Procaps Group, S.A. (NASDAQ: PROC) (“Procaps” or the “Company”), a
leading integrated LatAm healthcare and pharmaceutical
conglomerate, today issued the below letter to shareholders from
José Antonio Vieira, CEO of Procaps, addressing the current state
of the business and outlining key strategic priorities for the
Company.
“Dear Shareholders,
When I began my tenure as CEO of Procaps in
January 2024, I made a commitment to formulate a strategic plan
that steers Procaps towards consistent growth, optimal cash
management, and predictable profitability. I said then that to move
forward successfully, we must look back, learn from our mistakes,
and address any deficiencies. I believe doing so will better enable
us to position the Company going forward. Assessing our business
and determining our go-forward strategy in today’s challenging
market has been, and will continue to be, a non-linear journey.
I would also like to acknowledge that it has
been some time since we last communicated with the market. We
understand that our shareholders and the broader market are eager
for more frequent updates, especially given the challenges we are
currently navigating. Please know that we are fully aware of this
need for information and are doing our utmost to keep you informed.
However, due to the sensitive and evolving nature of the internal
investigation, we must take a careful and thoughtful approach. Rest
assured, as soon as appropriate and we have conclusions, we expect
to provide comprehensive updates on these matters.
Today, I am providing an update on the current
state of our business and outlining the key strategic priorities
that will guide our focus and efforts as we look to the future.
I recognize that our Company has near-term
objectives we must complete – most notably the previously-announced
ongoing internal investigation led by the Audit Committee. I would
like to emphasize that we are working diligently with our
accounting and legal advisors, in cooperation with our external
auditors, to complete the investigation in a timely manner so that
we can report audited financial statements to our shareholders.
Let me be clear: I joined Procaps with the
intent to bring an agenda of value creation for our stakeholders
and that intention remains intact. With over 30 years of
pharmaceutical industry experience and deep expertise of the Latin
American market, I firmly believe in the long-term potential of the
business and intend to chart the right path forward for Procaps to
realize this value. While I acknowledge the near- and medium-term
challenges our business faces, I remain confident, just as I did
when I took this job, that Procaps is a viable organization with
concrete growth perspectives and a path to profitability. However,
this year our primary focus is on addressing our internal
challenges. Our future depends on us concluding this investigation
process and filing our audited financial statement with our 2023
20-F. In the meantime, we are working to correct the course where
needed, securing financing and implementing our strategic plan.
Recent Developments
Legal action initiated by Hoche Partners
Last month, Hoche Partners initiated legal
proceedings against Procaps Group in Luxembourg. The primary claim
sought the Luxembourg Court’s intervention to appoint an ad-hoc
administrator to supervise or replace the current members of the
Audit Committee.
We are pleased to inform you that the Luxembourg
Court has ruled entirely in our favor, dismissing all of Hoche’s
claims as unfounded. The Court thoroughly examined the arguments
from both sides and disregarded the arguments made by Hoche and
upheld all the defenses presented by Procaps.
The Court not only rejected Hoche’s claim in its
entirety but also ordered Hoche to pay a procedural indemnity of
EUR 3,000, which is a notable amount given the nature of summary
proceedings in Luxembourg. Hoche retains the right to appeal this
decision within 15 days of its official service.
This is a significant step forward in protecting
our interests and reinforces our commitment to defending the
Company against unfounded claims.
Forbearance Agreement
The combination of non-recurring expenses
related to the delay in our financial results, coupled with the
broader challenges affecting our performance, has created financial
strain on the Company and our debt management strategy. To address
this, as previously announced, we have entered into forbearance
agreements with our key lenders, which temporarily pauses payments
and prevents lenders from enforcing remedies while we work toward a
financial solution along with them and our shareholders. The
agreement covers over $190 million of our indebtedness and will
allow us to focus on core business operations while we work to
restructure our financial obligations.
This agreement provides us with temporary
financial relief amounting to approximately $20 million for the
months of August, September, and October, which will be fully
invested into the company’s working capital.
Additionally, it is important to highlight the
expected $5 million contribution from Procaps’ majority
shareholders. We expect this amount will be made available on or
prior to September 10, through a subordinated loan, further
supporting our efforts to restore the company’s financial
position.
Internal Investigation and Delayed
Audited Results
As we announced in May and July 2024,
respectively, the Company has had to delay the filing of its Form
20-F for the fiscal year ended December 31, 2023, and has required
additional time to prepare and complete the review of its financial
statements. As previously disclosed, an internal investigation led
by the Company’s Audit Committee with the assistance of external
advisors is ongoing into matters involving the Company’s historical
accounting treatment and associated financial statement disclosures
related to certain historical related party transactions.
We are working diligently alongside our legal
and accounting advisors, in cooperation with our external auditors,
to resolve this matter so that we can finalize and report our
financial statements as soon as possible.
Additionally, Nasdaq has approved our
previously-submitted compliance plan and granted us an extension
until November 11, 2024, to file our results and regain compliance
with Nasdaq’s listing requirements. While we are making every
effort to meet this deadline, the timing of the finalization of our
financial statements will remain closely tied to the progress and
findings of the ongoing investigation.
Current State of the
Business
As we reflect on the current state of the
business, we are acutely aware of key challenges that continue to
weigh on the Company, which are outlined below.
Operational and Macroeconomic Challenges
We are currently navigating significant
operational and macroeconomic challenges that have negatively
impacted our performance, particularly in the OTC and prescription
drug (Rx) segments across Latin America. The region has experienced
a slowdown in market growth due to economic instability, political
uncertainty, and reduced consumer purchasing power. Additionally,
regulatory challenges, currency devaluations, and inflation have
further strained margins and sales volumes, contributing to a
modest overall performance with sharp declines in some markets.
In Ecuador, the pharmaceutical market is under
pressure due to the country's ongoing economic and societal
challenges. These challenges have led to increased pressure on
commercial channels to reduce inventory levels, negatively
affecting both our CASAND and CDMO segments.
According to IQVIA, market growth in the 11
countries where we operate has slowed from a growth rate of 6.6%
YTD June 2023 to just 2.2% YTD June 2024. In the specific
therapeutic classes where Procaps operates, the relevant market's
growth also decreased from 6.4% YTD June 2023 to only 1% YTD June
2024.
Despite these challenging market conditions,
Procaps has managed to significantly outperform the market. We
achieved a 5.1% growth rate YTD June 2024, which is double the
average growth in the markets where we operate. This performance
ranks Procaps as the second fastest-growing company overall and the
third fastest within our relevant segments, underscoring the
strength of our commercial organization and reinforcing our
confidence in the future of this organization.
This challenging environment requires strategic
adjustments, including tighter inventory management, cost control
measures, and a focus on maintaining market share amid slower
growth.
Operationally, we have experienced higher
year-over-year COGS, slow inventory turnover, and reduced CDMO
plant utilization, all of which have applied pressure on our gross
margins. Delays in orders and postponed product launches from our
customers have continued to put pressure on the business,
particularly in our CDMO operations.
Additionally, we have been actively working
towards reducing stock-in-trade in some of our markets, which ended
2023 at higher-than-normal levels and has continued to have a
significant impact in the first half of the year. This had a strong
adverse impact on revenues in our CAN and CASAND regions.
Net revenues for the six months ended June 30,
2024 (“1H24”) were approximately $190 million, a 2% decline from
$194 million for the six months ended June 30, 2023 (“1H23”). This
decline was driven by lower sales volumes, as a result of the
destocking process in key segments, including CAN and CASAND, and
was further compounded by delays in product launches in CDMO at
client´s requests.
We currently estimate Adjusted EBITDA for 1H24
to be between $8 million and $10 million, a significant decline
from $29 million in 1H23. This decline has been primarily driven by
two major factors. First, our destocking efforts had an
approximately $17 million negative impact as we worked to reduce
inventory levels across key segments, particularly in CASAND and
CAN segments. Second, the challenging economic and commercial
environment in Ecuador contributed approximately an additional $5
million negative impact.
These challenges, combined with increased
operational costs and reduced plant utilization, have put
considerable pressure on our margins. However, we are actively
addressing these issues through targeted cost control measures and
operational efficiencies, which we believe will support improved
EBITDA margins moving forward. By focusing on optimizing inventory
levels and navigating the complexities of markets like Ecuador, we
are positioning the company for stronger performance in the
future.
Partly compensating the above impacts, our core
businesses, particularly our Rx and Clinical Specialties lines,
have shown resilience, and we are optimistic that we can maintain
their robust growth. Our Clinical Specialties line continues to
ramp up from post-pandemic tailwinds, and our Rx segment continues
to experience strong demand coupled with launches of new products.
I am optimistic that our diverse product portfolio can continue to
see meaningful improvements as we further improve our
operations.
Cash Flow and Debt Management
As of June 30, 2024, our gross debt stood at
approximately $285 million, a slight increase from $282 million as
of June 30, 2023. Given our 1H24 performance, our cash flow from
operations is under pressure, and we have taken decisive steps
within our organization to manage our liquidity. In addition to the
recent forbearance agreements with key lenders, which provide us
with flexibility to restructure our debt and procure a financial
solution while continuing to support our core business operations,
we have also implemented actions to reduce our internal inventory
levels. We are also exercising tight control over our Capex needs,
focusing primarily on activities essential for maintaining of our
regulatory licenses across the countries where we operate.
A Time for Transformation
As we look to the future, I, alongside the rest
of the management team, are accountable for navigating these
challenges and steering the Company towards long-term growth. We
are committed to implementing strategies that will enable us to
realize the full value of our assets, tap into the strength of our
core business, and ultimately drive shareholder value. To that end,
our management team has developed certain top priorities that will
guide us on our journey forward. While our path ahead may not be
linear, we are confident that these initiatives are the right first
steps to recalibrating the business and positioning the Company for
a positive transformation.
Resolve Internal Investigation and Release 2023
Audited Financials
A top near-term priority is to see through the
conclusion of the ongoing internal investigation. As a public
company, it is critical that we timely disclose audited financials
to our shareholders and the market. We are committed to
expeditiously concluding this investigation and resuming timely
reporting of our financial statements to our shareholders and the
market.
Reorganize Internal Operations
We are committed to running this business in an
efficient manner that enables us to nimbly navigate our dynamic
industry. The way we are structured must enable us to meet our
customers’ ever-changing needs and position us to do so in a
cost-efficient manner. I, and the rest of the management team, have
already taken a fresh look at the way we are organized and our cost
drivers to optimize the way we operate and allocate resources. We
expect to implement significant changes to help us navigate
industry headwinds, such as rising costs of supplies and increased
competition, to ultimately drive margin expansion and cost savings
over the long-term.
Evaluation of Non-Core Assets
Over the past seven months, I have spent a great
amount of time with the management team gaining an in-depth
understanding of each of Procaps’ business and products. Our
portfolio is currently diverse and complex. Each business has
different margin profiles, trends in customer behavior, specific
macro headwinds, and different long-term outlooks.
As a result, we have been evaluating in detail
our non-core assets, assessing their recent performance, future
outlook, and fit within our overall portfolio. As a result, we have
decided to explore alternatives, including the potential sale, of
certain non-core assets or underperforming businesses, which should
enable us to simplify our portfolio, strengthen our financial
position, and reduce debt. We believe this will ultimately help
enhance our free cash flow and provide added operational
flexibility to invest in parts of the business that can drive
long-term growth. We expect to carry out this plan during the
following 12 to 18 months and expect to share updates as
appropriate.
Debt Reduction and EBITDA Margin Improvement
We are exploring various alternatives to obtain
additional financing, to bring a sustainable cash position which we
believe will allow the Company the necessary flexibility to pursue
key initiatives and further invest in higher growth segments with
stronger margins, such as prescription pharmaceutical drugs
(Rx).
With the measures above we want to demonstrate
that we are focused on reducing our debt burden and improving our
EBITDA margins through operational efficiencies, cost control
measures, and strategic asset sales where necessary. We expect that
our ongoing restructuring efforts will support these goals,
allowing us to optimize cash flow and invest in high-growth
segments.
The Path Forward
Overall, while the organization has challenges
to overcome, we believe there is also reason to have confidence in
the future of Procaps. We aim to continue building upon our market
leadership in high-impact therapeutic areas, as evidenced by our
business development efforts to expand our oncology portfolio and
ongoing in-house R&D investments. As we continue to navigate an
evolving healthcare landscape with favorable Rx dynamics, we are
confident that the foundation we have built in differentiated BGx
and commercialization will position us to unlock the full potential
of our strong business and accelerate our long-term growth.
We are committed to working harder than ever to
deliver the changes needed to help Procaps reach its potential.
While the path forward will be non-linear, I am confident in the
value we can drive for the Company’s shareholders over the
long-term. We appreciate your patience on this path and will
continue to provide updates with you as appropriate as we make
progress.
Sincerely,
José Antonio VieiraCEO of Procaps Group”
This press release shall not constitute an offer to sell or the
solicitation of an offer to buy any securities, nor shall there be
any sale of any securities in any state or jurisdiction in which
such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
state or jurisdiction.
About Procaps Group
Procaps Group, S.A. (“Procaps”) (NASDAQ: PROC)
is a leading developer of pharmaceutical and nutraceutical
solutions, medicines, and hospital supplies that reach more than 50
countries in all five continents. Procaps has a direct presence in
13 countries in the Americas and nearly 5,000 employees working
under a sustainable model. Procaps develops, manufactures, and
markets over-the-counter (OTC) pharmaceutical products,
prescription pharmaceutical drugs (Rx), nutritional supplements,
and high-potency clinical solutions.
For more information, visit www.procapsgroup.com
or Procaps’ investor relations website
investor.procapsgroup.com.
Investor Contact:Melissa Angelini
ir@procapsgroup.com +1 754 260-6476investor.procapsgroup.com
Forward-Looking Statements
This press release includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Forward-looking
statements may be identified by the use of words such as
"forecast," "intend," "seek," "target," "anticipate," "believe,"
"expect," "estimate," "plan," "outlook," “goal,” “objective,”
“will,” “may,” “should,” “can,” “project” and other similar
expressions that predict or indicate future events, objectives,
results or trends or that are not statements of historical matters.
Such forward-looking statements include, without limitation,
projected financial information, the Company’s expectations about
the timing of completion of the internal investigation and filing
of the 2023 20-F, the Company’s statements regarding seeking
additional financing, statements related to the Company’s plans,
outlook and strategy, other Company initiatives and objectives or
forecasts related to the Company’s business, performance and
industry. These forward-looking statements involve substantial
risks and uncertainties, or assumptions that may cause actual
results or performance to be materially different from those
expressed or implied by these forward-looking statements, and
actual results could vary materially from these forward-looking
statements. Factors that may cause future results to differ
materially from management’s current expectations include, among
other things, the discovery of additional information relevant to
the internal investigation; the conclusions of management (and the
timing of the conclusions) concerning matters relating to the
internal investigation; the timing of the review by, and the
conclusions of, the Company’s independent registered public
accounting firm regarding the internal investigation and the
Company’s financial statements; the possibility that errors may be
identified; the risk that the completion and filing of the Form
20-F will take longer than expected; the inability to successfully
implement or execute on the Company’s strategic objectives or
initiatives or to obtain financing; changes in applicable laws or
regulations; the possibility that the Company may be adversely
affected by other economic, business, and/or competitive factors;
the inability of the Company to execute on its expense reductions
plans or growth initiatives; and other risks and uncertainties
indicated from time to time in documents filed or to be filed with
the Securities and Exchange Commission ("SEC") by the Company. The
Company disclaims any obligation to update information contained in
these forward-looking statements whether as a result of new
information, future events, or otherwise.
Important Note Regarding Preliminary,
Unaudited Estimates and Non-IFRS Measures
Please note that the preliminary, unaudited
results estimates for the six months ended June 30, 2024 included
in this release were prepared by the Company’s management in
connection with the preparation of the Company’s financial
statements and are based upon preliminary operating results
estimated based on information available as of the date hereof, and
include a number of subjective judgments and assumptions.
Additional items that may require adjustments to the Company’s
preliminary estimated financial information may be identified and
could result in material changes to the Company’s preliminary
estimated results. The Company’s independent registered public
accounting firm has not audited, reviewed, compiled or performed
any procedures with respect to the preliminary estimated financial
information, nor have they expressed any opinion or any other form
of assurance on such information or its achievability. Further,
these preliminary estimated results are not a comprehensive
statement or estimate of the Company’s financial condition or
operating results for six months ended June 30, 2024. These
preliminary estimated results should not be viewed as a substitute
for complete financial statements prepared in accordance with IFRS.
In addition, the preliminary estimated financial information is not
necessarily indicative of the results to be achieved for any future
period. Accordingly, investors are cautioned not to place undue
reliance on this preliminary estimated financial information.
Because we have not yet completed our closing
process and because of the forward-looking nature of the estimated
Adjusted EBITDA ranges presented above for the 1H2024, we do not
have specific quantifications of the amounts that would be required
to provide a reconciliation of income (loss), the most directly
comparable financial measure calculated and presented in accordance
with IFRS to Adjusted EBITDA for 1H2024. We believe that there is a
degree of variability with respect to certain of the IFRS measures
and certain adjustments made to arrive at the relevant non-IFRS
measure that precludes us from providing an accurate preliminary
estimate of an IFRS to non-IFRS reconciliation without unreasonable
effort or expense. As a result, we believe that providing estimates
of the amounts that would be required to reconcile the ranges of
our expected Adjusted EBITDA for 1H2024 would imply a degree of
precision that would be confusing or misleading to investors for
the reasons identified above.
The Company is not able to reconcile its forward-looking
non-IFRS estimates without unreasonable effort because of the
inherent difficulty of accurately forecasting the occurrence and
financial impact of the various adjusting items necessary for such
reconciliation that have not yet occurred, are out of our control,
or cannot be reasonably predicted, which could have a material
impact on its future IFRS financial results.
Use of Non-IFRS Financial Measures
Our management uses and discloses EBITDA,
Adjusted EBITDA, Adjusted EBITDA margin, Net Debt-to-Adjusted
EBITDA ratio, Contribution Margin and net revenue on a constant
currency basis, which are non-IFRS financial information to assess
our operating performance across periods and for business planning
purposes. We believe the presentation of these non-IFRS financial
measures is useful to investors as it provides additional
information to facilitate comparisons of historical operating
results, identify trends in our underlying operating results and
provide additional insight and transparency on how we evaluate our
business. These non-IFRS measures are not meant to be considered in
isolation or as a substitute for financial information presented in
accordance with International Financial Reporting Standards
(“IFRS”) issued by the International Accounting Standards Board and
should be viewed as supplemental and in addition to our financial
information presented in accordance with IFRS.
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
and Net Debt-to- Adjusted EBITDA ratio
We define EBITDA as profit (loss) for the period
before interest expense, net, income tax expense and depreciation
and amortization. We define Adjusted EBITDA as EBITDA further
adjusted to exclude certain isolated costs incurred as a result of
the COVID-19 pandemic, certain transaction costs incurred in
connection with the business combination (“Business Combination”)
with Union Acquisition Corp. II (“Union”), certain listing expenses
incurred in connection with the Business Combination, certain costs
related to business transformation initiatives, certain foreign
currency translation adjustments and certain other finance costs,
and other nonrecurring nonoperational or unordinary items as the
Company may deem appropriate from time to time. We also report
Adjusted EBITDA as a percentage of net revenue as an additional
measure so investors may evaluate our Adjusted EBITDA margins. None
of EBITDA, Adjusted EBITDA or Adjusted EBITDA margin are presented
in accordance with generally accepted accounting principles
(“GAAP”) or IFRS and are non-IFRS financial measures.
We use EBITDA, Adjusted EBITDA, Adjusted EBITDA
margin, and Net Debt-to-Adjusted EBITDA ratio for operational and
financial decision-making and believe these measures are useful in
evaluating our performance because they eliminate certain items
that we do not consider indicators of our operating performance.
EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and Net
Debt-to-Adjusted EBITDA ratio are also used by many of our
investors and other interested parties in evaluating our
operational and financial performance across reporting periods. We
believe that the presentation of EBITDA, Adjusted EBITDA, Adjusted
EBITDA margin and Net Debt-to- Adjusted EBITDA ratio provides
useful information to investors by allowing an understanding of key
measures that we use internally for operational decision-making,
budgeting, evaluating acquisition targets, and assessing our
operating performance.
EBITDA, Adjusted EBITDA, Adjusted EBITDA margin,
and Net Debt-to- Adjusted EBITDA ratio are not recognized terms
under IFRS and should not be considered as a substitute for net
income (loss), cash flows from operating activities, or other
income or cash flow statement data. These measures have limitations
as analytical tools and should not be considered in isolation or as
substitutes for analysis of our results as reported under IFRS. We
strongly encourage investors to review our financial statements in
their entirety and not to rely on any single financial measure.
Because non-IFRS financial measures are not
standardized, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and
Net Debt-to-Adjusted EBITDA ratio, as defined by us, may not be
comparable to similarly titled measures reported by other
companies. It, therefore, may not be possible to compare our use of
these non-IFRS financial measures with those used by other
companies.
Adjusted
EBITDA Reconciliation |
U$ million |
1H23 |
Net
Income |
33.6 |
|
Financial expenses |
5.1 |
|
Income
tax |
13.2 |
|
D&A |
8.0 |
|
EBITDA |
59.9 |
|
FX translation adjustments1 |
(14.4 |
) |
Transaction expenses2 |
(19.3 |
) |
Other expenses3 |
3.0 |
|
Adjusted
EBITDA |
29.2 |
|
Adjusted EBITDA margin |
15.1 |
% |
Procaps (NASDAQ:PROC)
Historical Stock Chart
Von Nov 2024 bis Dez 2024
Procaps (NASDAQ:PROC)
Historical Stock Chart
Von Dez 2023 bis Dez 2024