profitable biotechnology/medical device company that primarily develops, manufactures, markets and sells medical implants. Most of the products are based on

Q-MED AB

ANNUAL REPORT

2007

Q-Med is a rapidly growing and

profitable biotechnology/medical device company that primarily develops, manufactures, markets and sells medical implants. Most of the products are based on

the company’s patented technology, NASHA ^™ , for the production of stabilized

non-animal hyaluronic acid.

The company today has more than 700 co-workers in 20 countries, with

approximately 500 at the company’s head office and production facility in

Uppsala. Q-Med had sales of 1,318 MSEK during 2007. Q-Med AB is listed in

the Mid Cap segment of the OMX Nordic

Stock Exchange in Stockholm.

• Revenues amounted to 1,318 (1,304) MSEK • Operating income amounted to 370 (300) MSEK • Growth within the Esthetics product area was 13 percent • Restylane Perlane

approved for sales in the USA • Macrolane

VRF approved for sales in Europe • Development of products based on botulinum toxin • Distribution of products for cosmetic treatment according to an agreement entered into with Palomar Medical Technologies Inc.

KEY RATIOS 2007 2006 Figures in MSEK 1,318 1,304 Revenues

85 85 Gross margin, % 370 300 Operating income

28 23 Operating margin, % 370 308 Income after financial items 315 212 Net income for the year 720 608 Number of employees at year-end

79 78 Equity/assets ratio, % 3.17 2.14 Earnings per share, SEK

13.83 12.56 Shareholders’ equity per share, SEK

Restylane

is a series of internationally leading beauty products which fill out lines and wrinkles,

contour cheeks and the chin, create volume in lips and help the skin to regain its lustre.

Restylane

• Restylane Perlane

• Restylane Lipp

Restylane Touch

• Restylane SubQ

• Restylane Vital

.

Macrolane

VRF is a new series of

products for body shaping – both to give volume and to smooth out body defects.

Macrolane

VRF 20 • Macrolane

VRF 30.

Durolane

for the treatment of osteoarthritis of the knee and hip joints, has been approved in Europe and Canada. A registration appli- cation was submitted in the USA in 2006.

Deflux

is the leading alter- native to several years of tre- atment with antibiotics for a malformation of the urinary bladder in children. Deflux has been approved for sales in the USA, Canada and Europe.

Solesta

for the treatment of fecal incontinence. The product is being introduced in Europe through a small number of specialists.

OPERATING INCOME

0 200 400 600 800 1,000

2007 2006 2005 2004 2003

821

345 112

300 370 MSEK

REVENUES

0 200 400 600 800 1,000 1,200 1,400

2007 2006 2005 2004 2003

607 823

976

1,318 1,304 MSEK

REVENUES PER GEOGRAPHIC AREA 2007 Nordic countries, 4%

Rest of the world, 5%

Asia, 21%

North America, 25%

Rest of Europe, 41%

Latin America, 4%

esthetics

hospital healthcare

the q - med group

02 The President’s statement 04 Objectives and strategies 06 Technology and product

development

08 Quality and the environment 10 The Esthetics product area 20 The Hospital Healthcare

product area 26 The co-workers

28 Financial reports 2007

29 Report of the Board of Directors 32 Consolidated income statement 34 Consolidated balance sheet 36 Consolidated cash flow analysis 37 Changes in shareholders’

equity for the Group 38 Income statement for the

Parent Company

39 Balance sheet for the Parent Company 41 Cash flow analysis for the

Parent Company

42 Changes in shareholders’ equity for the Parent Company 43 Notes

68 Auditors’ report

70 Corporate governance report 75 Board of Directors and auditors 76 Senior management

78 The share 80 5-year summary 82 Quarterly data 84 Definitions and glossary 85 Annual General Meeting and

Financial information

2 Q - M E D A N N U A L R E P O R T 2 0 0 7

THE PRESIDENT’S STATEMENT; DEAR SHAREHOLDERS,

It is a privilege to have the opportunity to share with you results and reflections from the year 2007. Q-Med is a fantastic workplace that has come into full bloom this very year. We have started to use fresh new premises and a great restau- rant. We are at the top of the “co-worker satisfaction list” and have become the best company regarding gender distribu- tion among the large companies listed on the Stock Exchange. We are also at the top of the environmental list. At the same time we have grown profitably – for the eleventh year in a row!

But no company can live on these things alone. In order not to lose our way intoxicated by success we have held a number of seminars with the aim of finding and confirming the strong points of our business culture. The company’s culture is something that must, of course, be con- stantly recaptured. In a rapidly growing unit the culture is easily diluted by fresh new forces. That which has taken years to gain can quickly disappear. Success grows painstakingly while a setback comes in an instant. Growth around the world also means that geographic idiosyncrasies are to be woven together with our recipe for success and further strengthen it.

What, then, do we consider has been the basis of our success? Of course we have been able to manage our resources and collaboration with others employing clear business sense. This is particularly difficult when the company has grown so big that “food for the day” has become self-evident and many functions are situ- ated some distance from the source of the business – sales. Simplicity quickly appeared as one of our characteristics.

Formal or purely bureaucratic organiza- tions not only lose efficiency but also the motivation of the co-workers. Simplicity is not only being informal but also not

least choosing the simplest route to the objective. This leads to us being able to be fairly innovative in matters great and small. In every problem that is to be solved there is an opportunity for renewal. This gives us competitive advantages and a more secure place in the market. A pre- condition for innovation in particular is a great tolerance of mistakes. People usu- ally choose the beaten track so as not to drive into the ditch. Without this latitude, however, there is no development. These qualities are of course not the whole truth, but they are sufficiently good to guide new employees and to serve as a target for the future: business sense and innova- tion combined with simplicity.

This year’s theme is Beauty, and more specifically individual beauty. The first human relic to be found, 150,000 years old, was a pearl from a piece of jewellery.

Several of our expressions of beauty are at the same time signs of health and strength – important selection criteria when the next generation was to be created. In this way our beauty products contribute to more and more people feeling satisfied with their looks. Another aspect of beauty is trying to erase the traces left by the years through discreet treatments. There are conferences that are called anti-aging conferences! We prefer to talk about

“beautiful” aging and mean by this that the most striking parts of premature aging can be discreetly toned down. Our vision – Q-Med enables individual beauty – is thus something that can appeal to everyone.

During the year we also saw Restylane Perlane

gain admittance to the North American market. The product very quickly took a strong position in the mar- ket and is today the next biggest dermal filler after… – that’s right, Restylane

! It is well known that healthy loss of weight often leads to less flattering shapes in the

body. The cheeks become hollow and the bust disappears. There is help at hand, thanks to Q-Med’s volume creating prod- ucts, Macrolane

VRF, which was approved last autumn, and Restylane SubQ

. Treatment of half an hour at the most without a knife and without an anesthetic makes this an attractive alter- native. It is particularly common in Asia that women have no bust or that the breasts are different sizes. The alternative of silicone does not always feel relevant with breastfeeding and a long life ahead.

In that case it is good to just fill up a little bit and then the future will tell what is the most suitable – a permanent alternative or ours, which slowly disappears. We believe a great deal in our new series of products but know at the same time that it takes time to build up confidence in a new alterna- tive among both doctors and consumers.

We have not been quite so successful

with our products Deflux

, Zuidex

and

Solesta

, which are handled above all by

specialists in the major hospitals. We have

approached the health service with great

enthusiasm, in the firm knowledge that

our products are important. Deflux is

today the leading product in the world for

treating children with VUR but it has

taken almost ten years. We therefore

believe that the systematic establishment

of other hospital products in well-admin-

istrated hospitals must be met by admin-

istrative work from the company. Such a

mentality is not consistent with the work

of selling direct to doctors in the face of

tough competition. It is therefore time to

separate the businesses, so that the Hospi-

tal Healthcare products are managed sep-

arately from the esthetic products. We can

then continue to establish our strong

esthetic products in the private market

and expand our geographic spread and

penetration for these, sure in the knowl-

2 0 0 7 A N N U A L R E P O R T Q - M E D 3

“The basis for Q-Med’s success is business sense, simplicity and innovation.”

edge that the Hospital Healthcare prod- ucts are being managed by skilful hands.

Our strategy so far has been to use our base technology. We will continue to do so. But at the same time our focus on the beauty market requires that we broaden the technology base. We should have the best products that our customers can offer. We create this through in-house development and through collaboration with different development companies.

The year began with a couple of agree- ments with a South Korean company, Medy-Tox Inc. They will give us experi- ence of botulinum toxin. The use of botu- linum toxin within both the beauty field and the hospital healthcare field has liter- ally exploded lately. But the products that exist are primitive and minor improve- ments are sure to come from elsewhere as well. We are developing the whole area, with unique products for each use, thus ensuring good treatment results.

Another example of collaboration is an agreement concerning an injection pen, which can distribute our gels over great areas of treatment with high precision.

Our customers will in this way get better treatment results and more effective use of the products.

All our products are injected. The needles that are used are of traditional design. We are collaborating on the devel- opment of new constructions that will be able to deliver the treatment through the skin simply and painlessly and at the intended depth.

Everyone knows how wonderful it feels when the summer sun gets the chance to activate the skin. At the same time the sun’s rays are harmful and can lead to the skin aging prematurely. What we are talking about is the sun’s light energy. The harmful properties of the light can, however, be controlled and this is the basis of treatment with light energy, which has come to be very common recently. We believe that there is a lot more to do using this technology in the years to come, which is why we have begun collaboration with the company with the strongest development, Palomar Medical Technologies Inc.

As everyone knows, many services

and products are bought within the beauty field. However, most is paid for dreams in the form of cosmetics, which is why we believe that well-documented, effective, non-surgical treatments are what are going to increase the most in the years to come. Our objective is to launch something new each year. In this way we will secure our leading role within the rapidly growing beauty field.

New situations crop up daily that require unplanned work by the personnel.

Quick action is then necessary, or other- wise an opportunity disappears for ever.

Our personnel always loyally do their best in these situations. I would like to say a warm thank you to all our co-workers.

Uppsala, March 2008

Bengt Ågerup

President and CEO

4 Q - M E D A N N U A L R E P O R T 2 0 0 7

OBJECTIVES AND STRATEGIES

Increased focus on the Esthetics product area

Q-Med has as its overall objective con- tinued high growth combined with good profitability. Q-Med shall consist- ently strive to meet its customers’ and other stakeholders’ expectations and needs, through constant improvements in quality and constant training. Q-Med also strives to give its shareholders a competitive return on their invested capital both in the short and long term.

Business concept

Q-Med is a medical device company that primarily develops, manufactures, markets and sells medical implants. The majority of the implants are based on the company’s own NASHA

technology, for esthetic and medical use by authorized users.

Vision – “Enabling Individual Beauty”

Q-Med enables individual beauty through:

Products which take the individual into account and help to meet his or her per- sonal needs and wishes.

Products which show an individual way of viewing beauty and which allow

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appearance to reflect how the person feels on the inside.

Products which offer a unique opportu- nity for tailor-made and safe beauty treatment.

Overall strategies and success factors Q-Med will continue to develop and document products which are primarily based on the NASHA

technology and its applications up to proof of effect. The Esthetics product area will be given greater focus.

The product portfolio will be broad- ened through in-house development and through strategic partnerships.

There will be increased focus on con- sumer communication so as to ensure both continued and increased interest in and demand for Q-Med’s products.

Q-Med will involve customers and con- sumers at an early stage of product development and help customers to develop their ability to sell so as to attain the best possible results for both themselves and Q-Med.

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Take responsibility in the company’s business and strategies for protecting the environment and surroundings and strive for sustainable development.

Contribute to strong commitment from the co-workers by providing a good working environment, opportunities to develop and competent leadership.

Objectives and outcome 2007

The overall objective within the Esthetics product area was to continue to grow in line with the market, strengthen the lead- ing position in the established markets and gradually further build up the new markets in Latin America and Asia. This has largely been achieved:

Sales approval was obtained in May for Restylane Perlane

in the USA and in September for Macrolane

VRF in Europe.

Distribution in Asia now takes place via Q-Med’s warehouse in Hong Kong and a subsidiary has been established dur- ing the year for sales in Poland.

Collaboration has been begun with

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2 0 0 7 A N N U A L R E P O R T Q - M E D 5

Medy-Tox Inc., with a view to develop- ing a new generation of botulinum toxin products.

The overall objectives within the Hospital Healthcare product area were to submit a registration application for Deflux

in Japan, continue with preparations for the launch of Durolane

in the USA and introduce Solesta

among specialist doc- tors in the European market.

The work on the launch of Deflux in the Japanese market proceeded throughout the year and a registration application was submitted in February 2008.

The introduction of Solesta to a rela- tively small number of specialists in Europe has been carried out with posi- tive results.

Preparations for the launch of Durolane in the American market have contin- ued. Amongst other things, a clinical study has been performed in order to provide information before the coming discussions with insurance companies regarding product and patient reim- bursement.

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Objectives and activities 2008 Esthetics product area

Q-Med will continue to grow in line with the market, strengthen its leading posi- tion in the established markets and grad- ually further build up the new markets in Latin America and Asia. Objectives and activities for 2008:

Begin global positioning of the Resty- lane

trademark.

Continue to launch Macrolane

VRF in Europe through training and certifica- tion of plastic surgeons.

Launch new product initiatives and injection techniques within the hydro balance area.

Obtain sales approval and establish a sales organization in China.

Increase Q-Med’s presence in Asia.

Continue development within the botu- linum toxin area.

Hospital Healthcare product area

Q-Med will continue to develop and pro- duce products within the Hospital Healthcare area. However, the overall

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objective for 2008 is to find new forms for sales and marketing of Deflux and Solesta. Objectives and activities for 2008:

Obtain sales approval for Durolane in the USA.

Change the principles for patient reimbursement regarding Deflux in the USA.

Prepare a wider launch of Solesta in the European market.

Terminate production and sales of Zuidex

.

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6 Q - M E D A N N U A L R E P O R T 2 0 0 7 The idea stage

TECHNOLOGY AND PRODUCT DEVELOPMENT Broader product portfolio and new areas of use

Most of Q-Med’s products are based on the company’s patented technology, NASHA

, for the production of stabi- lized non-animal hyaluronic acid. The modification of hyaluronic acid to a sta- ble and pure raw product has paved the way for strong brands and appro- priate treatments.

Hyaluronic acid occurs naturally in the human body. It is a polysaccharide – a sugar compound – that is produced by the cells and which has an important role in all organ development. Hyaluronic acid also protects the body by lubricating the joints and furthermore keeps the skin even and elastic as it binds water well.

Minimal modification

Hyaluronic acid is not stable, however, but moves all the time in the body. Getting it to stay in a determined place is there- fore one of the challenges when hyaluronic acid is used as a raw material in pharma- ceuticals and skin-care products. This and a great deal more is achieved by Q-Med’s patented NASHA

technology, which was developed during the 1990s for the production of stabilized non-animal hyaluronic acid. One of the advantages of the NASHA

technology is that the modi- fication of the hyaluronic acid is minimal.

This in due course results in a stable prod-

uct, where the hyaluronic acid in other respects keeps all its positive properties.

Gels are created from the refined hyaluronic acid. These gels have many advantages – they are tissue-friendly, bio- logically degradable, allow important nutrients to pass and also have a long-term effect when they are injected into the body.

Another important property is that the product is pure and does not contain foreign substances. The non-animal hyaluronic acid that Q-Med uses in its products is pro- duced by means of a well-controlled proc- ess which guarantees that they contain a minimum of foreign substances. This decreases the risk of allergic reactions.

Competing products are more chemically modified, something which means that they can contain a higher degree of impu- rities, which increases the risk of side-effects.

Constant development

During 2007 Q-Med invested 266 MSEK in research and development, which cor- responds to 20 percent of the turnover for the year. Approximately 60 people work in the research department, and they also collaborate with universities, clinics and practising doctors all over the world. R&D also comprises those co-workers who work with clinical trials, quality assur- ance and registration of the products.

The NASHA

technology acts as a

platform in Q-Med’s product development and offers many different opportunities.

Put simply it can be said that the same hyaluronic acid is used in all esthetic products and that the physical form – that is to say the size of the gel particles – is changed depending on the area of use.

There is thus great potential for the devel- opment of completely new products, but also when existing products are further developed through new product variants.

A clear example of this is Restylane

, which today comprises six different esthetic products. The long-term objective is more and more specially adapted products that increase the quality of the treatments. This means that the products are tailor-made for specific areas in the body. By quality is meant that customers – that is to say doc- tors and other specialists – and end con- sumers associate Q-Med’s products with simplicity, effectiveness and very good treatment results. Product development therefore focuses on contributing to mak- ing the treatments easier, quicker and more appropriate.

Active broadening

In addition to refined products, develop- ment work also focuses on treatment technique. The injection systems that are used for the injections are gradually being improved. Eventually each esthetic prod-

FROM IDEA TO REGISTERED PRODUCT

Product development Pilot study

CE mark Europe CE mark

FDA USA FDA

Study Study

The time from idea to registered product in different countries is primarily affected by how comprehen- sive the required clinical studies are and the process of each country’s authority. The requirements for getting a product approved for marketing vary greatly between different regions. Q-Med often carries out market studies even after a product has been approved so as to thereby obtain further data concerning the product’s effect and safety.

Registration process Europe, just over 1.5 years

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Registration process USA approximately 3 years

uct will have a unique injection system, where both the needle and the syringe are optimized for each particular area of use.

During 2007 Q-Med began develop- ment work on products based on botuli- num toxin. The company’s technological base has thereby been broadened, and this allows completely new, innovative products to be offered to the customers.

Q-Med already has a leading position with regard to the development of facial esthetic products. The broadening of the technological base strengthens this posi- tion and makes the company more of a total supplier in the esthetics market. As the focus on esthetic products increases, Q-Med will invest in even more supple- mentary technologies.

Far-sighted patent management Q-Med’s basic patent for the NASHA

technology was issued in the USA in 1998.

A patent for the technology has also been granted in those countries where it is assessed that Q-Med’s products have sub- stantial market potential. The lifetime of the patent in the USA, which originally ran until 2015 at the most, has been extended to December 2017 for Resty- lane

. In other countries where a patent has been granted the lifetime of the patent runs until May 2016 at the most.

Q-Med’s patent strategy aims to make the patent protection of the NASHA

technology more complete, amongst other things by protecting certain uses of the NASHA

gel. As the objective is to make the products more and more sophisticated, new technologies and vari- ous unique injection devices are being developed and protected. This will ensure the value of the product and brand port- folio and will mean that Q-Med can always offer what is most in demand, best protected and commercially most inter- esting in the esthetics market.

LOW RISK

The NASHA^™ gel is non-animal.

Unlike animal hyaluronic acid, there is no risk of transmission of infectious substances from or allergic reactions to the animal of origin.

NATURAL

The NASHA^™ gel is biologically degradable and is integrated into the tissue so that impor tant nutrients can pass through the implants.

VERSATILE

The NASHA^™ gel can be used for many different applications as it can be modified to achieve par ticular proper ties in diffe- rent end products.

LONG EFFECT

The NASHA^™ gel is stabilized in a two-step process. This allows the effect of the implants to remain in place between six months and up to a couple of years, depending on what is desired and which product is injected.

ADVANTAGES OF NASHA

2 0 0 7 A N N U A L R E P O R T Q - M E D 7

QUALITY AND THE ENVIRONMENT

Active work that promotes long-term sustainability and sustainable profitability

High quality and sustainable develop- ment are key concepts at Q-Med. The work on quality and the environment gives safe, effective and competitive products and at the same time makes long-term sustainable solutions a natu- ral part of the business.

Q-Med’s products should always be safe and effective when they are used in the way intended. This means that the quality requirements within development, man- ufacturing, marketing and sales are high.

By ensuring high quality in its internal work, the company can meet and also surpass the requirements, needs and expectations of authorities, customers and business partners.

Working in processes

Quality assurance is an integral part of Q-Med’s daily work. The improvement work follows the processes that the busi- ness is organized in. The requirements in each process are clear and ensure that quality and effectiveness are high. This applies from product development to sales and comprises the way of working, technical equipment, systems and docu- mentation and involvement and under- standing on the part of the co-workers.

The outcome of each process, for example regarding lead times and customer satis- faction, is monitored via special measures – so-called Key Performance Indicators (KPI). It is particularly important to eval- uate breaks in the trend in the company’s day-to-day work, for example reduced output or an increased number of noncon- formities. On the basis of the evaluations continual quality improvements are then made. Summaries of KPI and process results are also continually reported to Q-Med’s senior management.

The company is regularly inspected by the notified body that covers the markets in Europe, Canada and Taiwan, but also by business partners and by authorities such as the American FDA and the Aus- tralian TGA. In recent years the inspec- tions have shown continuing good results for the quality work within Q-Med. Dur- ing 2007 this work has also focused on the company’s own sales organization, where quality requirements and quality man- agement systems are implemented in the subsidiaries that have been established.

Meeting authority requirements In addition to the company’s own objec- tives and guidelines, the work on quality is also controlled by the rules and regula-

tions that various authorities have drawn up. The requirements focus on the safety and effect of the products and include the following rules and regulations:

American GMP/QSR (Good Manufac- turing Practice/Quality System Regula- tion CFR 820).

European medical device product direc- tive MDD93/42EEG, which is required to obtain CE marking from a notified body.

Australian TGA (Therapeutic Goods Administration).

Q-Med AB is also certified in accordance with ISO 13485:2003 – a quality standard adapted to medical device companies.

Environmental certification soon Work on the environment is deeply rooted at Q-Med, both through the com- pany’s environmental policy and the con- crete objectives that are continually fol- lowed up. During 2007 the work on certi- fication in accordance with ISO 14001 was begun, which means that work on the environment can be followed up in a more systematic way in the future. Certi- fication of the environmental manage- ment system is expected to be complete during 2008.

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Work on the environment shall promote a society that is sustainable in the long term and contribute to sustainable profitability. In order to achieve this, energy usage in the company shall be optimized at the same time as the relative amount of waste and emissions of greenhouse gases shall be reduced. In concrete terms this means that Q-Med shall:

• use energy efficiently so as to reduce environ- mental effects and work to reduce the use of en- ergy, taking into account changes in the business.

• carr y out our transpor tation taking the environ- ment into account. The travel policy assures envi- ronmental thinking in the business trips.

• minimize paper and energy consumption and sor t/handle waste paper in the most environ- mentally friendly way.

• handle products and their waste in an environ- mentally friendly way.

• in new construction work and reconstruction work choose alternatives for heating, comfor t cooling and building material that benefit the environment.

ENVIRONMENTAL OBJECTIVES FOR Q-MED

8 Q - M E D

Q - M E D 9

The Esthetics product area

consists primarily of Restylane ^® – a series of internationally leading beauty products which fill out lines and wrinkles, contour cheeks, the chin and so on, create volume in lips and rejuvenate the skin. Macrolane ^™ VRF

is a new series of products for body

shaping – both to give volume and to smooth out defects over the whole body.

THE ESTHETICS PRODUCT AREA

Esthetics, 81%

SHARE OF Q-MED’S REVENUES

Nordic region, 4%

Rest of the world, 6%

Asia, 26%

North America, 16%

Rest of Europe, 44%

Latin America, 4%

REVENUES PER GEOGRAPHIC AREA

0 200 400 600 800 1,000 1,200

2007 2006 2005 2004 2003 501

653 713 951

1,073 MSEK

REVENUES

0 100 200 300 400 500 600

2007 2006 2005 2004

2003 0

10 20 30 40 50 60

176

241 241 380

533

MSEK %

Operating margin, % OPERATING INCOME AND

OPERATING MARGIN

1 0 Q - M E D

ESTHETICS

KEY RATIOS 2007 2006 Figures in MSEK 1,073 951 Revenues

533 380 Operating income 50 40 Operating margin, % 2007 IN BRIEF

• Sales within the Esthetics product area increased by 13 percent to 1,073 MSEK.

• Operating income rose by 40 percent to 553 MSEK and the operating margin improved to 50 percent.

• Restylane Perlane^™ was approved for sales in the USA.

• Macrolane^™ VRF was approved for sales in Europe.

• Establishment of a local market company in Poland.

Q - M E D 1 1

1 2 Q - M E D

Restylane ^® – natural beauty from within

2 0 0 7 A N N U A L R E P O R T Q - M E D 1 3

Restylane

is a leading brand within its category in the global beauty market.

The product is based on Q-Med’s pat- ented NASHA

technology and im- proves people’s natural looks by adding and restoring volume to the skin. Re- stylane is used amongst other things to smooth out lines and wrinkles, to cre- ate fuller lips and clearer facial con- tours, and for rejuvenation of the skin.

Sales and income for the year Restylane’s

growth has continued dur- ing 2007. Sales amounted to 1,073 (950.6) MSEK, which is an increase of 13 percent compared with 2006. Operating income was 532.6 (380.0) MSEK and the operating margin 50 (40) percent. Sales have devel- oped positively in all the principal markets.

The increase in Europe was 12 percent and in the USA sales to Q-Med’s American partner Medicis rose by 21 percent. In Latin America, where the main markets are Brazil and Mexico, sales rose by 61 per- cent. The increase was 9 percent in Asia, where countries such as South Korea and Taiwan display the greatest growth.

Important events during the year In the USA market Restylane Perlane

was approved for sales during the spring.

Q-Med thereby also received a final sup- plementary purchase sum of 29.1 MUSD

in accordance with the agreement that was entered into with Medicis in 2003. In China work is ongoing to obtain sales approval for Restylane. Continued cus- tomer and market studies have been car- ried out during the year. As a result of increased demand a local market com- pany has been established in Poland, which is a market with great commercial potential for Q-Med.

Restylane – for revitalized looks Restylane is a leading brand in its cate- gory in the global beauty market. Resty- lane smooths out lines, fills out wrinkles and creates volume in the face, for exam- ple fuller lips or clearer facial contours.

More than nine million treatments have been successfully carried out in more than 70 countries since its introduction in 1996.

The brand comprises six products, which in different ways improve and enhance people’s natural looks by adding and restoring volume to the skin.

The products are based on Q-Med’s patented technology NASHA

and give a natural, visible and lasting result. The treatment, which is carried out by certi- fied practitioners such as dermatologists, is simple and takes about 30 minutes. The product is injected in small quantities into the skin using a very fine needle. The effect lasts for up to one year, depending

RESTYLANE

RESTYLANE PRODUCT GROUP Restylane^® – for the correction of lines and wrinkles

Restylane Perlane^™ – for the filling out of deeper folds

Restylane Touch^™ – for the correction of finer lines

Restylane Lipp^™ – for contouring and increased volume in the lips

Restylane SubQ^™ – for increased volume and sculpting of the chin and the cheeks, for example Restylane Vital^™ – for the creation of vitality and elasticity in the skin

1 4 Q - M E D A N N U A L R E P O R T 2 0 0 7

on the individual skin structure and what area has been treated.

Restylane

consists of hyaluronic acid, a substance that occurs naturally in the body and this therefore means that side- effects are rare. The degradation process in the body is natural and the risk of reac- tions is small. Comprehensive clinical studies confirm the product’s properties and show that is proven to be safe.

A secure growth market

The beauty market is a large and diversi- fied market that has grown constantly over the past ten years. The trend con- cerning healthy and natural looks means that the development within skin-care products is very strong. New target groups are appearing and new products and brands are being launched on the international market. More people spend an increasing amount of money on their looks and well-being. The increased inter- est in beauty and skin-care products can be seen in male consumers as well, where taking care of one’s skin and one’s looks has become more and more accepted in recent years. The demand for beauty products and beauty treatments that give safe, long-term and natural results is expected to continue to increase.

Growth for so-called dermal fillers, beauty products that like Restylane are

injected into the skin, has been more than 200 percent since the year 2000 and it is estimated that they will continue to grow by approximately 20 percent per year glo- bally and 10–15 percent per year in Europe. The market is continuing to grow as new players become established and more products are launched. At the same time the market is characterized by increasingly rapid consolidation, with acquisitions and mergers among compa- nies in both the USA and Europe. Invest- ments in marketing and sales have increased, which leads both to increased global competition and to an increased interest in esthetic products and thereby further growth in the market.

Market development 2007

It is estimated that global sales of dermal fillers amount to just over 500 million dollars. The USA accounts for around half of the global market for these products, according to Medical Insight, Inc. Q-Med’s market share in Europe is roughly esti- mated to be between 40 and 75 percent, depending on the market, and Q-Med’s total market share in Asia is estimated to amount to just over 60 percent.

During 2007 new players have become established and new products have been launched. There are now almost 100 dif- ferent dermal filler products on the inter-

cont. RESTYLANE

Restylane^®

Restylane Vital^™

Restylane is injected into the skin at different levels in order to achieve the right effect

in the skin’s tissue structures.

Restylane Perlane^™ Restylane

Touch^™

Restylane SubQ^™

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GREAT POTENTIAL WITHIN SKIN CARE

By adding hyaluronic acid it is possible to help the skin to regain its elasticity and lustre. Restylane Vital^™ is already used today in the treatment of the face, throat, décolletage and back of the hand.

There is great potential and Q-Med plans new product initiatives in the European market.

Hyaluronic acid occurs naturally in the body and contributes to the skin retaining its elasticity and lustre. Hyaluronic acid can absorb water corre- sponding to a thousand times its own weight and therefore has good fluid-balancing proper ties. How- ever, with time the skin’s ability to produce hyaluron- ic acid deteriorates with regard to both quality and quantity. The skin gradually becomes thinner and thinner and loses its elasticity and lustre.

It is possible to affect the skin’s ability to bind water by placing micro-por tions of hyaluronic acid under the skin. The skin’s ability to bind water thereby increases and its elasticity is improved. It is an effective method that gives natural, long-lasting but also discreet results, which is something that many customers want. One treatment session takes approximately 30 minutes, but it should be repeat- ed. Treatment is initially carried out three times at inter vals of a few weeks and then as follow-up treatment ever y four th to sixth month. It is carried out by specialists such as dermatologists, esthetic general practitioners or nurses.

Improves the skin’s health

Q-Med has carried out development work for several years into the skin’s well-being. Experience of similar products based on hyaluronic acid has resulted in comprehensive clinical knowledge and documentation. Fur thermore, Q-Med has per- formed consumer and market studies in order to see what needs, demands and wishes the products within hydro balance must be able to meet.

The studies focus on a categor y of consumers, women 35–40 years of age, who want to improve the quality and appearance of the skin without a major inter vention. This target group is knowledge- able and aware. These women have tried many creams and facial treatments without finding a solution that lives up to their own expectations.

A market with great commercial potential awaits those companies, products and treatments that can meet these expectations.

national market. The strongest develop- ment can be seen within the product cate- gory which is based on hyaluronic acid.

In North America Q-Med works in partnership with the company Medicis.

During the year sales to Medicis increased by 21 percent compared with 2006. Much of the growth came from the launch of Restylane Perlane

. In Latin America sales increased by 61 percent compared with 2006, primarily due to strong devel- opment in Brazil and Mexico. Growth in Asia was 9 percent. Sales to Japan were weaker than during 2006 while they developed very strongly in South Korea and Taiwan.

Prospects for 2008

An objective that continues to be impor- tant for 2008 is to strengthen and develop the company’s leading position in the glo- bal market. During 2008 focused invest- ments are being made in increasing knowledge and awareness of the Resty-

lane

brand. The competitive advantages will be communicated more clearly through coordinated global strategies and concepts. The work will be aimed at both consumers and customers. Increased advertising and marketing efforts vis-à- vis consumers will be combined with con- tinued training activities for doctors and other treatment specialists. New develop- ment areas for the brand are constantly being discussed through dialogue and continued close cooperation with the market and customers.

In Asia the registration process for Restylane in the Chinese market is ongo- ing. In Q-Med’s assessment the product can be launched in China towards the end of 2008. Furthermore, work is proceeding on developing the Restylane product line in the Chinese market. In parallel new information and training drives are also constantly being carried out in order to increase awareness of the brand, but also to quality assure treatment with Restylane.

RESTORES LIPS’ FULLNESS

Restylane Lipp^™ creates beautiful lips that both feel natural and look natural. The product was launched in 2006 and is tailor-made for the natural anatomy of the lips. Restylane Lipp is based on Q-Med’s pat- ented NASHA^™ technology. The unique formula- tion means that the gel maintains its shape, despite the complex movements and many blood vessels in the lip area. Restylane Lipp gives softer and fuller lips, and is also used to improve the symmetr y of the lips or to mark the contours of the lips and Cupid’s bow more clearly. The treatment, which is performed by doctors or other cer tified specialists, is carried out under local anesthetic. The effect of treatment with Restylane Lipp lasts approxi- mately six months.

cont. RESTYLANE

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Restylane SubQ^™ is used above all for sculpting facial contours such as the cheeks and the chin. The product shapes the facial contours by increasing volume and is used both as an alternative and as a

supplement to traditional facelifts. Restylane SubQ is based on Q-Med’s patented NASHA^™ technology.

The product leads to safe and effective treatment results if it is injected deep into the skin. Treatment

with Restylane SubQ should be performed by cer tified doctors.

INCREASES VOLUME

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MACROLANE

– GRACEFULLY SHAPES YOUR BODY

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Macrolane

VRF became ready for commercialization at the end of 2007.

The product fills out different body parts quickly, simply and painlessly. It is based on Q-Med’s patented technology, NASHA

, and gives immediate and long-lasting enhancement of relatively large body parts such as the breasts and the bottom.

Sales approval of Macrolane

VRF (Vol- ume Restoration Factor) is for the Euro- pean market. The product is used both to give volume and to smooth out defects over the whole body. This is called body shaping. Together with methods for reducing the volume of body parts it is anticipated that this will be a valuable addition to today’s treatment alternatives.

The treatment is preferably carried out by plastic surgeons.

Body shaping with Macrolane means that the breasts, bottom and other body parts can be filled out in a natural manner.

Macrolane is used for breast augmenta- tion and shaping of the décolletage, amongst other things, but also as a sup- plement after plastic surgery procedures such as breast operations and liposuction.

Compared with treatment with Resty- lane

much greater volumes are used in an average treatment with Macrolane.

The gel is injected deep into the skin and lifts the tissue in a natural way.

Quick and safe treatment

The body’s own fat has been used for body shaping for a long time. However, the method requires that fat is sucked out from other parts of the body. This method is painful, difficult to assess and time-con- suming. Treatment with Macrolane, on the other hand, means that the plastic sur- geon can renew body parts in a quicker and more predictable way. As with other esthetic products from Q-Med, Macrolane is degradable.

Work on Macrolane was begun at the end of the 1990s and the product is based on the same patented NASHA

technol- ogy as Restylane. The first version of Macrolane obtained sales approval in the autumn of 2006. It was an esthetic treat- ment for the correction of concave body deformities. Since then Q-Med has focused on broadening the treatment area.

During 2007 the new and improved Macrolane VRF was launched. There are two different versions – VRF 20 and VRF 30 – for different parts of the body, where VRF 30 is used for deeper injections.

The interest in quick, safe and natural body shaping is increasing all over the world. Many women decide against sili- cone implants or treatment with their own body fat: not least to avoid an opera- tion under anesthetic and long healing times. Macrolane VRF, on the other hand, enables smaller and simpler treatments

with a pure and tissue-friendly product.

Treatment usually takes an hour or so and the effect is immediate.

Prospects for 2008

The development and approval of Macro- lane VRF have thus laid the foundation for a new strategic series of products which enables all parts of the body to be filled out naturally. During 2007 the prod- uct has been introduced to selected plastic surgeons all around Europe. As with Restylane the marketing work surround- ing Macrolane focuses on certified spe- cialists. Technically treatment resembles the injection treatments that these sur- geons already carry out today using other products. As part of the launch work, however, the doctors receive tailor-made training via Q-Med which quality assures the use of Macrolane.

During 2008 further studies are being carried out in Europe at the same time as the training and certification of plastic surgeons is being expanded. During the latter part of 2008 the marketing work will be intensified through advertising and PR activities in selected markets. After registration in Europe in 2007 Q-Med is aiming at more markets. In the next stage countries in Asia and Latin America will be prioritized.

MACROLANE

HOSPITAL HEALTHCARE

THE HOSPITAL HEALTHCARE PRODUCT AREA

SHARE OF Q-MED’S REVENUES

Nordic region, 3%

Rest of Europe, 30%

Asia, 2%

North America, 65%

REVENUES PER

GEOGRAPHIC AREA REVENUES OPERATING INCOME

Hospital Healthcare, 19%

0 50 100 150 200 250 300 350 400

2007 2006 2005 2004 2003 106

170 263

353

245 MSEK

–150 –120 –90 –60 –30 0 30

2007 2006 2005 2004 2003 –141 –140

–66 –69

24 MSEK

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The Hospital Healthcare product area consists of the following products:

Deflux ^® for treatment of a malformation of the urinary bladder in children, Durolane ^™

for treatment of osteoarthritis of

the knee and hip joints and Solesta ^™ for treatment of fecal incontinence.

KEY RATIOS 2007 2006 Figures in MSEK

245 353 Revenues –69 24 Operating income 2007 IN BRIEF

• Sales, including royalties, decreased by 31 percent to 245 MSEK. ¹⁾

• Operating income was –69 MSEK.

• Great increase in volume for Durolane^™.

• Great interest in Solesta^™ in Europe and Canada.

• Positive signals in the reimbursement issue for Deflux^®.

• At the beginning of Februar y 2008 it was decided to terminate production and sales of Zuidex^™.

1) The royalties figure for 2006 included a one-time payment of 73.5 MSEK

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DEFLUX

– SIMPLE TREATMENT WITH RAPID EFFECT

Deflux

is used for the treatment of VUR – a malformation of the urinary bladder which affects children and can give severe infections of the urinary tract and even irreversible kidney dam- age. Treatment with Deflux is simple to perform and has a rapid effect.

Sales for the year

Sales of Deflux amounted to 178.2 (198.0) MSEK in 2007, which is a decrease of 10 percent compared with 2006. The lower sales are primarily due to the fact that a large American insurance company has changed its reimbursement principles for endoscopic treatment of VUR. The deci- sion is based on earlier guidelines which are, however, being updated. At the same time development in the European mar- ket has been strong. Furthermore, price increases have been carried out in several markets in Europe.

The market

The largest single market for Deflux is the USA. In Europe the product is sold in more than 10 countries, where Germany

is the largest market. Around one percent of all children born suffer from VUR. In many cases it disappears by itself as the child gets older. This can, however, take many years and in the meantime often long-term treatment with antibiotics is carried out. Experience shows at the same time that knowledge of VUR is poor and that up to 40 percent of the children affected never get to meet a specialist doctor.

Information and training – primarily injection training – are the mainstay of the marketing work. Drives aimed specifi- cally at child urologists and others have given a stable position in the USA market, where Deflux is today the only product that is approved for endoscopic treatment of VUR. However, the customer base must be extended to ensure long-term growth.

Important events 2007

During the year canvassing of referring doctors and other key groups has increased. These are groups where knowl- edge of VUR – and available treatment methods – may be lower, or where treat- ment with antibiotics dominates.

The work on a launch in the Japanese market continues. At the beginning of 2008 Q-Med submitted an application for sales and marketing approval. This means that the pre-launch of Deflux can begin at the end of 2008. At the end of 2007 the launch of Deflux also started in Australia.

During the year the American Urologi- cal Association (AUA) made an important so-called position statement, which it is expected will mean that the reimburse- ment issue for Deflux can be solved in a favourable way.

Prospects for 2008

For 2008 the work on securing the reim- bursement issue in the USA is being given priority. At the same time the market pen- etration in selected target groups is to increase, primarily via several sales drives aimed specifically at referring doc- tors. In Japan the launch of Deflux is to be begun. During 2008 Q-Med will also begin to offer cystoscopic use of Deflux for treatment of stress urinary inconti- nence (SUI) in both women and men.

For treatment of VUR.

Injected into the wall of the urinar y bladder using an endoscope.

Treatment with Deflux^® contributes to a higher quality of life, both for the children treated and their families. And Deflux is in demand. During the past ten years more than 50,000 children all over the world have been successfully treated with the product.

Suffering from VUR can mean constant infections of the urinar y tract together with pain and a temper- ature for small children. At worst the problems can also result in kidney damage. Sick children, worried parents and sometimes lengthy treatment there- fore mean that VUR affects the whole family in a negative way.

Deflux offers a simpler alternative, where one of the added values is also better quality of life.

– It is a simple procedure that is often managed in 20 minutes and where the child can usually leave hospital later the same day, says Maria Cole, Prod- uct Manager for Deflux. The treatment is effective and for the majority of children one single injection is enough.

Alternatives worse

Children with VUR are usually treated with antibi- otics, but then the children may need to take their medicine for several years. The treatment period

can thus be long and tr ying for the family. Fur ther- more, more recent research shows that antibiotics work poorly, amongst other things due to the fact that most patients do not take their medicine in the right way. In time the risk of resistance to anti- biotics also increases.

– Another alternative is surgical procedures, which are used in more serious cases of VUR. This treat- ment is effective but it is also a more comprehen- sive procedure for the patient. Fur thermore there are also medical risks here at the same time as the longer time in hospital affects the entire family’s life, emphasizes Maria Cole.

HIGHER QUALITY OF LIFE WITH DEFLUX

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DUROLANE

– GREAT INCREASE IN VOLUME

During 2006 Q-Med established strate- gic collaboration with the American company Smith & Nephew. The collab- oration has seen sales of Durolane

double during 2007 and in coming years the product will be launched in several markets.

Durolane is used in the treatment of osteoarthritis. The product is injected in the knee or hip joint, and this reduces patients’ pain and increases their mobil- ity. The collaboration with Smith &

Nephew means that the company has the main responsibility for the marketing, sales and distribution of Durolane in all markets while Q-Med manufactures and supplies the product.

Doubled volumes

The main markets for Durolane are North

America, Europe and Asia. Since Smith &

Nephew took over sales, volumes have doubled and launches are planned in fur- ther markets all over the world. Smith &

Nephew has 8,500 employees in all and operations in 33 markets. The company today has the largest sales force in North America for this kind of product, which creates considerable opportunities for Durolane.

Q-Med’s revenues for Durolane con- sist of sales revenues and royalty payments, which are linked to sales volumes. As the commercialization process for Durolane proceeds, Q-Med also receives one-time payments from Smith & Nephew. They can amount to a maximum of 60 MUSD, of which 10 MUSD has already been paid.

The launch of Durolane on the Ameri- can market is an important objective.

During 2007 a clinical study has been per-

formed in order to provide information before the coming discussions with insur- ance companies regarding product and patient reimbursement.

Development collaboration

Q-Med and Smith & Nephew are work- ing together on the future development of Durolane, where Smith & Nephew carry the costs for clinical development, regis- tration work and global commercializa- tion. The ongoing development projects – which include co-workers from both com- panies – will maximize the value of today’s product, but also pave the way for the development of new products based on the NASHA

technology. During 2008 the objective is to increase sales in existing markets, as well as continued work to secure the registration process in the USA market.

For treatment of osteoar thritis.

Injected into the hip or knee joint.

™

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SOLESTA

– AIMING AT THE EUROPEAN MARKET

Solesta

is a treatment for fecal incon- tinence that has been documented as effective. The first step is for the product to be launched in Europe and Canada.

During 2007 Solesta

has been tested and introduced via selected specialist doctors.

Interest has been great and the treatment results have been good. Furthermore, clinical studies are ongoing in both the USA and Europe. The market focus is ini- tially on Europe and Canada, where a launch is planned during 2009.

Important events 2007

In Europe and Canada more than forty specialists have tested the product on

approximately 400 patients. The results from previous studies have also been pre- sented at congresses for doctors during the year and these have received a great deal of attention. The positive response among specialist doctors in North Amer- ica and Europe confirms that Solesta is a unique and effective treatment alternative for fecal incontinence. In Europe a clinical study was begun in 2007. It comprises approximately 250 patients and will give more clinical data on Solesta and intro- duce the product to more treating doc- tors. An earlier American study with 200 patients has also been ongoing, as part of the registration process in the USA.

Prospects for 2008

The building up of knowledge around Solesta is continuing. At the end of 2008 some of the results for approximately 100 patients in the European study will be reported. In parallel the European launch is being prepared through increased information and training drives aimed at colorectal surgeons and later at general practitioners, gynecologists and other specialist doctors as well.

ZUIDEX

Since 2002 Q-Med has offered Zuidex

for the treatment of stress urinary incontinence (SUI) in women. At the beginning of 2008 Q-Med took the decision to terminate production and sales of Zuidex.

A clinical study comprising 300 patients has been carried out in North America with the intention of applying for market approval in the USA. In the study Zuidex

was compared with treatment using a col- lagen-based product and to measure the

urine leakage a standardized short-term pad test was used. Both treatments dis- played improvement regarding the incon- tinence problems and resulted in a similar proportion of continent patients. However, the study did not manage to fulfil its pri- mary purpose – to show that Zuidex gave better results than the competing product.

In Q-Med’s assessment the study results are not sufficiently good to success- fully support an application for market approval in the USA and the related busi- ness risks are not outweighed by future

business opportunities. Q-Med has there- fore decided to terminate production and sales of Zuidex. The product will be gradu- ally phased out during spring 2008.

Q-Med will actively encourage exist- ing customers to henceforth offer cysto- scopic use of Deflux

for treatment of stress urinary incontinence (SUI) in both men and women.

Treatment of fecal incontinence.

Injected into the anal canal.

CO-WORKER DEVELOPMENT IN A RAPIDLY GROWING ORGANIZATION

Competent managers and co-workers and an organization that works efficient- ly – some of the company’s objectives can be summarized in this way. This work is carried out in a Q-Med that is grow- ing rapidly and where recruiting and competence development must keep apace of the company’s development.

Personnel work primarily includes com- petence and leadership development, compensation questions and recruitment.

The fact that Q-Med is a growth company affects the activities within all these areas, not least recruitment. 112 new co-workers were brought into the Q-Med Group dur- ing 2007 – amongst others civil engineers, market strategists and process operators – and consequently at the end of the year the Group had 720 employees.

Top score in equal opportunities During 2007 Q-Med was given a high ranking in Folksam’s Equal Opportunities Index, where the work on equal opportu-

nities is reviewed and scored in 240 com- panies listed on the Stock Exchange. Q-Med was given a score of 4.3 on the five-point scale, where 5 means that gender distri- bution is completely even, both in the company as a whole and in the senior management team and on the Board.

62 percent of Q-Med’s employees are women and in the senior management team and on the Board 50 and 43 percent, respectively, are women. Other key ratios for the year show that personnel turnover in the company was 3.0 percent, which is a small decrease compared with 2006, that the average age was 40 and that the number of employees with a university education was 54 percent.

Competence and leadership

Competence development is based on an annual individual plan. It is discussed at a Development Discussion meeting, which is held together with the employee’s immediate superior. In the Development Discussion the company’s and the indi-

vidual’s expectations are compared at the same time as guidelines for the years to come are discussed.

Q-Med has an in-house leadership program and each year more than 30 managers attend selected parts of this program. It contains a mix of theory and practical exercises in communication, constructive feedback, management by objectives, situation-adapted leadership, the working environment and labour law.

The program has been evaluated during the year and the content will be further developed during 2008. More than 10 external mentors have been brought into the leadership development program during the year. The mentors – all of whom have long experience from differ- ent industrial fields – will help to broaden the perspectives of Q-Med’s leaders.

Development via survey

Using regular employee surveys Q-Med maps the health of the organization, what the internal attitudes look like and how

Postgraduate, 6%

High school, 2%

Senior high school/Post senior high school, 44%

Graduate, 48%

More than 50 percent of Q-Med’s co-workers have a university education.

EDUCATION – SWEDEN

21–30 yrs, 15%

>60 yrs, 1%

51–60 yrs, 11%

41–50 yrs, 29%

31–40 yrs, 44%

The average age at Q-Med’s Swedish business is 40 years.

AGE – SWEDEN

Production, 47%

Registration, 3%

Clinical, 6%

Product areas, 12%

R&D, 15%

Administration, 17%

Almost half of all personnel work in the Production Depar tment.

DEPARTMENTS – SWEDEN

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