Risk Factors

    Risks Relating to Brazil

    The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, may materially and adversely affect us.

    The Brazilian government has frequently intervened in the Brazilian economy and has occasionally made significant changes in monetary, credit, tariff, tax and other policies and regulations. The Brazilian government’s actions to control inflation and implement other policies and regulations have in the past involved, among other measures, the creation of or increase in taxes due to the need to change tax policies, price controls, intervention in the foreign exchange market and limitation on imports. We cannot foresee or control which measures or policies the Brazilian government may adopt and we may be adversely affected by changes in policy or regulations, as well as by economic factors, including:

    • exchange rate fluctuations;
    • expansion or retraction of the Brazilian and/or international economy, as measured by gross domestic product, or GDP, growth rates;
    • inflation;
    • interest rates;
    • salary decreases and downturn in economic levels;
    • increase in unemployment;
    • foreign exchange, monetary and tax policies;
    • changes in fiscal and tax laws;
    • rationing of water and electricity;
    • liquidity of Brazilian financial and capital markets;
    • intervention, modification or termination of government agreements and/or government authorizations; and
    • other political, social, diplomatic and economic developments in Brazil or affecting Brazil.

    Uncertainty over whether the Brazilian government will implement changes in policy or regulations affecting these or other factors may contribute to economic uncertainty in Brazil, which may adversely affect us.

    Ongoing political instability has adversely affected the Brazilian economy, our business and results of operations and may affect the trading price of our common shares.

    Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected, and continue to affect, the confidence of investors and that of general public, resulting in economic downturn and heightened volatility of securities issued by Brazilian companies.

    Brazilian markets have been experiencing heightened volatility due to uncertainties derived from the ongoing Lava Jato investigation, which is being conducted by the Federal Prosecutor’s Office, and its impact on the Brazilian economy and political environment. Certain members of the Brazilian government and of the legislative branch, as well as senior officers of large state-owned and private companies have been convicted of political corruption involving the acceptance of bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. Profits of these kickbacks allegedly financed the political campaigns of political parties that were unaccounted for or not publicly disclosed, and served to further the personal enrichment of the recipients of the bribery scheme. As a result, a number of senior politicians, including congressmen and officers of the major state-owned and private companies in Brazil, resigned or have been arrested and certain senior elected officials and other public officials are being investigated for allegations of unethical and illegal conduct identified during the Lava Jato investigation.

    The ultimate outcome of the investigations related to the Lava Jato is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether the allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future. We cannot predict the outcome of any such allegations nor their effect on the Brazilian economy. The development of those unethical conduct cases has and may continue to adversely affect our business, financial condition and results of operations and may adversely affect the trading price of our common shares.

    In addition, the Brazilian economy continues to be subject to the effects of the impeachment of President Dilma Rousseff on August 31, 2016. Vice-President Michel Temer was sworn in as the new President of Brazil until the next presidential election in 2018, but political uncertainty has remained. We cannot predict the effects of these recent developments and the current ongoing political uncertainties on the Brazilian economy.

    Additionally, the press, through online media and social networks, as well as newspapers, may also claim that certain sectors of the economy, conglomerates and companies are involved in conducts mentioned in these investigations. These investigations or news, directly or indirectly related to us, any of our current or former subsidiaries, our management and/or controlling shareholder, may adversely affect public perception, our reputation and the trading price of our shares even before any conviction.

    Efforts of the Brazilian government to curb inflation may significantly contribute to economic uncertainty in Brazil and may materially and adversely affect us.

    Brazil has experienced extremely high rates of inflation in the past. Governmental actions to curb inflation, together with the speculation about governmental measures to be adopted, have had a significant negative impact on the Brazilian economy, contributing to the economic uncertainty in Brazil and to heightened volatility in the Brazilian securities market. Brazil’s annual inflation, as measured by (i) the general price index (Índice Geral de Preços – Mercado), or IGP-M, was 3.67%, 10.54% and 7.19% in 2014, 2015 and 2016, respectively, and (ii) the broad consumer price index (Índice de Preços ao Consumidor – Amplo), or IPCA, was 6.41%, 10.67% and 6.29% in 2014, 2015 and 2016, respectively. Measures taken by the Brazilian government to control inflation have often included the maintenance of a restrictive monetary policy with high interest rates, thereby limiting the availability of credit and reducing economic growth. As a result, official interest rates in Brazil were 11.75%, 14.25% and 13.75% p.a. in 2014, 2015 and 2016, respectively, as established by the Brazilian Committee of Monetary Policy (Comitê de Política Monetária). Successive increases in inflation may increase our costs and expenses and, as a result, adversely affect us.

    Any measures taken by the Brazilian government, including the reduction in interest rates and intervention in the exchange and securities markets to adjust or determine the value of the real, may trigger inflation. In the event of increased inflation, we may not be able to adjust the prices of our products to offset the effects of inflation on our cost structure, which may affect us. Moreover, in the event of increased inflation, the Brazilian government may choose to significantly increase official interest rates. An increase in interest rates may affect the cost of our new loans, and also the cost of our financings.

    Exchange rate instability may adversely affect the Brazilian economy and, consequently, us.

    The real has frequently depreciated and appreciated in relation to the U.S. dollar and other strong foreign currencies during the past four decades. During this period, the Brazilian government implemented a number of economic plans and adopted a number of exchange rate policies, including sudden devaluations, periodic mini devaluations (during which the frequency of adjustments ranged from daily to monthly), a floating exchange rate system, exchange controls and dual exchange rate markets. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian real and the U.S. dollar and other currencies.

    In 2014, the real depreciated by 13.4% against the U.S. dollar and on December 31, 2014, the real/U.S. dollar exchange rate was R$2.6562 per US$1.00. In 2015, the real depreciated by 47.0% against the U.S. dollar and on December 31, 2015, the real/U.S. dollar exchange rate was R$3.9048 per US$1.00. In 2016, the real appreciated by 16.3% against the U.S. dollar, and on December 31, 2016, the real/U.S. dollar exchange rate was R$3.2591 per US$1.00. On January 18, 2018, the real/U.S. dollar exchange rate was R$3.213 per US$1.00. There can be no assurance that we will not be adversely affected by a depreciation or appreciation of the real against the U.S. dollar and other currencies.

    Approximately 90% of our products are affected by exchange rate variation of the U.S. dollar. Depreciation of the real against the U.S. dollar may create additional inflationary pressures in Brazil and cause increases in interest rates. This may adversely affect the overall Brazilian economy and us, due to a retraction in consumption and an increase in our costs. Conversely, the appreciation of the real against the U.S. dollar may deteriorate Brazil’s public accounts and balance of payments and adversely affect the growth of GDP from exports. We do not have any influence on the Brazilian foreign exchange policy, nor can we predict it. Changes in Brazilian exchange policies may adversely affect us. We cannot assure you that we will be able to pass cost increases derived from exchange rate variation onto our customers.

    Any further downgrading of Brazil’s credit rating may adversely affect the trading price of our common shares.

    Credit ratings affect the perception of risk of investments and, as a result, the yield required for future debt issuances in the capital markets. Rating agencies regularly assess Brazil and its sovereign ratings, based on a number of factors, including macroeconomic trends, national budget conditions, indebtedness metrics and the prospect of changes in any of these factors.

    Rating agencies started to review the sovereign credit rating of Brazil in September 2015. Subsequently, Brazil was downgraded by the three main rating agencies and lost its investment grade status. Standard & Poor’s initially downgraded the Brazilian rating from BBB- to BB+ and subsequently reduced it again from BB+ to BB, maintaining its negative outlook on the rating, citing a worsening credit condition compared to the first downgrade and on January 11, 2018, Standard & Poor’s downgraded the Brazilian rating again from BB to BB-. In December 2015, Moody’s placed the Brazilian issuance and securities rating (Baa3) under review for downgrading and then downgraded the Brazilian issuance and securities rating below investment grade to Ba2 with a negative outlook, citing a prospect of further deterioration of the Brazilian debt indicators, considering an environment of low growth and challenging political scenario. Fitch downgraded the Brazilian sovereign credit rating to BB+ with a negative outlook, citing the rapid expansion of budget deficit in Brazil and recession levels that were worse than expected. As a result, Brazil lost its investment grade status, as rated by the major rating agencies and, consequently, the trading price of Brazilian debt and equity securities was adversely affected. If the current Brazilian recession persists, Brazilian credit ratings may be downgraded again.

    Any further downgrading of Brazilian sovereign credit ratings may increase the perception of risk of investors and, as a result, increase our cost of capital, which could adversely affect us.

    Developments and the perception of risk in other countries, especially other emerging markets, may adversely affect the market price of our common shares.

    The market value of securities of Brazilian issuers, including securities issued by us, may be affected by economic and market conditions in other countries, including the United States, European Union and Latin American countries and other emerging-market countries. Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises elsewhere may diminish investor interest in securities of Brazilian issuers, including our common shares. This could adversely affect the market price of our common shares and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

    Risks Relating to Our Business and Industry 

    We may be adversely affected if we are unable to timely launch new products or make the necessary improvements on existing products.

    R&D and the launch of new products in the market or the improvement of existing products are important elements in our business strategy.

    The development of new products generally requires significant investments in research, even before the commercial feasibility analysis of the products is made. Funds invested in research do not necessarily result in the launch and/or acceptance of our products in the market, as we may be unable to: (i) anticipate and meet market demand; (ii) timely obtain all licenses; (iii) manufacture the relevant products in a cost-effective manner; and/or (iv) achieve positive clinical results, in accordance with applicable standards.

    We may not have sufficient funds to invest in the R&D of new products or their manufacture, sale and distribution may be delayed if we do not have the necessary regulatory approvals.

    If we are unable to timely launch new products or make the due improvements on existing products, our products may become obsolete in time, which may adversely affect us.

    Moreover, revenues from the sale of these products may not be sufficient to cover research and marketing expenses, which may adversely affect us.

    Our success depends extensively on our ability to anticipate and timely respond to the demands of physicians and health care institutions.

    Our success extensively depends on the appeal of our products to various physicians and health care institutions, whose preferences cannot be accurately predicted and are subject to changes in clinical protocols and therapeutic guidelines. We may be unable to accurately identify the preferences of physicians and health care institutions and translate this knowledge into products accepted by them or successfully integrate these products to our existing platform of products or operations. If our products fail to meet the existing demands of physicians and health care institutions or if we fail to anticipate their demands, we may be adversely affected.

    Our operations and success rely on the reputation of our products and brands and any reputational damage related to our products or brands may adversely affect us.

    Our success also depends on our ability to maintain and improve the image and reputation of our existing products and brands and to develop a favorable image and reputation for our new products and brands. We cannot assure you that the image and reputation of our products will not be adversely affected. Concerns about the quality of our products, even if groundless, may harm the image and reputation of our products and our image and reputation.

    Events that materially harm our brands may adversely affect their value and the revenue derived from the sale of our products. Recovering any damages caused to the image and reputation of our products may be costly and even unattainable, which may adversely affect us.

    Moreover, our marketing efforts are subject to legal and regulatory restrictions applicable to the advertisement and sale of pharmaceutical products. For more information, see “––We are subject to complex pharmaceutical regulations in Brazil and abroad, including interactions with government authorities, which may adversely affect us.”

    We operate in segments that are highly competitive and our competitors are large companies, which may materially and adversely affect us.

    The market segments in which we operate are highly competitive and we face competition in most of our lines and products from well-established companies in Brazil and abroad. Some of our competitors have substantial funds and marketing resources, and may have greater access to capital at lower costs and technologies, larger consumer bases and a larger variety of products than us.

    Our current and new competitors may be more successful than us in certain lines of products and/or regions and, as a result, we may lose market share to our competitors. As a result, we may have to increase our marketing and promotion expenses and/or reduce the prices of our products, adapt existing products and launch new products to maintain or increase our market share. The success of these measures is subject to risks, including uncertainties about consumers’ ability to assimilate these measures. Accordingly, these measures may not be sufficient to maintain or increase our market share, which may adversely affect us.

    The interests of our controlling shareholder may conflict with the interests of our other shareholders. The loss or absence of our controlling shareholder may materially and adversely affect us.

    After giving effect to this offering, the controlling shareholder will own 74.8% of our common shares, assuming no exercise of the over-allotment option. The interests of our controlling shareholder may conflict with the interests of our other shareholders. Pursuant to Brazilian Corporate Law and our bylaws, our controlling shareholders have the power to: (i) elect the majority of members of our board of directors; (ii) determine our policies; (iii) sell or otherwise transfer shares held by our management representing our control; (iv) determine the result of any resolution taken by our shareholders, including those related to transactions with related parties, corporate reorganizations and sale of all or substantially all assets; and (v) determine the distribution and payment of any future dividends. Additionally, the chairman of our board of directors is the father of our controlling shareholder. Our controlling shareholder may be interested in acquisitions, sale of assets, partnerships, financings or make other decisions that may conflict with the interests of our other shareholders and not necessarily improve our results of operations.

    Additionally, our ability to maintain our competitive market position and develop our strategies depend on our controlling shareholder, who is also our chief executive officer and vice-chairman of our board of directors. Accordingly, the loss or absence of our controlling shareholder may materially and adversely affect us. For further information on our principal and selling shareholder, see “Principal and Selling Shareholder.”

    A significant portion of our revenue depends on the performance of certain key products.

    A significant portion of our revenue derives from the sale of certain key products, which may change from time to time. For instance, in the fiscal year ended December 31, 2016, ten drugs accounted for 70.2% of our net revenue and in the nine-month period ended September 30, 2017, 80.0% of our net revenue.

    If one or more of our key products face problems affecting their performance, including: (i) disputes resulting from the use of the relevant product; (ii) reduction in demand; (iii) changes in the number of prescriptions; (iv) unexpected side effects; (v) registration issues or disputes on trademark use; (vi) regulatory proceedings; (vii) negative publicity affecting the confidence of physicians or patients; (viii) pressure from existing competitive products; (ix) changes in labels; (x) discovery of a new and more efficient treatment or alternative and generic treatment; and (xi) issues regarding the maintenance of licenses, we may be adversely affected.

    Some of our customers account for a significant portion of our net revenue. If these customers underperform, stop purchasing our products or prefer the products of our competitors, we may be adversely affected.

    In Brazil and in the other countries in which we operate, the sale of certain pharmaceutical products we manufacture are concentrated on certain customers. This concentration may increase the bargaining power of these purchasers, which may pressure our prices down and adversely affect us.

    The Ministry of Health accounts for a portion of our net revenue. If we are prohibited from selling to the Ministry of Health or fail to comply, partially or fully perform, or violate any agreement entered into with the Ministry of Health, we may be prohibited from contracting with the government. Other participants of public auctions or the government may challenge the public auction in which we participate. Any of these factors may adversely affect us.

    We also cannot assure you that the agreements, including government contracts, we entered into with our main customers will: (i) be renewed or extended; (ii) provide for favorable terms; (iii) not be terminated early; or (iv) affect our revenue. Accordingly, we may be unable to enter into agreements with other customers under the same conditions. At the same time, if any of our material customers faces difficulties, including financial difficulties, they may reduce their business volume with us or choose similar products from our competitors that have lower prices. As a result, we may be unable to receive all amounts due by these customers in a timely manner or at all, which may adversely affect us.

    We are subject to significant fluctuations in demand of our pharmaceutical products primarily related to agreements entered into with the Brazilian government.

    The demand for some products of our portfolio increases at the end of the first semester, before winter begins in Brazil, when the incidence of respiratory diseases increases. The period from May to July accounts for approximately 36% of our annual demand for these products.

    As a significant portion of our sales derives from the sale of pharmaceutical products to the public sector (45.4% of our net revenue as of September 30, 2017), we are subject to variations in demand related to governmental policies that determine which and the volume of pharmaceutical products that will be purchased in a certain period. Any reduction in demand or inaccurate estimate of demand due to seasonality or government policies, may adversely affect us.

    The public auction procedures in which we participate may be subject to political influence or be the target of investigations.

    A significant portion of our net revenue derives from our sales in the public sector. Public auction procedures may be affected by technical factors related to the convenience, opportunity, availability and requirements for participation, as well as political factors. Even after the award of the government contract, competitors and internal or external control government agencies may question these procedures. Any of these factors may adversely affect us.

    Some of the raw materials, including active ingredients, required to manufacture our drugs are supplied by a few suppliers registered with Anvisa, and the interruption in the supply of these raw materials may adversely affect us.

    We rely on third parties to obtain raw materials, including active ingredients. These raw materials are generally supplied by a limited number of suppliers registered with Anvisa.

    As of September 30, 2017 and December 31, 2016, epoetin alfa accounted for 20.5% and 11.3% of our net revenue, respectively. We purchase the raw material epoetin alfa from two different exclusive suppliers for the manufacture of two drugs, also called epoetin alfa, registered under two different health licenses, and each one of the suppliers is the exclusive raw material supplier for each drug.

    We did not enter into long-term supply agreements related to the raw materials we use and most of the raw materials we purchase are imported. Accordingly, we are exposed to the risk of insufficient supply of raw materials or supply interruption without any notice. Any suspension and/or restriction on the availability of raw materials may compromise our manufacturing process or generate other delays and, in the case of products whose raw materials are supplied by an exclusive supplier, may adversely affect us.

    The price of active ingredients may fluctuate significantly in a short period of time, as most of the raw materials we purchase are indexed to foreign currencies. A significant increase in the cost of active ingredients may adversely affect us.

    We import immunoglobulin and botulinum toxin from South Korea, the latter for purposes of expanding our activities and to begin selling and exploring a dermocosmetics line of products, which is one of our strategies. Considering that we do not currently have any alternative supplier of botulinum toxin, and our alternative supplier of immunoglobulin has a limited supply capacity, in the event of any issues involving North Korea, including war, we may be unable to purchase these raw materials from South Korea and, as a result, we may be unable to manufacture products based on these raw materials. If we are unable to import or obtain any of the raw materials we need, the development of our dermocosmetics product line and/or the manufacture of any of our drugs that use the relevant raw materials may be delayed and the delivery of our immunoglobulin may be affected, which may adversely affect us.

    Furthermore, the sources of active ingredients for pharmaceutical products are subject to approval of regulatory authorities, and changes in suppliers of active ingredients could delay the delivery of raw materials, increase our manufacturing costs and result in loss of sales and customers. Imports of active ingredients or other raw materials from countries in which we do not operate are sometimes subject to customs and other governmental clearances, charges and regulations of the relevant countries, which may take time and affect the shelf life of raw materials.

    The increase in the price of the commodities we use to manufacture our products or in the price of commodities that influence our utilities and freight costs may adversely affect us.

    We use certain commodities, whose prices are highly volatile, as raw materials to manufacture our products, including platinum, resins and other oil-based materials. The variation in the price of oil and oil byproducts also significantly affects our freight and transportation costs. If the price of these commodities increases, our margins and profitability may decrease, which may adversely affect us.

    Court decisions in lawsuits related to administrative impropriety may affect our ability to contract with the government, which may adversely affect us.

    We and one member of our management are defendants in lawsuits that investigate administrative impropriety (improbidade administrativa) allegedly committed by government agents related to irregularities in public auctions and overpayment of products available at a lower price.

    We are defendants to a civil proceeding brought by the Federal Prosecution Office for allegedly obtaining an irregular waiver to participate in a public auction for the sale of certain of our drugs to the Department of Health of the State of Amazonas (Secretaria de Estado de Saúde do Amazonas), or SUSAM. Our controlling shareholder, in his capacity of chief executive officer, is one of the defendants in a criminal proceeding, connected to the above civil proceeding, for allegedly overbilling and exercising undue influence to directly sell drugs to SUSAM through an allegedly irregular waiver to participate in a public auction.

    Any unfavorable decision in these lawsuits may result in penalties that limit our ability to continue to contract with the government, including the suspension of agreements and/or prohibition from participating in public auction for up to ten years. We may also be subject to fines and indemnifications and prohibited from using any tax and credit benefits or incentives. In addition to the immediate financial impact, any unfavorable decision may adversely affect our image.

    For more information related to our judicial and administrative proceedings, see “Business––Legal and Administrative Proceedings” and for more information related to the importance of our sales to the government, see “––Some of our customers account for a significant portion of our net revenue. If these customers underperform, stop purchasing our products or prefer the products of our competitors, we may be adversely affected.”

    We may be held liable for consumer incidents related to adverse reactions caused by the use of our products, which may adversely affect us.

    The use of our products may cause adverse reactions in our consumers. Judicial or administrative proceedings may be filed against us alleging that our products were deteriorated, adulterated, contaminated, did not have the claimed effects or did not include adequate information on potential side effects or on interactions with other drugs, among others. These proceedings may result in significant expenses with product recall, in addition to the cost of defense in different regulatory areas, which may adversely affect us.

    Any expected or unexpected health hazard, or potential health hazard, related to our products, including negative publicity about these health hazards, may result in loss of consumer confidence in the safety, efficacy and quality of our products. Any consumer-related issues may create negative publicity in our industry if third-party products harm consumers, as this fact may decrease the demand for products of the same class and any allegation of this nature against our products may adversely affect us.

    We may be unable to protect our intellectual property rights, which may adversely affect us.

    Our future success depends materially on our ability to protect our current and future intellectual property rights, including trademarks, patents, know-how, R&D projects, trade secrets and domain names. We cannot assure you that we will obtain all registrations of trademarks and patents we applied for with the relevant patent and trademark office. We may also fail to timely renew a trademark or patent and our competitors may challenge, invalidate or unduly use any of the current or future trademarks and patents held or licensed by us. If we are unable to protect our intellectual property rights against any violation or undue use, we may be materially and adversely affected.

    Our governance, risk management and compliance processes may fail to avoid regulatory, administrative or civil penalties, reputational damage and other adverse effects on us, which may adversely affect us.

    We are subject to different regulatory schemes, including: (i) laws and regulations of the Brazilian pharmaceutical industry; (ii) laws and regulations applicable to public companies whose securities are traded in the Brazilian capital market, including Brazilian Corporate Law, and CVM regulations; and (iii) laws and regulations applicable to Brazilian companies that participate in public auctions to contract with the government, among others. Our activities are subject to a number of additional regulations in the countries in which we operate.

    In the nine-month period ended September 30, 2017, the public sector accounted for 45.4% of our net revenue. We consistently participate in public auctions and enter into high-value contracts with the Brazilian government, together with a large number of suppliers and customers. As a result, the Brazilian government and we are exposed to the risk of fraud and administrative impropriety, inherent to this type of procurement.

    In recent years, Brazil has been intensifying and improving antitrust and anticorruption laws and legal frameworks. The Brazilian Law No. 12,846, dated August 1, 2013, as amended, or the Brazilian Anticorruption Law, sets forth the strict liability of Brazilian companies that commit acts against the Brazilian or foreign governments, including acts related to audit processes and government contracts, as well as strict penalties for companies that fail to comply with the law.

    Our governance, risk management and compliance processes may be unable to avoid violations of the laws and regulations to which we are subject, fraudulent and dishonest behavior by our employees, individuals and companies engaged by us and other agents that may represent us before third parties, especially the government, which may result in the loss of our ability to contract with the government and may adversely affect us.

    Our operations depend on our ability to efficiently operate our data collection and storage systems, which are subject to failures that may adversely affect us.

    In the ordinary course of business, we collect and store confidential data in our data centers and networks, including data related to intellectual property and clinical trials; our and our customers, suppliers and business partners exclusive commercial information; and customer and employee personal identification data. Safe processing, maintenance of our IT systems and transmission of this information is fundamental for our operations and for the good, continuous and uninterrupted sale of our products.

    Our technical infrastructure is vulnerable to damage or interruptions caused by IT and telecommunication failures, power outage, flood, storm, fire, terrorism, intentional offense, human error and similar events, including system failure, hardware or software failure, computer virus or hacker attacks. Any damage or failure in our technical infrastructure may compromise our networks. As a result, the information stored in our networks may be accessed, publicly disclosed, lost or stolen, affecting the quality of our services, customer satisfaction levels and our reputation, which may adversely affect us.

    All our processes, procedures, know-how, information and R&D projects are kept confidential as trade secrets. In the event of a data breach, we will be required to incur significant expenses to remediate the situation, take repressive measures against offenders and incur expenses to prevent the dissemination of trade secrets and reprehend those who may try to use this information to compete with us, which may adversely affect us.

    Our growth strategy provides for the acquisition of new business, including companies, trademarks and assets. If we are not successful in these acquisitions, we may be adversely affected.

    Our growth strategy provides for the acquisition of new business. As a result, we constantly review strategic growth opportunities through acquisitions. We do not have a relevant history of acquisitions, as our growth has been primarily organic. Accordingly, any acquisitions may involve a series of known and unknown risks and challenges that may materially and adversely affect us, including the following risks among them:
    • acquisitions may not contribute to our commercial strategy or our image;
    • we may be exposed to contingent liabilities relating to civil, environmental, tax, labor, social security and intellectual property issues, including voluntary and involuntary infringement of patents or civil liability complaints related to products, as well as other regulatory issues, which may be in addition to those initially forecasted and beyond the contractual protection clauses;
    • the acquisition process may be slow and costly, and our management’s attention may be diverted from our usual operations;
    • issues in obtaining regulatory approvals, including from antitrust authorities in the countries in which we seek to complete our acquisitions, and in connection with the revalidation of health licenses and granting of new licenses filed by the acquired company;
    • difficulties in the integration of operations or high integration costs due to cultural differences that were not initially identified during the acquisition process;
    • management of additional unplanned costs related to the integration of operations;
    • investments in acquisitions may not generate the expected returns; and
    • the cost structure of the acquired companies and/or trademarks may be different from our cost structure, and we may take a longer time than expected to adjust this structure to ours.

    If we identify a potential loss or suffer an effective loss related to the activities performed by the acquired companies prior to their acquisition dates, we cannot assure you (i) whether or when we will be able to enforce our rights to the respective collateral, and (ii) whether the amounts corresponding to damages or reimbursements will be available when we need them.

    Moreover, we may require additional funds to continue to implement our expansion strategy. If we do not obtain sufficient funds to complete any potential acquisition and implement our expansion plans, we will be unable to fully implement our growth strategy.

    Any of these factors may adversely affect us.

    We depend on our outsourcing and service agreements.

    We depend on outsourced providers for certain services related to information technology, R&D, human resources, and finance and legal consulting services.

    We may become more dependent on outsourced services. Failure of outsourced providers and other service providers to meet their obligations or any significant disagreements or other issues may materially harm our relationship with these outsourced providers and affect the services provided, which may adversely affect us.

    As a result of our outsourcing, we may be held jointly or secondarily liable by labor courts for the payment of any labor and social security charges. Additionally, any interruption in the provision of outsourced services by any service providers may affect the quality and continuity of our business, which may adversely affect us.

    Moreover, as a result of recent amendments to Brazilian labor law on outsourcing we cannot predict how these rules will be regulated or interpreted by labor courts and authorities. We cannot predict the impacts of these amendments on the labor market and on the compensation of outsourced service providers. If, as a result of the new labor law, outsourcing becomes more restricted or expensive, we may have to seek other alternatives to outsourced services, which may adversely affect us.

    We currently depend on intermediary distributors to place our pharmaceutical products, which subject us to commercial and operating risks and may adversely affect us.

    Our distribution and sales structures are fundamental to maintain our competitiveness in the retail segment in Brazil, primarily for certain categories of products of our portfolio.

    Our dependency on intermediary distributors, as an indirect channel, limits our ability to place our products at establishments that are part of the pharmaceutical channel. The use of intermediary distributors and an outsourced logistics structure exposes us to a number of risks, including potential delays and interruptions in the delivery of our products and loss of quality as a result of inadequate handling of products during transportation.

    We cannot assure you that our intermediary distributors will comply with applicable law, including the distribution of certain products only to authorized points of sale, which may adversely affect us.

    As we do not enter into agreements with our intermediary distributors providing for specific monthly sale and purchase volumes, we are subject to the risk of these distributors not purchasing our products in any given month, which would require us to find other intermediary distributors to sell our products. As a result, we may be adversely affected, as the replacement process may take time.

    Any deterioration in our relationship with our employees or increase in labor costs may adversely affect us.

    We are subject to labor downtime, stoppage or strike in all of our plants. In Brazil and Argentina, unions play an important role in labor relationships and proactively negotiate salary increases. Downturns, stoppages, conflicts with unions or other labor conflicts may result in a decrease in sales and negative publicity, which may adversely affect us. If the overall Brazilian economy shows signs of consolidated growth, including an increase in productivity, pressure from unions to increase salaries above inflation may adversely affect us, especially if the pressures are accompanied by strikes.

    Our growth plans require the hiring of additional employees in different areas. Accordingly, the increase in the number of professionals will result in additional costs related to hiring and retention of direct and outsourced labor. On the other hand, if we are unable to attract and retain qualified professionals to support our growth, we may be adversely affected.

    We are subject to complex pharmaceutical regulations in Brazil and abroad, including interactions with government authorities, which may adversely affect us.

    We are subject to a number of local laws and regulations in Brazil and abroad providing for the authorizations and requirements to obtain licenses, permits or registration of products, including operating and safety standards issued by the Ministry of Health, Anvisa and state and municipal health offices. We are also subject to best manufacturing practices certification by Anvisa. The regulation of the Brazilian pharmaceutical industry includes rules related to (i) approval of products and industrial facilities, (ii) advertisement, (iii) drug representatives visits and (iv) direct advertisement to the end-consumer. If Anvisa understands that we failed to meet any of the regulator obligations, either by failing to maintain valid permits for our plants, failing to maintain and renew the registration of our products or not complying with applicable pharmaceutical industry law, we may be subject to civil and criminal penalties, including warnings, fines, suspension of activities of the relevant plant and cancelation of authorizations or licenses, among others.

    Moreover, changes in these laws and regulations may adversely affect our operations, especially sales and marketing activities of pharmaceutical products, restrict our existing operations, limit the expansion of our business and regulate business areas that were not previously regulated, which may adversely affect us.

    Additionally, Anvisa may, at any time, suspend the manufacture and sale of any product that allegedly causes health hazards, according to applicable law.

    We cannot assure you that public authorities will not (i) change the requirements to grant or renew licenses, permits or registrations of products manufactured by us or third parties, (ii) delay the issuance of licenses, permits or registrations of products, or (iii) change the certification requirements regarding best manufacturing practices.

    Any significant change in these requirements or our inability to meet them, as well as any delays by public authorities to issue licenses, permits or registrations or noncompliance by us with the terms established by public authorities may (i) prevent us from manufacturing, selling and distributing a certain product, (ii) cause delays in the launching of products or (iii) increase our costs, which may adversely affect us.

    Obtaining the required governmental approvals is time consuming and uncertain. If we fail to obtain the necessary approvals we may be adversely affected.

    The regulatory approvals to which we are subject must be granted by the regulatory agencies of each of the countries in which we operate before the sale or manufacture of new pharmaceutical products. The approvals for our products and manufacturing processes are subject to the previous analysis of a dossier related to each International Non-Proprietary Name, or INN, and each formulation and concentration of the relevant INN in each country in which we intend to sell the relevant product. We also have to send feasibility studies and, in certain cases, bioequivalence studies, to establish the safety and efficacy of our products. We cannot assure you that we will obtain governmental approval for any request we make for the commercial sale of a product. If we obtain this approval, we cannot assure you that the therapeutic indications claimed will not suffer significant restrictions or that the relevant product will be a commercial success. We cannot estimate the time required to obtain any approval or authorization by any governmental entity regarding changes in the registration of products.

    Moreover, regulations, standards and other governmental requirements may change during the process of regulatory approval or authorization of products submitted by us. As a result, we may be subject to additional expenses, further delays, cost increases and/or be unable to sell a product in certain markets. Delays in obtaining regulatory approvals or authorizations for new or existing products may adversely affect our net revenue, marketing, brand reputation and market share, allowing our competitors to meet the needs of the customers we are unable to service. Any of these factors may adversely affect us.

    We may not obtain or renew all the operating licenses required to conduct our business.

    We are subject to a number of municipal laws and regulations related to licenses and requirements to obtain licenses and permits of operation for our units. We cannot assure you that we will maintain or timely renew all licenses and/or permits of use and operation required to conduct our business for each of our plants and manufacturing facilities issued by city authorities, health authorities and the competent fire department. Additionally, we cannot assure you that these licenses and/or permits were not subject to faulty attainment or renewal in the past. Failure to obtain or renew these licenses and permits may result in the application of successive fines and, as applicable, the closing of irregular plants, interrupting our activities, which may adversely affect us.

    A significant portion of the drugs existing in the market, including those we manufacture, is subject to price control regulation. This control may limit our margins and our ability to pass price increases onto our customers, which may adversely affect us.

    We are subject to federal legislation, which imposes price controls on substantially all of the pharmaceutical products we manufacture. These price controls limit price adjustments and adjustments for inflation for these products to one adjustment per year, according to a cap based on the IPCA, an adjustment factor for relative prices among sectors and an intra-sector price factor, all of which are calculated as percentages per year. These price controls may decrease our profit margins.

    We cannot assure you that we will be able to maintain our profit margin at the same levels. Moreover, we cannot assure you that the government will not change or expand this price control policy or that it will not create new factors or calculation formulas to establish a price cap, which may adversely affect us.

    We operate in emerging markets and our current and future results and financial condition depend on the economic conditions of the countries in which we operate and intend to operate. As a result, any downturn in the economic conditions of these countries may adversely affect us.

    All our development operations and/or activities are located in Latin America and as of December 31, 2016, 93.0% of our net revenue is derived from our operations in Brazil. Brazil and other countries in Latin America have experienced periods of economic and political instability in recent years. If private and governmental entities seek to reduce or control health costs, the inventory levels of our customers, consumer purchases and prices may be affected, which may adversely affect us.

    We currently operate, and intend to operate, in regions and countries in which we have little or no experience, and we may be unable to successfully sell our products or develop new products in these markets. As we expand to other markets, we may find difficulties in adapting to unknown circumstances and conditions. We may also face other risks related to international businesses, including: (i) difficulties and costs related to compliance with a number of domestic and foreign laws, regulations and complex treaties; (ii) changes in legal or regulatory requirements; (iii) exchange rate and price controls; (iv) political instability, including nationalization and expropriation; (v) trade restrictions, including delays regarding customs procedures, tariffs and import and export licensing requirements; (vi) taxes; and (vii) difficulties in enforcing intellectual property rights.

    We cannot assure you that the political, tax or legal regimes of the countries in which we operate or intend to operate will not increase compliance costs or decrease the demand for our products, which may adversely affect us.

    We operate in segments of products which the manufacturing requires the use of potentially toxic substances and generates potentially contaminating solid waste and effluents. Accidents or inappropriate handling of chemical raw materials or their incorrect disposal in the environment may cause significant environmental damage in the vicinity of our operating facilities and may adversely affect us.

    We operate in the pharmaceutical industry, which requires the handling of controlled substances that are potentially toxic and pollutant if we fail to follow operating procedures recognized as safe, or if we fail to control these processes and, as a result, these chemical substances are released in environments outside our manufacturing areas, at levels above those recommended by regulations. Moreover, our manufacturing processes generate solid waste or effluents that are potentially and significantly contaminating if disposed of in the environment without the due treatment or incineration by duly accredited entities. Accidents or operating failures may cause the release of chemical raw materials, pharmaceutical products and contaminated waste or effluents, damaging the environment and neighboring communities, materially and adversely affecting us.

    Changes in environmental laws and regulations may adversely affect us.

    Our activities are subject to extensive federal, state and municipal environmental laws in Brazil and in the countries in which we operate. Governmental bodies and agencies inspect our compliance with environmental laws and may impose administrative penalties for any non-compliance. These penalties may include, among others, the imposition of fines (up to R$50 million), cancellation of licenses and even the temporary or permanent interruption of our activities. As environmental laws are becoming stricter, the amount of capital expenditures and expenses required to comply with environmental law may vary significantly compared to current projections. The expenditures required to comply with environmental law may lead to a decrease in other strategic investments originally planned, decreasing our results. Any unpredicted material environmental costs may adversely affect us.

    Moreover, if we fail to comply with environmental law, we may face criminal charges and will have to repair any damage that may have been caused to the environment and third parties. Companies and individuals are subject to Brazilian Environmental Law penalties. Criminal charges include, among others, imprisonment of offenders, loss of or restriction on tax incentives, cancellation and suspension of credit facilities offered by government credit institutions and prohibition to contract with the government, which may adversely affect our revenue and prevent us from obtaining funds in the financial market.

    Environmental civil liability is strict, joint and several. This means that all directly or indirectly involved parties are subject to the obligation to repair environmental damage, irrespective of confirmation of fault of the agents. Proof of damage is sufficient to hold the agents fully liable for the environmental damage, with right of recourse against the other involved parties. As a result, when we outsource services, including the final disposal of waste or removal of vegetation, we are liable for any environmental damage caused by outsourced service providers.

    Moreover, according to Brazilian Environmental Law, our shareholders may be held liable for damages to the environment whenever we create an obstacle to repair such damages.

    In 2012, we entered into a settlement agreement (termo de ajustamento de conduta) with the Public Prosecution Office of the state of São Paulo related to improperly removing vegetation at a real estate property we rent. In December 2013, the Public Prosecution Office of the state of São Paulo filed an enforcement lawsuit against us and the court imposed a daily penalty on us for allegedly breaching certain terms of the settlement agreement. On December 12, 2017, the enforcement lawsuit was dismissed and the penalty was reduced by the court. We are in the final stages of concluding the acquisition of this real estate property from a third party for purposes of expanding our activities. Eventual delays in obtaining licenses or authorizations or additional court requirements may postpone or adversely affect our expansion plans.

    If the regulatory inspection agencies have interpretations and understandings regarding applicable tax law that are different from ours, we may be adversely affected.

    In the ordinary course of business, we are subject to and are directly and indirectly affected by different federal, state and municipal tax and social security laws. The audit procedure for the year ended December 31, 2016 conducted by our independent auditors identified that we adopt certain conducts based on our interpretation of applicable law, overlooking the timely fulfillment of certain ancillary obligations.
    We cannot assure you that, in the event of an inspection, the regulatory inspection agencies will apply the same interpretations of the applicable tax law as we do. As a result, we may be adversely affected.
    For more information on Brazilian tax, see “Taxation—Certain Material Brazilian Tax Considerations.”

    We do not enter into foreign exchange hedge transactions for our purchases of raw materials in foreign currencies.

    We do not currently enter into foreign exchange hedge transactions to hedge our main foreign exchange rate exposure, i.e., variations in prices of imported raw materials. The main raw materials we use are indexed to international market prices, primarily denominated in U.S. dollars.

    During periods of high exchange rate volatility, primarily the exchange rate of the real against the U.S. dollar, prices of drugs may suddenly increase for us. We cannot assure you that we will be able to immediately pass these costs onto our customers, which may materially and adversely affect us. For more information, see “––Risks Relating to Brazil–– Exchange rate instability may adversely affect the Brazilian economy and, consequently, us.”

    Risks Relating to the Offering and Our Common Shares 

    The protective mechanisms regarding stock dilution set forth in our bylaws may hinder or prevent investment in our Company, preventing shareholders from selling their shares.

    Our bylaws provide for protective mechanisms to promote stock dilution and prevent the concentration of our shares in a group of investors. Pursuant to our bylaws, any purchasing shareholder that holds shares or equity rights corresponding to 15% or more of our total capital stock is required to, within 30 days from the date of purchase or event that resulted in share ownership, conduct a tender offer to purchase all common shares issued by us, for a price calculated pursuant to our bylaws. This may hinder or prevent attempts to purchase shares issued by us and discourage, delay or prevent the acquisition of shares issued by us, including in transactions in which investors could receive a premium on the market price of our shares.

    There is no market for our common shares and we cannot assure you that an active and liquid trading market for our common shares will develop.

    Currently there is no market for our common shares. Moreover, we cannot guarantee that an active and liquid market for our common shares will develop or that this market, if developed, will be sufficiently liquid. Active and liquid markets generally have lower price volatility and more efficient trading of common shares.

    The volatility and illiquidity of the Brazilian securities markets and of our common shares may substantially limit your ability to sell our common shares at the price and time you desire.

    Investing in securities that are traded in emerging markets, including in Brazil, often involves greater risk and are generally considered to be more speculative in nature than investing in securities traded in the securities markets of more developed countries. These investments are subject to certain economic and political risks, including (i) changes in the regulatory, tax, economic and political environment that may affect the ability of investors to obtain a total or partial return on their investments; and (ii) restrictions on foreign investment and return of capital invested.

    The Brazilian securities market is substantially smaller, less liquid, more volatile and more concentrated than major international securities markets, including those in the United States and Europe. The B3 had a market capitalization of R$2.5 trillion as of December 31, 2016 and an average daily trading volume of R$7.4 billion in the year ended December 31, 2016. The ten most traded stocks by volume on the B3 during 2016 accounted for approximately 59.8% of total trading on the B3 during that period. The New York Stock Exchange had a market capitalization of approximately US$20.2 trillion as of December 31, 2016 and an average daily trading volume of US$43.9 billion in the year ended December 31, 2016. Furthermore, the regulations of the B3 may differ from what foreign investors are used to. The characteristics of the Brazilian securities market may substantially limit the capacity of holders of our common shares to sell them at their preferred time and price and, consequently, may adversely affect the market price of our common shares. If a liquid and active trading market is not developed or maintained, the trading price of our common shares may be negatively affected.

    The price of shares sold in an offering is frequently subject to volatility following the offering and the market price of our common shares could vary significantly as a result of a number of factors, including the risk factors mentioned in this offering memorandum related to our operational and financial performance and macroeconomic factors, in Brazil and abroad, some of which are beyond our control. After completion of this offering, your ability to sell our common shares at the price and time you desire may be substantially limited.

    The sale of a significant number of our common shares after this offering may negatively affect the trading price of our common shares.

    We, our controlling shareholder, our directors and officers have agreed to enter into lock-up agreements providing for restrictions on the sale of our common shares, pursuant to which we, our controlling shareholder and our directors and officers agree not to transfer, lend, encumber, give as collateral or exchange, directly or indirectly, our common shares issued by us after completion of this offering, subject to certain exceptions set forth in the placement facilitation agreement, for a period of 180 days from the date following the pricing of this offering. After the initial lock-up period of 180 days, we, the selling shareholder and our directors and our executive officers have agreed, for an additional period of 180 days, not to carry out any of the transactions described above relating to more than 60% of the lock-up securities held by any such person.
    After those periods, our common shares will no longer be subject to lock-up restrictions. For more information on our lock-up agreements, see “Plan of Distribution—Lock-ups.”
    A sale of a significant number of our common shares, or market perception of an intention to sell a significant number of our common shares, may have an adverse effect on the market value of our common shares.

    Holders of our common shares may not receive dividends or interest on shareholders’ equity.

    Pursuant to Brazilian Corporate Law and our bylaws, we must pay our shareholders at least 25% of our annual adjusted net income, as calculated under Brazilian GAAP and Brazilian Corporate Law, as dividends or interest on shareholders’ equity, as calculated and adjusted pursuant to Brazilian Corporate Law. Our adjusted income may be capitalized, used to absorb losses or otherwise retained, as permitted under Brazilian Corporate Law, and may not be made available for payment as dividends or interest on shareholders’ equity. If in any fiscal year our management recommends against the distribution of dividends or interest on shareholders’ equity due to considerations relating to our financial condition, our shareholders may not receive any distribution.

    Moreover, we may change our dividend policy at any time and we may also be subject to restrictions on dividend distributions under our loan agreements. In any of these events, our shareholders may not receive dividends or interest on shareholders’ equity.

    Pursuant to contractual covenants in some of our financing agreements, we are subject to restrictions on the distribution of dividends and we may not distribute more than 25% of our adjusted net income without the approval of the creditor.

    We may need to raise additional funds and may issue additional common shares or convertible securities or enter into certain transactions, which may result in a dilution of your interest in our common shares.

    We may have to raise additional funds through private or public offerings of shares or other securities convertible into shares issued by us. The funds we raise through the distribution of shares or securities convertible into shares may be obtained with the exclusion of right of first refusal of our existing shareholders, including investors in our common shares, as provided by Brazilian Corporate Law, which may dilute the interest of investors. A dilution of your interest in our common shares may occur in the event of a merger, consolidation or any other corporate transaction of similar effect in relation to companies that we may acquire.

    The participation of members of our board of directors, our officers and our affiliates, the Brazilian underwriters, the international placement agents and their affiliates in the bookbuilding process may adversely affect the liquidity and price of our common shares.

    The price per share of our common shares in this offering will be determined upon the conclusion of a bookbuilding process. Pursuant to applicable Brazilian regulations, if demand for this offering is not greater than the base number of common shares offered plus one-third, members of our board of directors, our officers and our affiliates, the Brazilian underwriters, the international placement agents and their affiliates and certain other individuals and entities (who are all deemed to be individuals and entities who are connected to the offering (pessoas vinculadas) pursuant to CVM regulations) may participate in the bookbuilding process for up to 20% of the number of common shares initially offered. The participation of these persons in the offering may have an adverse effect on the determination of the price per share or the liquidity of our common shares in the secondary market.

    The protections afforded to minority shareholders in Brazil are different, and may be more difficult to enforce, than those in the United States and some European countries.

    The protections afforded to minority shareholders in Brazil are different from those in the United States and some European countries. In particular, jurisprudence with respect to shareholder disputes is less developed in Brazil than in the United States and some European countries and there are different procedural requirements for bringing shareholder lawsuits, including shareholder derivative suits. As a result, it may be more difficult in practice for our minority shareholders to enforce their rights against us, the controlling and principal shareholders, our directors or executive officers than it would be for shareholders of a U.S. or European company.

    The use of hedge transactions, including total return swaps and other derivatives, may influence the demand for, and the price of, our common shares.

    The Brazilian underwriters, the international placement agents and their affiliates may enter into derivative transactions, including hedge transactions, using our common shares as reference, and total return swap transactions hired with third parties, as permitted by CVM regulations. The use of derivatives may influence the demand for, and therefore the price of, our common shares.

    A U.S. holder of our common shares may be unable to exercise preemptive rights or tag-along rights relating to our common shares.

    U.S. holders of our common shares may not be able to exercise preemptive rights or tag-along rights relating to our common shares unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to our common shares relating to these rights and we cannot assure you that we will file any registration statement. Unless we file a registration statement or an exemption from registration is available, a U.S. holder may receive only the net proceeds from the sale of his or her preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse and the holder will receive no value for them.

    Judgments of Brazilian courts with respect to our common shares will be payable only in reais.

    If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and the amounts are then adjusted to reflect exchange rate variations through the effective payment date. The prevailing exchange rate may not afford non-Brazilian investors full compensation for any claim arising out of or related to our obligations in respect of our common shares.

     

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