Procaps Group CEO Issues Shareholder Letter

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 Vieira

CEO of Procaps Group