Fagron BV: Full Year Results 2015 Company: Fagron BV Conference - - PDF document

Fagron BV: Full Year Results 2015 Page | 1 Ref 5119479 05.02.16

Company: Fagron BV Conference Title: Full Year Results 2015 Presenters: Hans Stols (CEO) and Jan Peeters (CFO) Date: Friday 5th February 2016 Operator: Good day and welcome to the Fagron Full Year Results 2015 Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Hans Stols, CEO; and Jan Peeters, CFO. Please go ahead. Hans Stols: Good morning and welcome to Fagron’s Conference Call regarding the Annual Results

• 2015. I am Hans Stols, as you know I am the CEO of Fagron since December 2015. With me here

today are Jan Peeters, CFO of Fagron; and Constantijn van Rietschoten, responsible for Investor

• Relations. I would like to share with you the highlights of the year under review and give you an

update on our financing, probably the main topic of your interest today. We have prepared a presentation that is available on our website, investors.fagron.com and after taking you through the presentation we will take your questions. Let’s go to slide 1. Looking at 2015 we had a challenging and difficult year. Turnover increased by 5.8% to €473 million and REBITDA decreased by 10% to €106.5 million, both within the revised guidance announced in October. Although our annual results are in line with this revised

• utlook, the majority of our operations performed well. We experienced several negatives

during the year. The main issue impacting on our results is the change in the reimbursement system for non-sterile preparations in the US which became apparent in May 2015. This was also the cause for the impairment we had to take, €225.6 million on the US operations Bellevue and Freedom. This impairment causes the net result to turn negative over the year. The issue we encountered in the US also caused problems for our covenants and we had to give priority to

• ur refinancing and I’m glad to announce that we are close to a sustainable solution going
• forward. I will come to that shortly. In light of our financial situation we propose not to pay out

any dividends over that year.

Fagron BV: Full Year Results 2015 Page | 2 Ref 5119479 05.02.16

Let’s turn over to slide 2, our financial situation. As announced in October, when we revised our forecast we have also addressed our financial situation. We had engaged in discussions with parties that indicated their interest in a potential acquisition of Fagron which continued for quite a period. In December 2015 we announced to give full priority to discussions with our banks and to concentrate on a potential public or private capital raising. By the end of the year we were able to announce that a waiver for covenants on the revolving credit facility and the US private placement developed until the end of March gave us time to work on a sustainable

• solution. It is calculated that we need approximately €220 million to be able to operate well

within our covenants going forward and to execute our strategy. We are currently in exclusive negotiations with a cornerstone investor for part of this amount and in an advanced stage of preparations for an equity raise. At this point we will not be able to give the split in more detail and timelines but we will communicate that in due course. Turning to slide 3, recapping the important events of the year, many of the operations performed well. We were hit by the worsening of the Brazilian real and the change in reimbursement system in the US. We will go into some more detail later on. We continue to invest and to expand our business. We invested in new facilities in the US and in the Netherlands and we have done acquisitions: AnazaoHealth and ABC Chemicals during the year under review. I mentioned already that the decision of the board in December 2015 to no longer give priority to discussions with private equity parties for an offer of the company, after which decision Ger van Jeveren stepped down as CEO and I succeeded him in that position. As said we then negotiated for a waiver on our revolving credit facility and on the US private placement and are very close to a sustainable solution to our financing going forward. Going to slide 5: now to our operational view. We show turnover growth of 5.8% at constant exchange rates or an organic decline of 1% mainly as an effect of the change in reimbursement system for non-sterile compounding in the US and a further weakening of the Brazilian real. The negative effects on turnover of the change in reimbursement systems in the US were approximately €49 million over 2015. To counter the negative developments in the US several initiatives were taken: new concepts and trademarks were launched mainly focused on the cash market in the non-sterile segment. In the sterile segment we are investing in an integrated national sales team to fully use the capacity of the new sterile GMP compounding facility in

Fagron BV: Full Year Results 2015 Page | 3 Ref 5119479 05.02.16

Wichita that will open shortly probably in the month of March. We also initiated a company- wide cost saving programme with the aim to structurally lower our cost level with approximately €10 million on an annual basis. Going to slide 6, here we present the bridge that explains the development of the turnover in

• 2015. We wanted to show you how the change in the reimbursement system affected the

business in the US. You can also see that in Europe and Brazil against constant exchange rates

• ur turnover showed healthy growth.

The next slide, turning to Fagron’s speciality pharma services, we saw a strong turnover growth

• f 27.1% at constant exchange rates with an organic increase of 7%. We also saw strong growth

in Europe, Colombia, South Africa and the sterile activities in the US. The increase was driven by an increasing demand for sterile compounding. The non-sterile activities in the US declined due to the negative effects of a change in the reimbursement system for non-sterile compounding in the US. Our REBITDA margin decreased to 21.9%. As mentioned before we have invested in two new facilities, our new antibiotic facility in the Netherlands opens in June of this year while the new sterile facility in the US will open next month. Trademarks in the year, we saw a turnover growth of 10.3%. This increase is mainly driven by global trademarks like SyrSpend. The REBITDA margin decreases to 31.1% of turnover due to the weakening of the Brazilian real. I am particularly proud to see that there is an exceptionally high demand worldwide for SyrSpend. SyrSpend is developed in-house based on active suspension technology, results of the largest independently conducted stability study showed that SyrSpend is compatible with almost all medicines. We have a strong and extensive R&D pipeline and our global presence boosts our cross-selling and innovation capacity. Going to slide 9, Fagron Essentials. We saw a decline of turnover of 8.1% or an organic decline of 9.1%. We concluded the acquisition of the Belgian company ABC Chemicals which is consolidated from July 2015. The acquisition further strengthens our market leadership in the sale of pharmaceutical raw materials. In the US we suffered from the changes in the reimbursement system as explained; while in Brazil the weakening of the real impacted our

Fagron BV: Full Year Results 2015 Page | 4 Ref 5119479 05.02.16

• turnover. Our REBITDA margin decreased to 21.6% of turnover and by going to slide 11 I would

like to hand over to Jan for our financial review. Jan Peeters: Hi, good morning from my part. So we are on slide 11. So notwithstanding the situation in the US, we saw a 7.4% increase in the gross margin to nearly €310 million. It’s important to mention that also in percentage of sales the gross margin developed very well and increased

• ver the year 2015 by 90 basis points which I think is a good result, showing that all the
• perations we currently have generate an increased gross margin despite the situation in the

US. On slide 12 we see the evolution of the REBITDA which is a decline of 10% for the full year which is mainly caused by an increase of operational costs and these increases in costs were mainly driven by acquisitions in the 2015 year. As mentioned by Hans we initiated a cost saving programme to take out about €10 million in costs on an annual basis started towards the end of the year and of which we will see the main impact in 2016. On slide 13 depreciation and amortisation. As a consequence of the change in the reimbursement system during the year 2015 we have taken an important impairment on the US

• perations, so the businesses Bellevue and Freedom have been impaired for €225.6 million. The
• ther depreciations and amortisations were €23.6 million which is a 24.1% increase compared

to 2014. Then on slide 14 I will probably spend a little bit more time on the net debt, given the fact that net debt came in at €523.8 million at the end of the year which is higher than most of the analysts expected, so on slide 14 you see the bridge between the end of June and the end of December, so at the end of June the net debt stood at €455 million. We see an operational cash flow of €47 million negative in the second half of 2015. Acquisitions amounted for €66.3 million which is I think higher than most of the people expected and this is due to the fact that we basically have paid nearly all our earn-outs and deferred payments over the years 2015, so you will remember that at the end of 2014 the contingent liabilities in the balance sheet stood for roughly €100 million and now we only have a little more than €3 million left for the next three years, so that’s why this amount is higher than most of you expected. The capex stood for €11

Fagron BV: Full Year Results 2015 Page | 5 Ref 5119479 05.02.16

million in the second half, €22 million on the full year and the interests are at €20.7 million which is higher than expected as well. We also have an effect of FX, so the US dollar-euro conversion on our debt has a negative effect of €7.5 million for the second half and roughly €20 million for the full year. We also have taken some provisions related to the refinancing of roughly €10 million, so roughly €30 million of the increase of net debt between 1st January and 31st December are related to FX and provisions and are basically non cash. As you are aware we have negotiated a waiver with our financing banks for our revolving credit facility and for our US private placement in respect of our covenants which is valid until the end

• f March. Although we understand that from your perspective it has already taken a long time

to come with a sustainable solution but you have to understand that there were many developments at the same time and as Hans, our CEO, already mentioned, we are now close to a sustainable solution. I will hand back to Hans. Hans Stols: I have one more slide for you and that’s regarding the dividends. As already mentioned in the first slide, we will propose to the AGM not to distribute any dividends. Although we understand there is a lot of negatives for our shareholders, we trust that you all agree with us that strengthening our balance sheet and restoring our financial situation now has a key priority. As I mentioned we are very close to reaching a solution there and we will update you in the next few weeks. With that I would like to conclude our presentation for today and I would like to give you the

• pportunity to ask questions.

Operator: Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered you may remove yourself from the queue by pressing *2. Again please press *1 to ask a question.

Fagron BV: Full Year Results 2015 Page | 6 Ref 5119479 05.02.16

We will now take our first question from Jan De Kerpel from KBC Securities. Please go ahead, your line is open. Jan De Kerpel: Hello, good morning everybody, thanks for taking my questions. I will start with three questions, first of all one, can you elaborate on how you get to the 220 million, so give us some details on how you get there? Secondly on the private placement and capital increase, can you explain to us what’s the rationale of doing a private placement first and then followed by a more broader rights issue? Linked to that when can we expect the AGM to take place? Then thirdly related to the impairment of Bellevue and Freedom, are you continuing with the activities of Bellevue because this was a B2C activity which you are not doing in the rest of the world, so if you could just elaborate a little bit on that what you will continue of these activities and what exactly you are impairing? Thank you. Hans Stols: Thank you for your questions. Let me start by answering the first questions, if I recall well you had four questions, so I will take 1, 2 and 4 and Jan will go to the rationale. The first question was regarding the 220 million, whether we could give some more detail on that. The thing is that we already mentioned that we are working with a cornerstone investor there and some other private investors. Due to the exclusivity and the NDAs we have signed up we at this moment are not in a position to give any further detail on that. Regarding the rationale I think Jan can best answer that. Jan Peeters: Yes, good morning Jan. The rationale is clear that it’s a clear wish of the board of directors today to bring back a cornerstone investor in the shares of Fagron because cornerstone reference shareholders always gives a lot of stability towards the company, so given that, that’s the main rationale why we want to attract important investors of which one reference shareholder and also then in the second phase will give the opportunity to the rest of the shareholders to participate in the public tranche. Hans Stols: Then regarding the AGM, when will that take place? As mentioned we are in the final stages of the negotiations. We are not sure when we will finalise that but expectations are within the coming weeks. At the moment we do so, we will announce that and we will send the invitation out for the AGM. As far as I understand that will take 45 days before the AGM comes

Fagron BV: Full Year Results 2015 Page | 7 Ref 5119479 05.02.16

together to take a vote on the proposals on the table. Then regarding your fourth question, Bellevue, Freedom and both companies going forward, it’s an excellent question I have to say because especially if you look at Bellevue, to be fully transparent about that, at this moment Bellevue is not making any money, so from a REBITDA perspective it’s running break-even. Looking at all options there, we’re restructuring also our sales team, we’re looking at cutting on

• ur operational expenses. In general we already cut 10% of our total number of employees, if

you look specifically to the US it’s even more, it’s close to 20%, so at this moment it’s too early to say what the future will be going forward regarding these two companies but all options are

• n the table I think. We’re trying to find synergies within the existing organisation and take a

decision on the basis of that. Jan Peeters: Just to add a little comment on that is it’s clear that we still see a lot of upside in the US regarding the sterile environment, so market estimates are between 800 and 1.2 billion in terms

• f market size, where we will focus not only on the high sterile segment but also on the low risk

sterile segment of what we call the ad mixture, so the plant in Wichita is now ready. We plan first commercial batches to be released in the first quarter. We have visited these plants meanwhile and this is the state of the art facility in the US, so we expect a lot of growth there and we hope there also in terms of sales organisation on that activity. Jan De Kerpel: Ok, thank you very much Jan. Just to come back, I understand that you don’t want to give details on the 220 million but my question was can you give details on how you arrive to the 220 million? What are you going to resolve exactly and is there additional money with that amount available to do growth projects, to do acquisitions and stuff like that, so it’s more how you get to the 220 million and what you can do with it. Jan Peeters: Ok, I understand your question better now. We come to the 220 million basically because we want to find a right balance between bringing enough new money on board to resolve the actual situation and to come back to normal covenant levels so that we also have a good position again towards our financing banks and institutions; and also the balance between as I said bringing enough money but also preventing not too much dilution to the current shareholders; and therefore we believe given the current business plan we have on the table and cash flow we expect going forward that 220 million will be enough to bring Fagron back in a

Fagron BV: Full Year Results 2015 Page | 8 Ref 5119479 05.02.16

normal business environment and let’s say business as usual. I have to admit that this brings us not an enormous firepower for acquisitions but I think that we have invested the last years a lot

• f money in new facilities not only in the US but also in the Netherlands, in South Africa and in
• ther parts of the world and it’s our main focus now to basically drive organic growth to all the

investments we have done in the past months or years and that will have to drive the growth going forward. Jan De Kerpel: Ok, that’s very clear Jan, thank you for those. I will go back in the queue, I may come back later on. Jan Peeters: Thank you. Operator: We will now take our next question from Matthias Maenhaut from ING. Go ahead please. Matthias Maenhaut: Yes, good morning, thanks for taking my questions. Maybe to pick in on what you previously said Jan, you said you already invested a lot in new facilities. Could you just maybe set out what those facilities represent in revenue potential and in REBITDA potential going forward? How do you see that ramp-up actually going over the next couple of years? Then secondly there has been a bit of news flow that you received several civil investigation demands in the US. Could you state on how that is proceeding? Are there any claims filed or could you say that with 100% certainty that you will not be pursued? Thank you. Hans Stols: Yes Matthias, thanks for your questions. Regarding your first question, for revenue potential, if you look at now the total availability of capacity we have, for example in the US we have currently three facilities which are under the 503B regulation, FDA 503B outsourcing facility, so we have there the possibility to serve the full US market, so all the states, there are no inter-state restrictions whatsoever. This is a total of 75,000 square feet or 7,500 square metres of facility. If you compare that for example to a PharMEDium which is currently the market leader, that’s about a third of the capacity of PharMEDium. PharMEDium is doing roughly 400 million of sales, so for our facilities the minimum sales potential over the next years, so it’s not going to be realised over the next 12 months but it’s going to take a couple of years

Fagron BV: Full Year Results 2015 Page | 9 Ref 5119479 05.02.16

can go up to 300 million. Having said that the ramp-up will take of course some years. We are building as we speak a salesforce. We have already signed three GPA contracts with the three most important GPAs, there are basically five big group purchase organisations in the US of which three we have now signed agreements, that means we are listed and we are now building

• ur salesforce towards the hospitals and the clinics and we plan to have 25 people, so feet on

the ground by the end of this year. To give a comparison, PharMEDium has roughly 75 people on the streets, and depending on the success of and the ramp-up of the sales team, we will see going forward increasing sales. The high risk sterile compounding market is something we

• perate in on a full scale, so we will be able to offer a broader range of products and services to

the hospitals than PharMEDium, so that also will differentiate us from the main competition in that market. Coming back on your second question regarding the DoJ investigation, it’s still an investigation. We didn’t receive any claim. We have several legal opinions. It’s difficult however to say…you cannot say that we don’t have any risk although we didn’t receive any claims so we are in the impossibility to settle today. Saying that there is no risk, I think that’s not fair, but we believe and also given the legal opinions we received from third party lawyer firms, the risk is limited but we have a provision in the balance sheet of $10 million. Matthias Maenhaut: Alright, thanks. Maybe if I may follow up Jan, you said PharMEDium does about 400 million in turnover if I understood correctly and you say you have about one third of the capacity, but I thought I understood you said that you would do 300 million in turnover. Wouldn’t it be rather close to 150 million then? Hans Stols: No, because we are also operating in what we call the high risk compounding sterile segment which is a market which has higher prices, higher margins, so in that respect we are different from PharMEDium. Also the setup of our facilities is completely different from

• PharMEDium. We have a lot more automation, so we will work for example with automating

saving fillers, so we are we would say more state of the art which will enable us to produce more efficient.

Fagron BV: Full Year Results 2015 Page | 10 Ref 5119479 05.02.16

Matthias Maenhaut: Alright, and in terms of margin can you give a rough guidance on what we should expect in terms of gross margin in line with the group average at this point in time or even higher? Hans Stols: I would say on the gross margin it’s a little bit higher but given the extensive investments we need to do in salesforces to enable us to ramp up these sales, we will not see EBITDA margins yet at the group level, a little bit below, but once you have let’s say full capacity then you will be able to reach EBITDA margins which are at group average. Matthias Maenhaut: Alright, thank you. If I may just one more question: can you give a bit more colour on how the pricing environment actually evolved in the US? I recall there was quite some pressure on prices. Did that continue in the fourth quarter and what do you expect for 2016? Hans Stols: We clearly saw in the non-sterile segment a stabilisation of the prices around to $170 a script. Matthias Maenhaut: Alright, thank you. Operator: We will now take our next question from Pieter Zandee from Rabobank. Please go ahead. Pieter Zandee: Good morning guys, a couple of questions if I may. First of all on the specialty pharma services, in the prior quarter you gave a split between non-sterile and sterile. Could you again provide a split? Then secondly could you give an indication of the organic growth figures that you’ve witnessed in Europe, South America and the rest of the world in the fourth quarter? Then thirdly on the impairment of €226 million, was it only goodwill that had been impaired because if I recall correctly, the goodwill for these two companies amounted to €193 million at year end ’14. Is that just a dollar translation impact or were there any other items that were impaired? Thank you. Jan Peeters: Thank you for your questions. Regarding the organic growth, in the fourth quarter, for North America we see a drop in the fourth quarter of roughly 30% in historical currencies; and in

Fagron BV: Full Year Results 2015 Page | 11 Ref 5119479 05.02.16

South America, in Brazil mainly because 95% of our turnover is made in Brazil, we see an increase of 24%, so despite the let’s say weak economic environment in Brazil we have a very solid…I would say above average organic growth in local currency in Brazil and this is due to the fact that we mainly benefit from weakness from competition. We see some competitors having big problems in sourcing, in working capital and that gives us an upside. Regarding the goodwill, what was your question again I’m sorry? Pieter Zandee: You impaired €226 million again on Bellevue and on Freedom, but if I recall correctly they were in the books for €193 million… Jan Peeters: Yes, but that’s due to the fact that in the purchase price allocations we also allocate some goodwill to brand and to fixed assets, so to other intangibles and fixed assets, so part of that is impaired as well. It’s not purely goodwill, it’s also intangibles, so brands and fixed assets that’s related to the purchase price allocations in the past. Is that clear? Pieter Zandee: That’s clear. Could you please come back to the organic growth in the rest of the world and Europe please? Jan Peeters: The rest of the world we see an organic growth of more than 40% and in Europe we see a little decline in the fourth quarter and that is mainly due to the fact that for example in Belgium we have changed a little about our sales strategy towards the wholesalers which has a let’s say one time effect in the fourth quarter and we also saw a little bit weaker sales in Spain and in the Netherlands, but on a yearly level we see an organic growth of 5% for Europe overall, so that’s in line I think with the past performance and also that’s also in line with what we expect going forward. Pieter Zandee: Thank you Jan and could you please come back to the first question about the split in specialty pharma services, about how much of your revenue is still within the non-sterile segment and how much is sterile? Jan Peeters: Today the revenue for Bellevue which is our pharmacy operations which is basically our direct to patient sales of non-sterile compounding is let’s say after the…it’s not relevant to give

Fagron BV: Full Year Results 2015 Page | 12 Ref 5119479 05.02.16

you the year figure. We should look at the fourth quarter figure. This business now turns around about $3 million a month. Pieter Zandee: Alright, thank you. What about Freedom? Jan Peeters: Freedom also suffered from the reimbursement because Freedom was mainly positioned towards the let’s say high volume compounds operating mainly in the third party reimbursement market, so also volumes in Freedom have been affected severely and Freedom now generates sales of about roughly $1.5-2 million a month. Pieter Zandee: Alright, thank you. Operator: We will now take our next question from Roderick Verhelst from De Groof Petercam. Your line is open. Roderick Verhelst: Most of my questions have been answered but just to come back on the margins, you indicated despite the start of the sterile compounding which as indicated has far higher margins than the non-sterile part, that margins are going to remain stable at 18.1% for 2016 – is that correct on group level? Jan Peeters: Can you repeat that Roderick? Roderick Verhelst: You indicated despite the start of the sterile compounding that the margins will not improve and that they will be around the same level as what we see now for the group, so it’s going to be around 18.1% for 2016, that’s a bit of the ballpark number that we should choose for EBITDA margin. Jan Peeters: You mean for the specialty pharma services in general or only for the US? Roderick Verhelst: Only broadly speaking for specialty pharma services.

Fagron BV: Full Year Results 2015 Page | 13 Ref 5119479 05.02.16

Jan Peeters: For the specialty pharma services for the group, in 2015 we have margins of 21.9% in EBITDA and we believe that is a more or less sustainable level going forward, but that’s for the

• group. That’s not only the US, that’s also the other regions where we are active with specialty

pharma services. Roderick Verhelst: Ok, thank you. Operator: We will now take our next question from Solange Timp from ABN AMRO. Please go ahead, your line is open. Solange Timp: Yes, good morning. Most of my questions are already answered but I have a couple

• more. My question is about the cost cutting that makes the situation in the US easier to deal

with but it still doesn’t solve the fact that reimbursements are lower, so should we see the second half 2015 margins just 16.1 as the new margin going forward; and if sterile…is there a higher margin business then do you still want to continue with non-sterile in the US? Hans Stols: Thank you Solange for that, I will answer that. First regarding the cost cutting, indeed we started with that of course in the second half of 2015 already. Globally we have had to say goodbye to 10% of the total number of employees. If you go more specific in the US it’s even close to 20% of the employees that had to leave the company. On top of that we’re looking at all the measures to do some cost-cutting and it’s a fair estimate that the total saving on an annual basis for 2016 will be around €10 million. The second question is I think regarding the margin. I think Jan can better answer that. Jan Peeters: Solange, I think we already answered that in a previous question to Roderick, so for the specialty pharma services on a global level we have a margin for the full year of 21.9% and the second half of 16.1% although with the growth perspectives we have in the US regarding sterile compounding and also because we start up activities in the Netherlands, in South Africa and

• ther countries, we believe that going forward…I wouldn’t say on an immediate basis but going

forward an EBITDA margin around 20% is a sustainable level.

Fagron BV: Full Year Results 2015 Page | 14 Ref 5119479 05.02.16

Solange Timp: For the deviation you mean then? Jan Peeters: For the deviation, for let’s say the coming years. Solange Timp: Ok, and how do you expect the picture to look like because yes, I have a question also about the low and high risk sterile compounds because that’s new for me. My question basically is how will the Fagron Specialty Pharma Services division, how is that going to look like split between non-sterile, high risk sterile and the low risk sterile? Can you provide a better view for me about that decision? Jan Peeters:

• Yes. First of all to maybe explain the difference between low risk and high risk, so high

risk sterile compounding means that you mix APIs with sterile products, so that they’re in a sterile environment and that you also sterilise it, autoclave or some other way of sterilising. It’s called high risk because there you have the highest risk for contamination, so that’s the most risky business also generating the highest margins. Low risk sterile means basically only mixing two sterile products together in a sterile environment, so that’s for example what PharMEDium does, they also call it an admixture business. It’s basically only mixing, so that’s bigger volume, that is lower margins, lower prices but much bigger in volume, that market. We will basically focus on the two segments in order to be able to offer a full range of products and services to the hospitals and the clinics, not only the US but also in Europe. Regarding your question on the division between sterile and non-sterile, it’s clear that sterile will become more important in the US than non-sterile, although in Europe non-sterile compounding is still a very important piece, especially in the Netherlands. We don’t disclose the split in percentages but it’s obvious that in the Netherlands we have still a very important part in the non-sterile compounding with our facilities and we’re also ramping up with our new facilities, for example the antibiotic facility in the sterile part. Hans Stols: To add on what Jan is saying, the sterile compounding of course as Jan explained already means that the investment level is a lot higher than needed for non-sterile, so what you will see is that in the hospital markets in Europe and in the US that because of the fact that the current facilities will have difficulties with coping with current and new GMP and FDA levels that people

Fagron BV: Full Year Results 2015 Page | 15 Ref 5119479 05.02.16

will more and more outsource these products which creates the opportunity. The thing is that – I don’t know whether we mentioned that already somewhere – but sterile compounding market in the US is estimated between 800 million and 1 point something billion dollars, so it’s a huge market with great opportunity for Fagron and the facility in Wichita, which will launch its first commercial ventures in March. It’s state of the art, I’ve been there a few weeks ago and to give you an idea, it’s the first facility in the US for example where every clear room has a separated air treatment facility, so that means in case of technical problems you don’t run into problems with the whole facility, so it’s only linked to this one specific cabin, so I think we have a great unit there to help us going forward. Solange Timp: Also if I may ask a question about the new facilities because I expected them to already show a small positive contribution in organic growth levels in Q4 because earlier it was announced that they would be operational at the end of the year, so is there a specific reason for this delay? Because of this sterile compounding I expect you to be… Hans Stols: It’s for me a bit difficult to comment on the past but I know it was announced that the sterile facility in Wichita would start running October/November last year. To be fair and frank and open, I’ve been there. They started constructing the facility end of December 2014/beginning January 2015, so building this facility within 12 months is already an amazing

• job. So there has been some delays. One has to understand that it’s not very different from

building a house with a lot of techniques. It always takes a bit longer than expected. On top of that if you talk about sterile compounding, after you have built the facility you have to start transferring products in, to validate the processes, to validate the machinery and things like that, that takes also a few months, so it has taken a bit longer than expected but again looking at where we are today, March will be definitely the date that we will start selling the first batches. Solange Timp: Ok, and June for the Netherlands, you are also sure about that? Hans Stols: Talking about the antibiotic unit and the penicillin facility? Solange Timp: Mmm hmm.

Fagron BV: Full Year Results 2015 Page | 16 Ref 5119479 05.02.16

Hans Stols: As far as I can judge, I’ve been there as well, by coincidence last week, had a good view at it. There’s still a lot of validation work to be done there but what I know today and what I’ve seen, the goal is to start off in June. We have to make it work because it will be the first dedicated penicillin compounding facility in the Netherlands, so also there we are very unique. We’re the only one in that space of the market, so that creates an enormous opportunity, so we’ll do everything to make that work in June. Solange Timp: Ok. Just let me come back to one question before I let go, which you said about non- sterile compounding, it’s still important in Europe. I understand that, but what about the US? For now it seems that in the second half of the year the positives contribution and the growth in sterile compounding wasn’t enough to offset the negatives from non-sterile compounding, so are you going through with non-sterile compounding or are you really more on sterile and are you going to shift? How should we see it? Hans Stols: It’s a good question, I understand where you’re coming from. First of all I have to say that last quarter was 2015, we have seen that turnover was stable in that area, so we felt in that way comfortable at a lower level of course but that where we are in the last quarter, that will be the way to go forward in 2016. As indicated we’re working on finding the right structure, so the national sales force, we are combining things, we’re finding synergies there to make sure that we also still are able to continue in the non-sterile area. Of course all options are taken into consideration, but today the combination of the US business of course is still profitable and by combining certain things and finding the synergies, depending on what the market will develop like but as it looks today all options are on the table, but the non-sterile part will still be a part of

• ur business going forward.

Solange Timp: Ok, yes. I just missed it when you said it but what’s now the price of compound, non- sterile, of the reimbursed I mean? Jan Peeters: Let’s say the last quarter we saw an average price which is basically an average not between reimbursed and cash market of roughly $170.

Fagron BV: Full Year Results 2015 Page | 17 Ref 5119479 05.02.16

Solange Timp: Alright, ok. Thank you. Jan Peeters: Thank you. Operator: We will now take our next question from Anastasia Karpova from Kempen. Please go ahead, your line is open. Anastasia Karpova: Good morning, three questions if I may. Can you please comment on the reimbursement cuts in the Netherlands regarding compounding pharmaceuticals and pharmaceutical ingredients and the impact it’s going to have on your operations? Second, how confident are you in your growth projections regarding sterile compounding in the US and what would be the uncertainties or the risk factors to your projections? Finally if you just could explain the contribution of acquisitions to the net debt position because a significant proportion

• f those acquisition payments were supported to be paid in shares, however it somehow

contributed to the decrease in either the cash position or debt position. Can you please clarify? Thank you. Hans Stols: Anastasia, I will take the first two questions and then Jan will address the third one. First the reimbursement in the Netherlands, it’s a good question, again a good remark. In November 2015 there’s an ongoing process by the way I have to say, so it’s not the first time, then in November 2015 there was another new reimbursement list coming out which affected Fagron in a certain way. There were a number of products that were taken out of the reimbursement. The effect of that measurement was limited because there are two things that will happen there: first of all there will be the therapeutic substitution, so prescribers by themselves but also on indication of us will move to prescriptions that are still reimbursed, so that’s a normal thing that you always see happening in this industry; and the second thing of course that we came up with

• ther solutions addressing this, so if you look at the development of Fagron in the Netherlands

last year, that was positive and for 2016 still a growth is foreseen. Regarding the confidence in sterile compounding, I think we are pretty confident that we will do a great job there. I will explain why, what you see today is that sterile compounding seems to be the issue in the compounding space, so if you look in the US, everybody is telling or writing something about it. The second point is that the market is huge. That combined with the level of our facility in

Fagron BV: Full Year Results 2015 Page | 18 Ref 5119479 05.02.16

Wichita gives us great confidence; and thirdly I mentioned that earlier in the call already, hospitals today have to cope with new regulations that change every year and by change I mean the levels of the facilities have to go up. That means investment is needed in the facilities and that brings automatically the opportunity to the one that offers to do it outdoors or the hospitals can outsource it to somebody that has a dedicated facility for that. Don’t forget that a lot of hospitals compound a lot of things – one of them being sterile products where they do suppositories, they do sort of everything and you can understand that if you do not specialise in a certain area and you have to maintain all these investments to keep the facilities running, that

• utsourcing is often the best option, so yes I would say that we are pretty optimistic that we can

easily achieve a 10% market share in that market. That’s the minimum goal. Anastasia Karpova:

• Great. If I may follow up on your comments regarding the Wichita facility, have

you already passed the FDA expansion of this height? Hans Stols: The question to that is easy: the FDA works a bit different than in other countries. Of course it has to cope with FDA requirements, but the FDA does not come in and gives you approval before starting, so you have to cope with the regulations that are in place. On the basis

• f that you have to validate the plant. After you have validated the plant you can start with

production and selling the product. At a certain point of course the inspection and the authorities step in and check whether the facilities are coping with the FDA requirements, so we do not have to wait for getting a certain licence by the FDA. Anastasia Karpova:

• Great. The last question regarding acquisitions?

Jan Peeters: Yes Anastasia. So if you look at the bridge in the second half we see 66.3 million of cash

• ut regarding deferred payment and earn-outs, nearly 42 million of that is related to new

acquisitions, that’s both Anazao and ABC Chemicals; and the remaining part, roughly 25 million is related to deferred payments and earn-out payments linked to several acquisitions, both US, Brazil, South Africa so all kinds of let’s say earn-out and deferred payment options. We did pay a part of it also in shares but the 25 million is the cash part and as I already mentioned before there’s a little bit over 3 million now left on the balance sheet which we have to pay over the next three years.

Fagron BV: Full Year Results 2015 Page | 19 Ref 5119479 05.02.16

Anastasia Karpova: Am I understanding correctly that the majority of those acquisition payments were actually made in cash? I just don’t see the issue of shares that you announced…straight after H1 results to pay earn-outs in your bridge for financial debt. Jan Peeters: The €25 million obviously is only the cash part of the earn-outs. Anastasia Karpova: Ok. Jan Peeters: We have issued new shares, if I remember well roughly four hundred and something thousand shares at the share price of roughly €40 which was also part of the closing of all the earn-outs. Anastasia Karpova: But those earn-outs are not shown in the amounts of 66 million that you show

• n the bridge?

Jan Peeters: Of course not because this is basically a contribution in kind, so we issued new shares which we then swapped against the liabilities. Anastasia Karpova: Thank you. Now it’s clear for me. Jan Peeters: That’s not a cash component. Is that clear? Anastasia Karpova: Yes. Jan Peeters: Thank you. Anastasia Karpova: Thank you for taking my questions. Operator: We will now take our next question from Edward Keeling from SIG. Please go ahead, your line is now open.

Fagron BV: Full Year Results 2015 Page | 20 Ref 5119479 05.02.16

Edward Keeling: Hi there. I just had one question regarding the capital raise. I’m just wondering, is there any guidance between the split of the cornerstone investor versus what amount will be raised from the market via the rights issue? Is there any sense for how much will be available for investors versus what the cornerstone will be taking up? Hans Stols:

• No. At this moment we are not at liberty to say that. Of course the cornerstone is

limited to acquiring maximum 30% of the total because otherwise it has to make a public offer. So further details regarding that are still being discussed and we are not at liberty to talk about that because of the NDAs that have been signed and are still in place. Edward Keeling: Got you, fair enough. On the 30%, that’s not 30% of the capital raised, it’s holding posts… Hans Stols: Of the total, of the new total. Edward Keeling: Yes, ok. Thank you. Operator: Ladies and gentlemen, if anyone wants to ask a question please press *1 on your telephone keypad. We will now take our next question from Matthias Maenhaut from ING. Please go ahead, your line is open. Matthias Maenhaut: Thank you. One more follow-up actually from my side. The average pricing level in the US has decreased throughout the year. You say it’s quite stable in the fourth quarter, however I can assume that it’s still quite somewhat lower than at the beginning of the year. Could you maybe quantify the impact that you would see on 2016 turnover if pricing levels would stay stable at this point in time? What would be the incremental negative effect? Thank you. Jan Peeters: Matthias, if you go to the sales bridge, you see that the impact on the 2015 sales for the US was 49 million, although that’s obviously not a full year. Let’s say the full year effect would be higher. As we already mentioned I think in the third quarter call, we mentioned about 75-80 million, but obviously if you look at the fourth quarter, we can say that the fourth quarter

Fagron BV: Full Year Results 2015 Page | 21 Ref 5119479 05.02.16

level of sales, we don’t see a further decrease. So I think for 2016 you can basically, that’s also what we did in our forecasts extrapolate the fourth quarter sales level of both Bellevue and Freedom because also Freedom has been impacted significantly, so we are basing our forecasts based on the let’s say run rate of the fourth quarter. Matthias Maenhaut: Run rate of the fourth quarter, because for us it’s a bit difficult because we don’t have the exact split, but let’s say that 80 million would be the full year impact, so you would have an additional 30 million negative impact in 2016 – would that be correct to assume? Jan Peeters: In the first half obviously you will see still a negative impact which should start to stabilise as of the third quarter and hopefully will be compensated gradually depending on how quick we ramp up the sterile. Matthias Maenhaut: Yes, but the 30 million is a correct assumption? Jan Peeters: That’s quite a good assumption, yes. Matthias Maenhaut: Yes, thank you very much. Operator: We will now take our next question from Patrick Vermeulen from JP Morgan Asset

• Management. Please go ahead, your line is open.

Patrick Vermeulen: Good morning. I just would like to come back on the sterile opportunity in the United States. Numbers have been mentioned but I just want to make sure I got them correctly. So what do you think the market opportunity is in the United States? Do you want me to give you all my questions in one go or shall I give them one by one. Hans Stols: Give them one by one, I don’t have a problem with that. Estimates are between $800 million and $1.5 billion, so let’s be careful there and place it at $1 billion. Patrick Vermeulen: Ok, and how much of that is still in-house or is it all in-house with the hospitals?

Fagron BV: Full Year Results 2015 Page | 22 Ref 5119479 05.02.16

Jan Peeters: Good morning Patrick, good to hear you. Most of it is still in hospitals and that’s basically due to the fact that as you remember there has been a major outbreak, meningitis

• utbreak back at the end of 2013 where most of the facilities which were not FDA regulated by

the way have been closed down; and then the FDA came up with a new regulation, so that resulted in the 503B facility. Let’s say in 2014 we have seen a major shift back towards the hospitals and we still see a lot of compounding done in the hospitals although there is a great

• pportunity because of the fact that the hospitals prefer back to outsource and given the fact

that the regulatory environment now is very stable and that all these outsourcing facilities are under the oversight of the FDA, today we have 55 facilities in the US which have been approved as 503B. We believe that market growth will be driven by not only the market sales growth but also that the percentage of outsourcing from hospitals towards facilities will increase. Patrick Vermeulen:

• Ok. What is the capital intensity of that business? If you put down a new sort of

facility, i.e. how much do you have to spend for a million dollars of turnover and what is the

• ptimal size of a facility?

Jan Peeters: I think we have to put that in perspective. You have on the one side the pure capex of building a facility, for example our Wichita facility which is 50,000 square feet, roughly I think 20 plus screen rooms, so separate suites, we spent roughly $15 million and that’s on a full capacity basis should be able to generate $200 million. Of course on top of that you need to spend money commercially and also to basically run the facility, but the most important effort

• bviously is to fill the facility and you have to build a sales team. The running costs, not capex.

Patrick Vermeulen: So you invest $15 million for a $200 million turnover? Jan Peeters:

• Yes. If you would have full capacity based on two shifts then you would be more – at the

current pricing again, that can change – but you would generate roughly $200 million. Patrick Vermeulen: If I understand correctly it takes basically a year before you can start using the facility – is that correct? Hans Stols: That’s correct.

Fagron BV: Full Year Results 2015 Page | 23 Ref 5119479 05.02.16

Patrick Vermeulen: Any idea of the ramp-up time before you reach what I would say is normal capacity utilisation? Would that be another year? Hans Stols: We would start in March and we will be fully operational by the end of the year. Jan Peeters: Yes, but then of course you will not reach the 200 million. I think it’s a little bit early to see how quick the ramp-up goes, so we will have much more visibility on that after a couple of quarters when we start really bringing the sales in. Every product you’re going to sell, you need to validate, so in the beginning it’s relatively slow, but the important thing to mention here is that it’s very recurring business because it’s basically contract business. Once you have a contractual relationship regarding products which have been validated and you obviously deliver correct services and quality products, it’s very sustainable revenue. Patrick Vermeulen:

• Yes. What do you think your competitive advantage is? Why are you better at

this than anyone else? Jan Peeters: I think there are three main reasons: it’s because first of all we have now…I think we have anticipated already some new regulations which is in the pipe regarding the setup of the facilities – that means that we work with individual clean rooms for one product; where most of

• ur competitors, they have multiple sterile routes in one clean room which we believe going

forward the FDA will change the rules because there is a big risk for contamination. The second competitive advantage we have is that we offer not only low risk but also high risk sterile compounding products which is…there are not that many suppliers of that type of products; and thirdly is that we also have vertical integration, so we are the only player vertically integrated into compounding, so that also in terms of sourcing and in terms of integration with let’s say

• ther compounding services and products, I think we believe it’s a competitive advantage.

Patrick Vermeulen: Ok, and last question is on the management structure in the United States. You are going to be running that US business as CEO of the Group and then CEO of US business. How is that going to work from a practical…are you going to be there in the States? I presume that’s not a sustainable situation, you know?

Fagron BV: Full Year Results 2015 Page | 24 Ref 5119479 05.02.16

Hans Stols: That’s not the idea indeed. I have been six weeks on board with the Fagron Group as

• CEO. I have been in the States already three times and it’s definitely going to be the focused

period for me as well going forward. It’s a temporary thing. Mr. Jackson suffered from health issues and had to step down. On the other hand I think where we are today, I think it’s highly needed also that the new CEO of the company addresses the problems which did put Fagron in the current situation, so I want to be on top of things, so that’s the reason I said I will step in as an interim to get a good view of where we should be heading to and make sure that we take the right steps going forward. Parallel to that of course we will start looking at somebody that will be able to take over the position of President North America going forward…Fagron North America I have to add. I know there are elections taking place in the States. Patrick Vermeulen: How easy is it to split the sterile and non-sterile business from each other and do they need each other to develop? Hans Stols: They don’t really need each other but it’s an add-on. The thing is that the same thing,

• ne-stop shopping, if you’re a hospital pharmacy and you decide to start outsourcing, the

advantage we can offer is that we can sell them APIs, but we can offer them sterile and we can

• ffer them non-sterile. That’s the reason also we’re installing a national sales team, that one

sales team can visit these potential customers and offer them a whole range of products. Jan Peeters: I think a good example Patrick is for example SyrSpend. SyrSpend is one of our top products in trademarks. We know that market in the US is more than $250 million, only for this

• product. Currently we probably generate less than 1 million I think. Our main competitor is Ora

which is by the way a product of Perrigo, probably a name that sounds familiar to you, so we believe that having GPO contracts in place, having established relationships with hospitals which is also built also on trust and confidence, we will be able to also sell other products than just sterile, just leveraging on the relationships. Patrick Vermeulen: Ok, thank you very much and good luck. Operator: We will now take our next question from Solange Timp from ABN AMRO. Please go ahead, your line is open.

Fagron BV: Full Year Results 2015 Page | 25 Ref 5119479 05.02.16

Solange Timp: Yes, good morning. I just wanted to ask something about the development in North America of essentials and Fagron Specialty Pharma that’s given in the press release. I believe in the third quarter you also gave them, it was then I think 16 or 17 million negative impact. What’s the split between what’s from Essentials and what’s from Fagron Specialty Pharma because what I basically want to know is if Essentials impacted us as an indirect result of the reimbursement cuts in Specialty Pharma or is it also Essentials itself? Jan Peeters: No, it’s Essentials that has been impacted also severely. We basically have three companies acting in the Essentials business in the US which is Fagron where we basically sell to the cash market and to hospitals, so that’s not really impacted. We also have B&B which is a company focused on controlled substances, so they are a little bit impacted, but Freedom was very active in sales towards the big compounds which were active mainly in pain and this has been impacted severely and there we have a direct impact on the Freedom business which is significant. Solange Timp: Ok, because in the press release I read that the change in reimbursement systems for non-sterile compounds results in a decrease in the sale of pharmaceutical raw materials, but it is also a change in reimbursement for pharmaceutical raw materials itself because I know that from an earlier results update, that was also mentioned, that it’s also a different reimbursement system for Essentials. Is that correct? Jan Peeters: No, I think you’re mixing up two things. The system, the reimbursement has changed in two ways: first of all the prices have decreased because of a lot of PBMs imposing price caps or pre-authorisation, so they make it just more difficult to get reimbursed; but the second important thing and that was basically the thing which surprised us the most is that they skipped reimbursement out of APIs but they still make possible products which are based on commercial products still are reimbursed. That’s why the API business has been hit, because of the fact that a lot of PBMs, especially Tricare as an insurer with Express Scripts in total have basically stopped reimbursement based on APIs but not based on commercial products. Solange Timp: Yes, ok. So you want to make your Fagron Essentials business a more commercially finished product decision?

Fagron BV: Full Year Results 2015 Page | 26 Ref 5119479 05.02.16

Jan Peeters: Not only that, I think the main focus for the Essentials business in the US going forward will be on the trademarks and will be on the cash market, so introducing new concepts which are basically not reimbursed and also basically introducing new products for example for hospitals as I just previously mentioned the SyrSpend example. Solange Timp: Alright, ok, so cash based, alright. Then just to get an idea, what’s then the split of the 49 million? How much is essentials and how much is non-sterile? Jan Peeters: It’s more or less 50-50. Solange Timp: Alright, ok. Clear. Thanks. Operator: We will now take our next question from Jan De Kerpel from KBC Securities. Please go ahead, your line is open. Jan De Kerpel: Thanks. Two small additional questions: you said that 10% of the staff were laid off, so that’s around 230 FTEs, of which around 135 FTEs area in the US. Can you explain where the

• ther FTEs have been cut? Then secondly on the margin, there have already been some

questions on that before but could you give us an idea on the group level what kind of margin we can expect going forward? So in 2015 in the second half, this was 18%; for the full year around 23%. What can we expect going forward to 2016 on this line? Thank you. Jan Peeters: Jan, regarding your first question is you state correctly that roughly 230 people have left the company and apart from the US we also did some cuts on a corporate level because we believe that everybody has to contribute if business goes temporarily not so well and also in South America we do continuously aim for lean and mean organisations because you should know that the wage inflation in Brazil especially is roughly between 7-8% for the year, so we do have to do cuts every year in Brazil in order to maintain our margins because of the wage

• inflation. Also we have for example, we did some streamlining of activities, for example we

closed a production facility in Germany which resulted in roughly 20 people leaving. We do

Fagron BV: Full Year Results 2015 Page | 27 Ref 5119479 05.02.16

continuously other streamlining of let’s say back office and supply chain activities, but I would say that’s an ongoing theme. Your second question regarding the margin, as you probably saw, we don’t provide a specific guidance for 2016, so on the safe side if you look at the margins in the second half of 2015 which is 18.1, I think going forward on the safe side that is certainly sustainable and given the fact that we introduced additional measures to cut costs and we continuously focus on a positive development of the gross margin, we might see some upside, but on the safe side I think that’s a sustainable level. Jan De Kerpel: Ok. Thank you very much gentlemen. Operator: We will now take our next question from Ben Eaton from Jefferies. Please go ahead, your line is open. Ben Eaton: Hi there, thanks for taking my questions. I think most of them have been answered, I have one very quick one. The 10 million in savings that you’re targeting, can you give us any guidance on which segment that will fall in? Thanks. Hans Stols: That’s easy to answer actually. The majority of this of course is on head count by far. You can understand that 220 people take the average salary and you will see that the majority

• f the cutting is sitting in that area.

Ben Eaton: And by division, which divisions will the cuts mainly be in? Jan Peeters: We basically aim on streamlining activities creating synergies, so we mainly cut

• bviously in the areas where we don’t see growth going forward. We even recruit for example in

sales team for sterile compounding, so it depends a little bit on where we see growth and in which areas we do synergy exercises in terms of back office supply chain etc etc, so it’s a little bit company-wide. Ben Eaton:

• Ok. Thanks very much.

Fagron BV: Full Year Results 2015 Page | 28 Ref 5119479 05.02.16

Operator: We will now take our last question from Patrick Vermeulen from JP Morgan Asset

• Management. Please go ahead, your line is open.

Patrick Vermeulen: Thank you. I just quickly would like to come back on the capital raising exercise and your statement that no one that comes to an investor cannot hold more than 30% post the

• peration because otherwise you will have to make a full bid. Your press release says that you

are negotiating with a cornerstone investor and other investors – does that mean that the whole, the cornerstone investors plus the other investors could actually hold more than 30% or is it 30% relating to cornerstone plus other investors? Hans Stols: No, they could hold more than 30%. The cornerstone is limited to 30%. It’s not limited but then it’s not a cornerstone anymore, but it’s independent on what the other people will do. Ben Eaton: Ok. Jan Peeters: One remark on that: if the cornerstone would go over 30% given the fact that they backstop a rights issue, then they don’t have to do a mandatory offer. But it’s clear that the cornerstone investors and the other investors are not acting in consent. Ben Eaton: Ok, alright. Thank you. Operator: There are no further questions in the queue at the moment so I would now like to turn the call back to the speaker for any closing remarks. Hans Stols: Thank you very much. For me this was the first call I had for Fagron. I know some of you tried to reach me beforehand but given the fact that I was new or at least new as an executive in my role within Fagron I first wanted to get a good feel and look in the company and spend my time on the issues of refinancing going forward, so again my excuses for that, I know a lot of you tried to find me but I kept a bit away from that. I think looking back to the call I think we had a lot of good questions. I hope we were able to answer them sufficiently. If not our investor relations department Constantijn van Rietschoten is always to be found by either telephone or by email. Don’t hesitate to send him additional questions.

Fagron BV: Full Year Results 2015 Page | 29 Ref 5119479 05.02.16

I’m pretty optimistic, looking at the figures of course we had a tough year. I’ve spent 6, 7 weeks

• n the organisation. We have good people. If you look at the bridge of sales you can definitely

see that we had a major issue to deal with but you can also see that the rest of the company is in pretty good shape. I hope we were able to share that with you. I have a good feel for Fagron going forward. Of course we have to finalise the discussion regarding the refinancing of the

• group. There we will spend the majority of our time in the coming weeks and I hope to get back

to you on short notice with more or at least good news. Thank you. Operator: Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.