Galenica - Geschäftsbericht 2022

25. Financial instruments

25.1 Categories of financial instruments

Carrying amounts of financial instruments 2022

in thousand CHF	Financial assets at amortised costs	Financial liabilities at fair value through profit or loss	Financial liabilities at amortised costs	Total
Cash and cash equivalents	93,927	–	–	93,927
Trade and other receivables	529,479	–	–	529,479
Financial assets	23,693	–	–	23,692
Current financial liabilities	–	–	218,464	218,464
Current lease liabilities	–	–	50,173	50,173
Trade and other payables	–	–	346,083	346,083
Non-current financial liabilities	–	49,180	185,668 1)	234,848
Non-current lease liabilities	–	–	183,005	183,005
Total	647,098	49,180	983,393

1) Of which CHF 3.9 million are in connection to put options for non-controlling interests. Changes in the liability amount are recognised in equity

Carrying amounts of financial instruments 2021

in thousand CHF	Financial assets at amortised costs	Financial liabilities at fair value through profit or loss	Financial liabilities at amortised costs	Total
Cash and cash equivalents	164,982	–	–	164,982
Trade and other receivables	461,108	–	–	461,108
Financial assets	19,152	–	–	19,152
Current financial liabilities	–	–	43,052	43,052
Current lease liabilities	–	–	49,717	49,717
Trade and other payables	–	–	356,067	356,067
Non-current financial liabilities	–	24,000	382,544	406,544
Non-current lease liabilities	–	–	173,334	173,334
Total	645,242	24,000	1,004,714

Net gain/(loss) on financial instruments 2022

in thousand CHF	Financial assets at amortised costs	Financial liabilities at fair value through profit or loss	Financial liabilities at amortised costs	Total
Change in fair value of contingent consideration	–	1,077	–	1,077
Net gain/(loss) on foreign exchange	–104	–	–137	–241
Other financial result	–144	–	–55	–198
Interest income	426	–	–	426
Interest expense	–	–	–2,818	–2,818
Interest expense on lease liabilities	–	–	–2,455	–2,455
Interest income on impaired trade receivables	301	–	–	301
Expected credit losses	–1,781	–	–	–1,781
Net gain/(loss) recognised in profit or loss	–1,302	1,077	–5,466	–5,690

Net gain/(loss) on financial instruments 2021

in thousand CHF	Financial assets at amortised costs	Financial liabilities at amortised costs	Total
Net gain/(loss) on foreign exchange	304	–274	30
Other financial result	–36	–89	–125
Interest income	492	–	492
Interest expense	–	–2,701	–2,701
Interest expense on lease liabilities	–	–2,298	–2,298
Interest income on impaired trade receivables	245	–	245
Expected credit losses	–1,023	–	–1,023
Net gain/(loss) recognised in profit or loss	–17	–5,362	–5,380

Accounting principles financial instruments (measurement and categories)

Galenica classifies its financial assets and financial liabilities at initial recognition. Subsequent measurement is at amortised cost or fair value through profit or loss.

Measurement of financial assets and financial liabilities

With the exception of trade receivables, financial assets and financial liabilities are initially measured at fair value plus or minus directly attributable transaction costs, if those financial instruments are not subsequently measured at fair value through profit or loss. Trade receivables are initially measured at the transaction price resulting from the revenue transaction. All purchases and sales of financial instruments are recognised using trade date accounting.

Financial assets are generally derecognised when the contractual rights to the cash flows expire. Financial liabilities are derecognised when they have been settled.

For subsequent measurement Galenica distinguishes between the following types of financial assets and financial liabilities:

Financial assets at amortised cost

This category includes trade and other receivables as well as loans and other financial assets such as rental deposits and securities. These financial assets are subsequently measured at amortised cost using the effective interest rate method less expected credit losses. Expected credit losses are based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. Changes in expected credit losses due to changes in estimated credit risk are determined at each reporting date and charged to profit or loss. Galenica uses the simplified approach to determine its bad debt allowances for trade receivables using lifetime expected credit losses. Expenses for expected credit losses comprise the change in bad debt allowance and receivables directly written off.

Uncollectible loans and receivables are only derecognised if a certificate of loss has been issued.

Financial liabilities at fair value through profit or loss

Financial liabilities classified as at fair value through profit or loss correspond to contingent consideration liabilities from business combinations.

Financial liabilities at amortised costs

Financial liabilities mainly comprise trade and other payables as well as financial liabilities and bonds and are measured at amortised cost using the effective interest rate method.

25.2 Fair value measurement

Fair value

		2022		2021
in thousand CHF	Carrying amount	Fair value	Carrying amount	Fair value
Bond (fair value level 1)	380,194	370,830	380,306	389,270

With the exception of the bond in current and non-current financial liabilities, the carrying amounts of all financial instruments approximate to their fair value or fair value disclosure is not required (lease liabilities).

Fair value of contingent consideration liabilities from business combinations (level 3 of the fair value hierarchy)

in thousand CHF	2022	2021
1 January	24,000	70
Arising from business combinations	26,256	24,000
Change in fair value (recognised in profit and loss)	–1,077	–
Payments (cash out)	–	–70
31 December	49,180	24,000

Sensitivity analysis of contingent consideration liabilities from business combinations

Determining the contingent consideration liability of the business combination of Aquantic AG EBITDA of the acquired business was identified as a key assumption. Galenica has recorded the amount of CHF 3.4 million as contingent consideration liability based on the expected future performance for 2025 and 2026 of the acquired business. The possible future cash outflows range between zero and CHF 5.5 million. An increase in the forecasted EBITDA of the acquired business 2025 and 2026 by 5% would increase the contingent consideration liability by CHF 0.4 million. In return, a decrease of the forecasted EBITDA 2025 and 2026 by 5% would reduce the contingent consideration liability by CHF 0.4 million.

Determining the contingent consideration liability of the business combination of Bahnhof Apotheke Langnau AG future net sales for 2026 and 2027 of the acquired cannaplant business was identified as a key assumption. Galenica has recorded the amount of CHF 22.9 million as contingent consideration liability based on assumed probability-adjusted net sales and the expected achievement of other operational targets. The possible future cash outflows range between zero and CHF 29.0 million. An increase in the expected net sales of the acquired business 2026 and 2027 by 5% would increase the contingent consideration liability by CHF 2.0 million. In return, a decrease of the expected net sales 2026 and 2027 by 5% would reduce the contingent consideration liability by CHF 2.0 million.

Determining the contingent consideration liability of business combinations from previous years net sales of the acquired businesses was identified as key assumption. Galenica has recorded the discounted maximum amount as contingent consideration liability, an increase in the forecasted net sales of the acquired businesses would hence have no impact on the contingent consideration liability. In return, a decrease of the forecasted net sales of the forecasted net sales 2024 by 5% would reduce the contingent consideration liability by CHF 2.2 million.

Accounting principles financial instruments (fair value measurement)

Fair value

Financial liabilities contain contingent consideration liabilities from business combinations which are measured at fair value. The fair value of these financial instruments is measured based on the expected cash flows in due consideration of the probability of occurrence and the current market interest rates (level 3 of the fair value hierarchy).

The fair values of the fixed-rate bonds derived from quoted prices (level 1 of the fair value hierarchy).

Fair value hierarchy

Galenica measures financial instruments at fair value using the following hierarchies for determining the fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
Level 3: Unobservable inputs for the asset or liability. These inputs reflect the best estimates of Galenica based on criteria that market participants would use to determine prices for assets or liabilities at the reporting date.