as MedCore did, 15 percent.

RISKS

The Group is exposed to a number of risks and uncertainties. Wrongful, delayed or missing deliveries form the Group's suppliers mean that the Group's deliveries also may be delayed, inadequate or faulty. The Group is also exposed to exchange rate fluctuations. It cannot be 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 diminishes 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 of Karo Pharma AB will take place on Thursday, 3 May at 16.00 in Näringslivets Hus at Storgatan 19 in Stockholm.

DIVIDEND

Considering the company's earnings capacity, the Board has decided to propose that the Annual General Meeting resolves on a dividend per share of SEK 0.30.

AUDIOCAST

This 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 8-505 56 474. Questions can be submitted both over the Internet and over the phone.

AUDITOR'S REVIEW

This interim report has not been reviewed by the auditors.

FINANCIAL REPORTS

AGM 3 May 2018 Interim report Jan-June 19 July 2018 Interim report Jan-Sept 1 Nov 2018 Year-end report 14 Feb 2019

Stockholm 26 April 2018

The Board of Directors

FOR FURTHER INFORMATION, PLEASE CONTACT

Peter Blom, CEO, +46 70 655 56 98 or peter.blom@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 26 April 2018 at 8.00 a.m. CET.

CONSOLIDATED INCOME STATEMENT SUMMARY (KSEK)
----------------------------------------------	--	--

	January - March		Full year
	2018	2017	2017
Net sales	267 063	139 333	657 606
Cost of sales	-115 493	-64 540	-315 703
Gross profit	151 571	74 793	341 904
Operating expenses
Distribution costs	-74 036	-34 653	-198 609
Administration	-14 355	-7 565	-43 650
Research and development	-400	-1 361	-4 355
Other operating income/expenses	776	213	-15 385
	-88 016	-43 366	-261 999
Operating profit	63 555	31 427	79 904
Financial net	-15 208	-12 007	-59 054
Profit before tax	48 347	19 420	20 851
Tax	-1 184	1 930	-6 346
NET PROFIT	47 163	21 350	14 505
Net earnings attributable to:
Shareholders in the parent company	47 164	21 352	14 516
Non-controlling interests	-1	-2	-11
Earnings / loss per share (SEK) 1	0,45	0,27	0,17
Number of shares issued (000)	109 555	82 166	82 166

¹ Taking into account the bonus element in the rights issue and that warrants issued do not imply any dilution.

	January - March		Full year
	2018	2017	2017
NET PROFIT FOR THE PERIOD	47 163	21 350	14 505
Other comprehensive income for the year, net of tax
Exchange rate differences	65 897	39	-20 638
TOTAL COMPREHENSIVE INCOME	113 060	21 389	-6 133
Total comprehensive income attributable to:
Shareholders of the parent company	113 061	21 391	-6 122
Non-controlling interests	-1	-2	-11

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (KSEK)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (KSEK)

	March 31	Dec 31
	2018	2017	2017
Intangible assets	2 976 131	1 420 213	2 923 110
Equipment	14 945	12 537	14 498
Other financial assets	76 974	9 465	79 686
Other current assets	311 539	179 640	285 969
Cash and cash equivalents	295 189	166 110	838 586
TOTAL ASSETS	3 674 778	1 787 965	4 141 848
Shareholders' equity and liabilities
Equity	1 876 744	1 104 374	1 586 515
Deferred tax	83 332	57 467	89 537
Long term debt	1 456 374	505 489	1 452 623
Current liabilities	258 328	120 635	1 013 172
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	3 674 778	1 787 965	4 141 848

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (KSEK)

		Ongoing	Other contrib	Retained earnings/	Non control
Attributable to shareholders of the parent	Share	rights	uted	accumu	ling	Total
company	capital	issue	capital	lated losses	interest	equity
Amount at 1 January 2017	25 563		0 1 726 100	-1 034 773	122	717 012
Total comprehensive income			-	-6 051	-82	-6 133
Dividend				-41 083	-	-41 083
Rights issue, net proceeds	7 303		341 487	-	-	348 790
Rights issue paid in, not registered equity net of transaction costs		8 501	559 428			567 929
Amount at 31 December 2017	32 866		8 501 2 627 015	-1 081 907		40 1 586 515
Amount at 1 January 2018	32 866		8 501 2 627 015	-1 081 907		40 1 586 515
Total earnings				113 061		113 060
Dividend				-	-	0
Rights issue, net proceeds	10 956	-8 501	174 714	-	-	177 169
Rights issue paid in, not registered equity net of transaction costs						0
Amount at 31 March 2018	43 822		0 2 801 729	-968 846		40 1 876 745

	January - March		Full year
	2018	2017	2017
Operating activities
Operating income/loss before financial items	63 555	31 427	79 904
Depreciation	25 395	12 313	60 561
Other items not affecting liquid assets	1	0	0
	88 951	43 740	140 465
Financial items received and paid	-24 013	-2 858	-47 986
Income tax paid	-1 123	-1 618	-2 292
Cash flow from operating activities before changes in working capital	63 815	39 264	90 186
Changes in working capital	-22 287	-4 393	-56 667
Cash flow from operating activities	41 528	34 871	33 519
Investing activities
Net investment in company acquisitions	0	-2 025	-1 255 689
Net investment in intangible assets	-1 354	-75	-4 075
Net investment in other financial instruments	0	17 786	17 671
Net investment in equipment	-703	-719	-3 721
Cash flow from investing activities	-2 057	14 967	-1 245 815
Financing activities
Net proceeds from share issues	177 980	374 014	990 309
Transaction costs share issue 1)	-48 878	-8 040	-25 523
Dividend	0	0	-41 083
Warrants	0	0	0
Borrowings	0	0	1 750 368
Repayment of loans	-719 643	-371 000	-743 017
Transactions with minorities	1	0	0
Cash flow from financing activities	-590 540	-5 026	1 931 054
Cash flow for the period	-551 068	44 812	718 759
Cash at the beginning of the period	838 586	121 346	121 346
Currency exchange in cash	7 673	-48	-1 519
Cash at the end of the period	295 190	166 110	838 586

CONSOLIDATED STATEMENT OF CASH FLOWS (KSEK)

1) Comprises the portion of transaction costs paid during the period

	PARENT COMPANY INCOME STATEMENT SUMMARY (KSEK)

	January - March
	2018	2017	2017
Net sales	2 086	6 847	39 269
Cost of sales	0	-10	152
Gross profit/loss	2 086	6 837	39 420
Operating costs
Sales costs	-1 147	-1 031	-5 518
Administration	-6 445	-4 083	-19 158
Research and development	-400	-1 361	-4 355
Other operating income/expenses	1 097	-8	-594
Total operating costs	-6 895	-6 483	-29 624
Operating profit/loss	-4 809	354	9 796
Financial net	-13 232	-11 905	-55 033
Profit/loss before tax	-18 042	-11 551	-45 237
Group contributions paid	0	0	65 537
Tax	0	0	-62
NET PROFIT/LOSS	-18 042	-11 551	20 238

* Sales costs consist of amortization of trademarks whuch were reported separately during the corresponding periode last year.

PARENT COMPANY BALANCE SHEET SUMMARY (KSEK)

	2018-03-31	2017-03-31	2017-12-31
Assets
Intangible assets	76 486	75 373	76 279
Equipment	8	490	16
Deferred tax receivables	75 000	75 000	75 000
Other financial assets	371 944	21	350 388
Shares in group companies	2 646 768	1 308 367	2 646 768
Other current assets	35 524	80 886	127 073
Cash	165 339	105 984	695 191
TOTAL ASSETS	3 371 070	1 646 121	3 970 715
Shareholders' equity and liabilities
Equity	1 766 569	1 066 840	1 607 442
Long term debt	1 467 756	519 201	1 464 152
Current liabilities	136 745	60 078	899 121
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	3 371 070	1 646 119	3 970 715

Note 1

ACCOUNTING AND VALUATION PRINCIPLES

This interim report has been prepared in accordance with International Accounting Standards 34 for interim reports and international accounting standards IFRS as adopted by the EU. The accounting and valuation principles that have been used are unchanged compared to those applied in 2017, except for those listed in this Note under new accounting principles for 2018.

For the parent company, this interim report has been prepared in accordance with the Annual Accounts Act and RFR 2 Accounting for Legal Entities. The accounting policies applied to the Parent Company differ from those applied to the Group solely on the accounting of leasing agreements.

NEW ACCOUNTING PRINCIPLES FOR 2018

As of January 1, 2018, IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments came into force.

IFRS 9 deals with the classification, valuation and accounting of financial instruments. Karo Pharma has completed the analysis of the effects of implementing these two standards during the fourth quarter 2017. There are no changes of significant size that affects earnings or financial position.

IFRS 15 Revenue from Customers: The Standard supersedes IAS 11 Construction Contracts and IAS 18 Revenue and contains a new revenue recognition framework. The standard introduces a five-step model to be applied on all customer contracts so that the revenue statement can be determined in terms of amount and time. The application of IFRS 15

has not had any material impact on timing or amount for the recognition of Group income.

	Jan -Mar	FY
	2018	2017	2017
Perscription drugs	92.8	61.5	232.0
OTC drugs	69.2	0.3	66.0
Other	105.1	77.5	359.6
Total net sales	267.1	139.3	657.6

Note 2

TRANSACTIONS WITH RELATED PARTIES

Karo Pharma's acquisition of the company Medcore included two smaller products licensed to a company owned by Anders Lönner for more than 10 years. Karo Pharma receives the same commission on sales as MedCore did, 15 percent..

Chairman Anders Lönner and Board members Per-Anders Johansson and Håkan Åström as well as the Nomination Committee and the shareholder Leif Edlund, who together hold approximately 17.8% of the capital and votes in the Company, have committed to subscribe for their respective pro rata share in proposed rights issue. The remaining part of the rights issue is underwritten by Anders Lönner, Leif Edlund and Håkan Åström, who receive a 2.5% remuneration on their respective guaranteed amount. Issue size has not yet been established, so the underwriting fee cannot yet be determined.

In January 2018, the Board decided to purchase the brand Viruseptin from a company owned by the Board Chairman Anders Lönner, Beampoint for KSEK 74, corresponding solely to registration costs. Anders Lönner did not participate in the decision to acquire the brand Viruseptin.

Note 3

ACQUISITIONS

On April 4, 2018, Karo Pharma acquired an operation from Leo Pharma (the LEO operations). The acquisition is an asset purchase transaction and includes a product portfolio of well-known drug brands as well as platform for further development.

The purchase price amounted to MSEK 2,673. The assets acquired relate to product rights and goodwill. Acquired Goodwill is attributable to the platform for continued operations in Scandinavia and Europe which the acquisition of the LEO operations entails.

As the acquisition of the LEO portfolio is of a commercial takeover character, it also adds an obligation for the Company to acquire the LEO product portfolio inventory. This cost is estimated at approximately MSEK 100 and is expected to be paid in the second half of 2018.

The acquisition relates only to assets belonging to the former owner as part of an integrated business and has no historical historical financial information and not a separate operation with associated assets, liabilities and obligations. Consequently, a pro forma income statement as if the acquisition had taken place on 1 January and which gives a fair image cannot be established. Furthermore, this means that a preliminary acquisition analysis has not yet been prepared.

Acquisition-related costs in Karo Pharma AB amount to approximately MSEK 0.5.

The consideration amounts to MSEK 2 673. Since no liquidity was acquired, the cash flow is equals the consideration.

The acquisition analysis of the acquisition of the LEO operations is preliminary until the final distribution of goodwill, product rights has been determined. The company currently evaluates the future potential and life of the acquired products. When this analysis is completed, the acquisition analysis will be determined, which may lead to a change in the distribution of product rights and goodwill.

Karo Pharma will gradually assume management of the products. During a transitional period, LEO Pharma manages the product portfolio on Karo Pharma's behalf against a reimbursement at market levels. Under the agreement, the transitional period may be 24 months.

As a result of the acquisition, costs are expected to increase during the second until the fourth quarter 2018 due to the building up new subsidiaries and expansion of existing sales organization (approx. MSEK 50) as well as the costs associated with integration and bextension of Karo Pharma's regulatory organization (approx. MSEK 20).

Note 4

DEFINITIONS

In the report, a number of financial performance measures are referred to which are not defined by IFRS. These measures are used to help investors, management and other stakeholders to analyze the company's operations. These measures may differ from measures with similar names at other companies.

Below are a number of financial performance measures and how these are used to analyze the company's goals.

For further definitions, see the Annual Report 2016 under the heading definitions.

Financial performance
measure	Definition	Purpose
Average number of shares	Weighted average number of shares
Earnings per share	Earnings per average num ber of shares
Equity ratio	Equity as a percentage of Total assets	The equity ratio is relevant for investors and other stakeholders who want to assess the com pany's financial stability and ability to manage long term.
Gross margin	Gross earnings as a percent age of Net sales.	Gross earnings are used to show the company's margin before the impact of costs such as sales and administration costs and R & D.
Adjusted EBITDA	Operating earnings before depreciation excluding items affecting comparabil ity	The financial performance measure shows the underlying earnings from operations, adjusted for effect of depreciation and items that affect com parisons over time. It provides a picture of earn ings generated from ongoing operations.
Adjusted EBITDA margin	Adjusted EBITDA in relation to Net sales	The ratio is used to measure the profitability of ongoing operations.

	January - March		Full year
Reconciliation adjusted EBITDA	2018	2017	2017
Operating earnings / loss	63 555	31 427	79 904
Depreciation	25 395	12 313	61 744
Other depreciation and amortization	0	0	0
Items affecting comparability	-235	0	27 615
Adjusted EBITDA	88 715	43 740	169 264

Items affecting comparability are:

• Transaction costs linked to the acquisition of product rights, trademarks, licenses or companies.
• Costs related to restructuring and reorganization, e g in the case of acquisitions.