Nine months interim report January - September 2001

NINE MONTHS INTERIM REPORT JANUARY - SEPTEMBER 2001 · The Swedish company Q-Med's strong growth continues. During the period turnover increased by 66 percent to SEK 257.5 (155.3) million. · Operating income for comparable units (excluding Ixion) amounted to SEK 35.7 (23.7) million, corresponding to an operating margin of 13.9 (15.3) percent. · Continued strong increase in income SEK 80,2 (46,9) million within Esthetics. The operating margin was 31.9 (30.6) percent. · Q-Med had its first product approved in the USA - DEFLUX for the treatment of vesicoureteral reflux (VUR) in children. [REMOVED GRAPHICS]Sales growth has weakened after the acts of terror in New York. Q-Med is a rapidly growing and profitable biotechnology/medical device company that develops, produces and markets medical implants. All products are based on the company's patented technology for the production of Non-Animal Stabilized Hyaluronic Acid- NASHA. Q-Med's operations focus on the areas of Esthetics, Orthopedics, Uro-Gynecology, and Cell Therapy and Encapsulation. The products RESTYLANE, RESTYLANE Fine Lines and PERLANE are used for the filling out of lips and facial wrinkles. DUROLANE, for the treatment of osteoarthritis in the knee- joint, has been approved in Europe since May 2001. DEFLUX is a product which has been approved in Europe and the USA for the treatment of vesicoureteral reflux (malformation of the urinary bladder) in children. ZUIDEX for the treatment of stress urinary incontinence in women is estimated to be available in Europe at the beginning of 2002. Together with the subsidiary Ixion Biotechnology, Inc., Q-Med carries out research within cell therapy for diabetes. The Q-Med group today has over 230 employees, with 170 at the company's head office in Uppsala, 20 at Ixion and the remainder in wholly owned foreign subsidiaries. The Q- Med share is listed on the O-list of the OM Stockholm Stock Exchange. Please note that in the USA Q-Med operates under the name of Q-Med Scandinavia, Inc. REVENUES Q-Med increased its sales by 66 percent during the first nine months of 2001, to SEK 257.5 (155.3) million. In the third quarter turnover amounted to SEK 83.5 (47.8) million, an increase of 75 percent. Converted to a rolling 12 months, that is the period October 2000 to September 2001, turnover amounted to SEK 339.4 (195.6) million, an increase of 74 percent. Fluctuations in exchange rates have affected sales positively for the first nine months by approximately SEK 15.0 million compared with the same period the previous year. Due to seasonal swings within the Esthetics area Q-Med's sales are historically weakest during the third quarter. Net turnover per geographical area Jan - Sept July - Jan - Oct - Sept Dec Sept SEK millions 2001 2000 +/- 2001 2000 +/- 2000 2000/20 % % 01 Nordic 11.0 8.9 +24 3.4 3.0 +13 11.9 14.0 countries Rest of Europe 136.3 88.7 +54 43.6 26.0 +68 128.4 176.0 North and 46.1 33.8 +36 13.2 13.3 -1 52.3 64.6 South America Rest of the 64.1 23.9 +168 23.3 5.5 +324 44.6 84.8 world Total 257.5 155.3 +66 83.5 47.8 +75 237.2 339.4 Esthetics · Sales amounted to SEK 251.6 (153.1) million, an increase of 64 percent. · Operating income SEK 80.2 million and a 31,9 (30,6) percent operating margin. · All shares in the Italian distributor Nuova ICT acquired. Net turnover and operating income - Esthetics Operating income for Esthetics amounted to SEK 80.2 (46.9) million, which for the first nine months of 2001 gives an operating margin of 31.9 (30.6) percent. Jan - Sept July - Jan - Oct - Sept Dec Sept SEK millions 2001 2000 +/- 2001 2000 +/- 2000 2000/01 % % Net turnover 251.6 153.1 +64 81.1 47.2 +72 233.8 332.3 Operating 80.2 46.9 +71 21.3 14.0 +52 82.4 115.7 income Operating 31.9 30.6 26.3 29.7 35.2 34.8 margin, % The development of sales within Esthetics continued to be strong. Turnover increased by 64% compared with the same period in 2000, to SEK 251.6 (153.1) million. Growth has been greatest in Asia (included in Rest of the world), where above all development in Japan and Korea is very positive. The increase is due to the fact that Q-Med's products continue to gain market shares and that demand is increasing in existing markets, as well as to the fact that operations have been established in new markets. Further distributors have been established during the third quarter in Israel, the Netherlands, the Czech Republic and Thailand. Q- Med's products for facial esthetics are at present sold in 54 countries. In September all the shares in the Italian distributor Nuova ICT were acquired. Since the end of 1996 the company has acted as the exclusive distributor of Q-Med's facial esthetic products in Italy and as such has been very successful. Through the acquisition of Nuova ICT with approximately 45 people employed full time Q-Med will achieve an even stronger presence in one of the most important markets. In addition to the strategic reasons for the acquisition Nuova ICT will add over SEK 30 million per year to the turnover through the skin and peeling products that the company sells under licence. The purchase sum for Nuova ICT amounts to Euro 5.2 million, to which should be added additional purchase sums of a maximum of Euro 1.8 million. The additional purchase sums depend on Nuova ICT's financial results over a period of three years (2001, 2002 and 2003). The comparative clinical study between RESTYLANE and the competing ZYPLAST (Inamed) which is ongoing in the USA is proceeding according to plan. Recruitment of the 130 patients participating in the study was completed in the month of July. The results from the study will form the basis of the application for registration in the USA which it is estimated will be submitted during the first half of 2002. Orthopedics · Building up of the sales network in Europe begun. · Introduction of Durolane on the German market begun. Net turnover and operating income - Orthopedics Large resources are being put into the Orthopedics business unit for the introduction of DUROLANE on to the market. Jan - Sept July - Jan - Oct - Sept Dec Sept SEK millions 2001 200 +/- 200 200 +/- 2000 2000/ 0 % 1 0 % 2001 Net turnover 0.0 0.3 - 0.0 0.0 - 0.3 0.0 Operating -19.5 - - - - - -16.1 -27.1 income 8.5 129 7.9 2.4 229 Sales approval of DUROLANE in Europe, so-called CE-marking, was obtained in May 2001. The work on introducing DUROLANE in Europe has now been begun via Q- Med's subsidiaries. In parallel Q-Med is pursuing discussions with potential partners for the distribution of DUROLANE in Europe, Japan and USA. The aim is to have engaged a partner in the USA during 2001. The world market for injectable hyaluronic acid products within this area is today estimated to be SEK 6 billion, where the USA is the fastest growing market. The most important market in Europe is Germany, where there is an extensive tradition of treating osteoarthritis in the knee joint with hyaluronic acid based products. DUROLANE was presented to German doctors in Berlin at an orthopedic congress in October, and the product was met with great interest by the delegates. The effect study ongoing in the USA, Canada and Sweden, where DUROLANE is compared with a placebo (sodium chloride injection), is proceeding according to plan. The recruitment of the just over 340 patients was completed in July and the follow-up time is 6 months. The results from the study will, amongst other things, form the basis of Q-Med's application for registration of the product in the USA, which it is estimated will be able to be submitted during the first half of 2002. Uro-Gynecology · DEFLUX approved by the FDA (Food and Drug Administration), the American regulatory authority. · Long-term data (DEFLUX) published in the "Journal of Urology". · Sales amounted to SEK 5.9 (1.9) million. Net turnover and operating income - Uro-Gynecology Great efforts are being made within the Uro-Gynecology business unit to introduce DEFLUX and to develop ZUIDEX (for the treatment of stress urinary incontinence in women), which has yet to be commercialized. Jan - Sept July - Jan - Oct - Sept Dec Sept SEK millions 2001 2000 +/- 2001 2000 +/- 2000 2000/01 % % Net turnover 5.9 1.9 211 2.4 0.5 380 3.1 7.1 Operating -20.4 -11.6 -76 -6.7 -4.3 -56 -19.1 -27.9 income On September 25 DEFLUX, as the first product of its kind, was approved in the USA by the FDA (Food and Drug Administration), the American regulatory authority, for the treatment of vesicoureteral reflux (VUR, reflux) in children. Reflux means that the child does not have the valve function that prevents urine from running back from the urinary bladder up towards the kidneys. The condition can lead to irreversible kidney damage if it is not treated. VUR is classified from level I to level V, where I is the mildest form and V the most serious. DEFLUX has now been approved for the treatment of reflux levels II-IV in the USA. There are no competing products on the American market at present, that is Q-Med is first on the American market with a substance for endoscopic VUR treatment. The other alternatives available are many years of treatment with antibiotics or comprehensive surgery. Q-Med estimates that the worldmarket is worth approximately SEK 400 million per year, based on the fact that approximately 1 percent of all children are born with reflux and 0.5 percent require treatment. DEFLUX is sold in existing markets through Q-Med's own subsidiaries and through local distributors. Sales and marketing in the USA will be carried out using Q-Med's own resources in a wholly owned subsidiary. However, a specialized firm will take care of the physical distribution nationwide. A study has been performed at the University Hospital of Uppsala on over 220 children to measure the long-term effect and safety of DEFLUX. The data show that DEFLUX cures the patient in almost 70% of the cases and a further 10 % are greatly improved. These study results have been published in volume 166, November 2001, of the American "Journal of Urology". Cell Therapy and Encapsulation · New strategy for animal studies but maintaining the schedule for clinical studies. · Grant of USD 1.3 million received for oxalate research. Net turnover and operating income - Cell Therapy and Encapsulation The Cell Therapy and Encapsulation business unit consists primarily of business activities within Ixion Biotechnology. Jan - Sept July - Sept Jan - Oct - Dec Sept SEK millions 2001 2000 +/- 2001 2000 +/- 2000 2000/01 % % Operating -27.6 -7.7 -258 -10.2 -6.0 -70 -13.6 -33.6 income The studies which have been begun within the subsidiary Ixion Biotechnology using insulin-producing islet cells on animals have been revised. As the experimental animal chosen was not suitable for the study alternative solutions are now being considered. The animal study will form the basis of the clinical studies which will start according to plan during 2002. The work at Ixion also includes evaluation of NASHA as protection for the cells. Ixion was awarded a further research grant of USD 0.8 million in October by the National Institutes for Health (NIH), for continued research within the company's other large sphere of activities, oxalate. The last time Ixion received a grant was in June, when the company was awarded USD 0.5 million. An excess of oxalate in people can lead, for example, to kidney stones or exacerbate the life-threatening condition primary hyperoxaluria, which is a rare metabolic disease where the patient often dies at an early age. EXPENSES AND INCOME · The gross margin was 89 (89) percent. · Large investments were made in research and development, SEK 89.3 (39.7) million. · Operating income amounted to SEK 12.7 (19.1) million. Ixion's share wasSEK -22.9 (-4.6) million. Q-Med's gross margin amounted to 89 (89) percent during the first nine months of 2001. Continued international expansion and investments in the new business units Uro-Gynecology and Orthopedics have given increased selling expenses compared with the same period last year. All subsidiaries apart from Ixion are sales companies. The costs for research and development increased by 125% compared with the same period the previous year and amounted to 35 (26) percent of the net turnover. For the third quarter the increase was 122 percent or 42 (33) percent of the net turnover. Research and development costs in Ixion amounted to SEK 25.3 (5.6) million for the period, of which SEK 9.4 (5.6) was for the third quarter. Excluding Ixion's costs research and development costs increased from 22 to 25 percent of the turnover. The majority of the research and development costs consist of Q-Med's comprehensive clinical trials program, above all the clinical studies for RESTYLANE and DUROLANE. There have been additional costs for scaling up and developing the manufacturing process for all products compared to the previous year. Amortization and depreciation of SEK 8.7 (6.4) million, of which SEK 0.6 (0.5) million is comprised of goodwill, has been charged against income. Amortization and depreciation for the third quarter was SEK 3.1 (2.5) million, of which SEK 0.2 (0.1) million is goodwill. The amortization of goodwill is included in research costs.. Other operating revenues and expenses consist primarily of the effects of exchange rates on accounts receivable and payable. Furthermore, other operating revenues include research grants received within Ixion amounting to SEK 2.4 (0.9) million, of which SEK 0.8 (0.9) million is attributable to the third quarter. Currency fluctuations, primarily the strengthened USD and Euro, have entailed a positive effect on income of approximately SEK 9 million compared with the first nine months of 2000. Operating income for the first nine months amounted to SEK 12.7 (19.1) million, which gives an operating margin of 4.9 (12.3) percent. For the third quarter operating income was SEK -3.5 (1.3) million. For comparable units (excluding Ixion 2001 and 2000) operating income amounted to SEK 35.7 (23.7) million, which gives an operating margin of 13.9 (15.3) percent and during the third quarter operating income was SEK 5.2 (6.1) million and the margin 6.1 (12.8) percent. Net financial income amounted to SEK 8.8 (7.3) million for the period January-September, SEK 2.9 (3.3) million for the third quarter Estimated tax costs amounted to SEK -5.5 (-3.2) million, with a tax revenue of SEK 0.0 (-1.3) million for the third quarter. Tax costs for the year 2000 were affected by loss carry-forward, mainly in the Parent Company, where SEK 15 million was still unused of the loss carry-forward which arose in 1999, consisting of costs in connection with the new share issue and listing on the Stockholm Stock Exchange. A net sum of SEK -7.7 (-2.5) million, of which SEK -2.4 (-2.5) million was for the third quarter, has been charged against income on account of Ixion. INVESTMENTS AND CASH FLOW · The construction work in Uppsala is proceeding according to plan. During the first nine months SEK 37.8 (15.9) million was invested in buildings, of which SEK 11.6 (4.0) was during the third quarter. The construction of new office and laboratory premises with an area of 11,000 m2 was begun at the beginning of the year and it is estimated that occupancy will be able to take place in parts of the new building during the first half of 2002. The new premises are being built on land that was acquired during the end of 1999 adjacent to the existing facility. Until the new premises are complete some of Q-Med's personnel will be working in rented offices in Uppsala. The investment in the premises is estimated to amount to approximately SEK 130 million. Investments in machinery and equipment amounted to SEK 16.2 million during the period, consisting both of machinery and equipment and of furniture and computers for new employees. Q-Med's cash flow from operating activities amounted to SEK 12.0 (18.0) million for the first nine months of 2001, of which SEK -8.9 (5.8) million was for the third quarter. The total cash flow for the period was negative, SEK -49.3 (7.1) million and for the quarter it amounted to SEK -23.8 (-2.6) million. Investments during the period amounted to a total of SEK 112.7 million, of which SEK 48.9 million concerns the acquisition of Nuova ICT. The acquisition of Nuova ICT has partly been financed by a loan of Euro 4.2 million. When making a comparison with the previous year's cash flow it should be pointed out that the cash flow for 2000 has been affected by the fact that Q-Med's next largest owner, HealthCap, utilized outstanding subscription options during the first quarter of 2000, which generated liquid funds of SEK 28.0 million for Q-Med. A prerequisite for product approval in the USA is that the quality requirements of the FDA, the American regulatory authority, are met in accordance with GMP, Good Manufacturing Practice. In order to meet these requirements Q-Med has invested in a new quality system. SEK 26.1 million had been invested at June 30, 2001, and the investment is thus complete. SEK 10.3 million of this was invested during 2001. The FDA inspected Q-Med's facility in Uppsala in the middle of June with very positive results and no adverse remarks were made. Sales approval was obtained on September 25. PARENT COMPANY The net turnover for the Parent Company Q-Med AB was SEK 195.7 (119.6) million for the first nine months. Income after financial items amounted to SEK 35.7 (37.9) million. PERSONNEL Q-Med continues to employ new employees and has thus far during the year primarily recruited within production and research and development. At September 30 the number of employees amounted to 237 (170), including 172 (125) in Sweden. At September 30, 15 employees were added through the acquisition of Nuova ICT. At the end of 2000 the number of employees was 197. During 2001 the recruiting within production, research and development will continue as well as beginning to build up a market organization in USA. PROSPECTS FOR WHOLE OF 2001 The turnover for 2001 will considerably exceed that for the year 2000. Previously during the year 2001 Q-Med has not been affected by the current recession but after the acts of terror in New York on September 11 sales growth has, however, weakened. The company's assessment is thus that growth in the fourth quarter will be lower than that during the first nine months of the year. The gross margin will continue to be about 90 percent. The investments in new products and markets will continue and this means that the costs for above all clinical trials will increase. Research costs attributable to Ixion will also increase. The expansion will take place with continued profitability. October 25, 2001 Uppsala Q-Med AB (publ) Bengt Ågerup President and CEO This report has not been the subject of scrutiny by the company's auditors. The same accounting principles and methods of calculation have been used in the drawing up of this interim report as in the latest Annual Report. The company's accounting and valuation principles are in accordance with the recommendations and pronouncements of the Swedish Financial Accounting Standards Council. The report on operations for 2001 will be submitted on February 8 and the quarterly and interim reports for 2002 will be issued on April 23, August 22 and October 24. Queries should be addressed to Bengt Ågerup, President and CEO, on 018- 474 90 00 or 070-974 90 25. Appendices: Income statement, balance sheet, statement of changes in financial position, and key ratios for January - Sept 2001. Q-Med AB (publ), Seminariegatan 21, SE-752 28 Uppsala, Sweden. Corporate identity number 556258-6882. Tel: +46(0)18-474 90 00. Fax: +46(0)18-474 90 01. E-mail: info@q-med.com. Home page: www.q-med.com ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2001/10/25/20011025BIT00660/bit0001.doc The full report http://www.waymaker.net/bitonline/2001/10/25/20011025BIT00660/bit0001.pdf The ful report