Notes to the consolidated interim financial statements of the Galenica Group

1. Group organisation

General information

Galenica is a fully-integrated healthcare provider in Switzerland. Galenica operates a network of pharmacies, develops and offers own brands and products, exclusive brands and products from business partners as well as a variety of on-site health services and tests for customers. Galenica is also a provider of pre-wholesale and wholesale distribution and database services in the Swiss healthcare market.

The parent company is Galenica Ltd., a Swiss company limited by shares with its head office in Bern. The registered office is at Untermattweg 8, 3027 Bern, Switzerland. Shares in Galenica Ltd. are traded on the SIX Swiss Exchange under securities no. 36067446 (ISIN CH0360674466).

The Board of Directors released the consolidated interim financial statements 2021 on 2 August 2021 for publication.

2. Accounting principles

Basis of preparation

The unaudited consolidated interim financial statements of Galenica are based on the financial statements of the individual companies of Galenica as at 30 June 2021, prepared in accordance with uniform principles. Except for the amendments to International Financial Reporting Standards (IFRS) as detailed below, the consolidated interim financial statements have been prepared using the same accounting principles as the consolidated financial statements for the year ending 31 December 2020 and comply with IAS 34 – Interim Financial Reporting. As mentioned in notes 4 and 6 there have been changes to operating segment and net sales information. The consolidated interim financial statements should be read in conjunction with the consolidated financial statements for the year ending 31 December 2020 as they update previously reported information.

Galenica's consolidated interim financial statements are prepared in Swiss francs (CHF) and, unless otherwise indicated, figures are rounded to the nearest CHF 1,000.

Due to rounding, numbers presented throughout this report may not add up precisely to the totals provided. Totals are calculated using the underlying amount rather than the presented rounded number.

Foreign currencies are not of relevance for the consolidated interim financial statements.

Estimation uncertainty and assumptions

The preparation of the Group's consolidated interim financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense, and the disclosure of contingent liabilities as at the reporting date. Although these estimates and assumptions are made on the basis of all available information and with the greatest of care, the actual results may differ.

Seasonal influences on operations

Sales in the business sectors in which Galenica operates are usually not significantly influenced by seasonal or cyclical fluctuations during the financial year. The effect of the COVID-19 pandemic is further explained in note 3.

Income taxes

Current income taxes are based on an estimate of the expected income tax rate for the full year.

Scope of consolidation

The consolidated interim financial statements of Galenica comprise those of Galenica Ltd. and all its subsidiaries, including associate companies and joint ventures.

Details of changes in the scope of consolidation in the reporting period are included in note 4, Business combinations.

Amendments to IFRS

As at 1 January 2021 Galenica adopted the following new International Financial Reporting Standards:

Amendments to IFRS 7, IFRS 9, IAS 39 and IFRS 16 – Interest Rate Benchmark Reform – phase 2 (1 January 2021)

This change has no or no material impact on the financial position, financial performance and cash flows of Galenica nor on disclosures in these consolidated interim financial statements. Galenica has not early adopted any other standard or interpretation that has been issued but is not yet effective.

3. COVID-19 pandemic

As expected, the first quarter of 2021 was also difficult for Galenica due to the COVID-19 pandemic. Repercussions of the pandemic, such as the absence of seasonal colds, the lack of any flu epidemic as well as people's continued low mobility had a negative impact on the sales. Sales in pharmacies at high-frequency locations were still around 30% lower than their pre-pandemic level in the first quarter of 2019.

Business improved substantially from April 2021 onward. Galenica Group pharmacies and logistics companies actively supported the federal government and the people of Switzerland in the combat against the COVID-19 pandemic. Various activities and offers connected to these efforts, in particular the distribution of COVID-19 self-test, have strongly contributed to this growth. As a result, the positive impact on net sales and EBIT resulting from the aforementioned COVID-19 initiatives could more than compensate the incurred losses due to COVID-19 in the first half year 2021.

4. Operating segment information

Operating segment information first half of 2021

Based on the changed organisational and management structure of Galenica valid as at 1 January 2021, Galenica has redefined and renamed its segments. Galenica now has the two operating segments Products & Care (largely corresponds to the former operating segment Health & Beauty) and Logistics & IT (largely corresponds to the former operating segment Services).

Operating segment information first half of 2021

in thousand CHF	Products & Care	Logistics & IT	Group Services	Eliminations	Galenica Group
Net sales	918,926	1,377,914	10,485	–450,222	1,857,103
Intersegmental net sales	–35,419	–404,963	–9,840	450,222	–
Net sales to third parties	883,507	972,950	645	–	1,857,103
Other income	3,723	3,024	188	–825	6,111
Share of profit from associates and joint ventures	3,910	8	–	–170	3,748
Earnings before interest, taxes, depreciation and amortisation (EBITDA)	112,403	39,343	–307	-4,846 1)	146,592
Depreciation and amortisation	–34,749	–12,989	–1	150	–47,589
Earnings before interest and taxes (EBIT)	77,654	26,354	–308	-4,697 1)	99,003
Interest income					189
Interest expense					–2,482
Other net financial result					–45
Earnings before taxes (EBT)					96,666
Income taxes					–17,108
Net profit					79,559

Assets	1,703,395	922,123	569,830	-681,751 2)	2,513,598
Investments in associates and joint ventures	27,833	57	–	–1,074	26,816
Liabilities	720,229	653,989	707,911	-682,388 3)	1,399,741

Investments in property, plant and equipment	8,460	10,581	37	–155	18,924 4)
Investments in intangible assets	2,155	3,770	–	–102	5,824 5)

Employees as at 30 June (FTE)	3,799	1,364	225	–	5,388

1) Including the effects of IAS 19 from defined benefit plans and long-service awards of CHF -3.9 million

2) Of which elimination of intercompany positions CHF -713.2 million and other unallocated amounts CHF 31.5 million

3) Of which elimination of intercompany positions CHF -713.2 million and other unallocated amounts CHF 30.9 million

4) Of which non-cash investments of CHF 1.7 million

5) Of which non-cash investments of CHF 0.2 million

The CEO of Galenica acting as chief operating decision maker (CODM) allocates resources and monitors performance of the Group's operating segments Products & Care and Logistics & IT on the basis of information prepared in accordance with IFRS with exception of defined benefit plans and long-service awards, which are recognised at Group level.

In the operating segment Products & Care with its large network of pharmacies the accounting for leases is of particular importance. The Group continues to prepare information as if its leases were accounted for as operating leases (e.g. in line with Galenica's accounting policies prior to the adoption of IFRS 16). Those figures are relevant for management incentive and remuneration plans. However, Galenica has determined that the figures including the effects of IFRS 16 are used by the CODM for monitoring and resource allocation decisions and therefore presents its segment reporting as above.

Operating segment information first half of 2020

The operating segment information 2020 has been restated to the changed organisational and management structure and the internal financial reporting to the chief operating decision maker (CODM).

Operating segment information first half of 2020 (restated)

in thousand CHF	Products & Care 5)	Logistics & IT 5)	Group Services	Eliminations	Galenica Group
Net sales	809,023	1,283,416	8,852	–410,871	1,690,420
Intersegmental net sales	–32,530	–370,135	–8,207	410,871	–
Net sales to third parties	776,494	913,281	645	–	1,690,420
Other income	1,800	4,173	448	–418	6,003
Share of profit from associates and joint ventures	1,684	–	–	–95	1,589
Earnings before interest, taxes, depreciation and amortisation (EBITDA)	98,586	33,961	–319	-2,938 2)	129,290
Depreciation and amortisation	–35,662	–11,460	–11	124	–47,008
Earnings before interest and taxes (EBIT)	62,924	22,501	–330	-2,814 2)	82,282
Interest income					394
Interest expense					–2,559
Other net financial result					–166
Earnings before taxes (EBT)					79,951
Income taxes					–13,602
Net profit					66,349

Assets 1)	1,617,936	836,658	963,767	-1,159,423 3)	2,258,938
Investments in associates and joint ventures 1)	26,471	49	–	–3,571	22,949
Liabilities 1)	1,115,060	556,834	629,531	-1,095,842 4)	1,205,583

Investments in property, plant and equipment	7,544	8,815	–	–134	16,224
Investments in intangible assets	3,991	6,529	–	–93	10,428

Employees as at 30 June (FTE)	3,927	1,419	33	–	5,379

1) Figures as at 31 December 2020

2) Including the effects of IAS 19 from defined benefit plans and long-service awards of CHF -2.4 million

3) Of which elimination of intercompany positions CHF -1,150.6 million and other unallocated amounts CHF -8.8 million

4) Of which elimination of intercompany positions CHF -1,150.6 million and other unallocated amounts CHF 54.8 million

5) The organisational and management structure has changed as at 1 January 2021. As a result, Medifilm Ltd. moved from the operating segment Logistics & IT (formerly Services) to the operating segment Products & Care. Net sales for the half year 2020 has been restated.

5. Business combinations

In the first half of 2021, the scope of consolidation has changed as a result of the following transactions:

Acquisition of pharmacies. Galenica acquired 100 % of the interests in pharmacies in various locations in Switzerland. Upon acquisition, most of these pharmacies were merged with Galenicare Ltd.

The purchase consideration amounted to CHF 3.6 million and was fully settled in cash. The fair value of the provisional net assets amounts to CHF 0.3 million at the acquisition date. The goodwill of CHF 3.3 million was allocated to the operating segment Products & Care and corresponds to the added value of the pharmacies based on their locations. Transaction costs were insignificant.

Acquisition of the pharma business of Dr. Wild & Co. AG. On 27 May 2021, Galenica acquired the range of pharmaceutical products of the Swiss company Dr. Wild & Co. AG, including the well-known brands Vitamin D3 Wild Oil^® and VI–DE 3^®. In addition, the experienced physician field service of Dr. Wild & Co. AG was transferred to Verfora.

The purchase consideration amounted to CHF 34.7 million and was fully settled in cash. The fair value of the net identifiable assets amounted to CHF 26.8 million at the acquisition date. The goodwill of CHF 7.9 million was allocated to the operating segment Products & Care and corresponds to the added value based on the acquirer-specific synergies expected to arise from the acquisition in strengthening its leading position in the Swiss consumer healthcare (CHC) market and the know-how of the employees gained. Acquired intangible assets include trademarks with an indefinite useful life of CHF 22.8 million. As the acquisition date was recent, the purchase price allocation is yet to be finalised. Transaction costs were insignificant.

Business combinations

in thousand CHF	Pharma business of Dr. Wild & Co. AG	Pharmacies	Fair value
Inventories	2,141	339	2,480
Right-of-use assets	–	952	952
Intangible assets	24,634	–	24,634
Lease liabilities	–	–952	–952
Other current and non-current liabilities	–	–24	–24
Fair value of net assets	26,775	315	27,090
Goodwill	7,875	3,334	11,208
Purchase consideration	34,650	3,649	38,299
Payment of consideration due to previous business combinations			70
Net cash flow from business combinations			38,369

Pro forma figures for acquisitions made in the first half of 2021

Since their inclusion in Galenica's scope of consolidation, the businesses acquired contributed net sales of CHF 3.2 million and an operating result (EBIT) of CHF 0.6 million to the Group's results. If these acquisitions had occurred on 1 January 2021, they would have contributed additional net sales of CHF 4.5 million and increased EBIT by CHF 1.0 million.

6. Net sales

Net sales first half of 2021

Based on the changed organisational and management structure of Galenica valid as at 1 January 2021, the internal reporting and disaggregation of net sales has been adjusted accordingly. Net sales information for the previous period has been restated to conform to the new presentation.

Net sales first half of 2021

in thousand CHF	Sale of goods	Sale of services	Total Net sales	Intersegmental net sales	Total Net sales to third parties	of which sale of goods to third parties	of which sale of services to third parties
Local Pharmacies	581,825	35,101	616,926	–34	616,892	581,791	35,101
Pharmacies at Home	213,535	3,998	217,533	–225	217,309	213,311	3,998
Retail (B2C) 1)	795,188	39,099	834,286	–86	834,201	795,102	39,099
Products & Brands	58,228	1,355	59,583	–29,308	30,275	28,919	1,355
Services for Professionals	22,331	6,604	28,935	–9,903	19,032	17,237	1,795
Professionals (B2B) 1)	80,583	7,935	88,518	–39,212	49,307	46,156	3,151
Products & Care 1)	873,222	45,704	918,926	–35,419	883,507	841,258	42,249
Wholesale	1,313,526	15,261	1,328,787	–389,208	939,579	934,377	5,201
Logistics & IT Services	1,284	49,259	50,542	–17,171	33,372	293	33,079
Logistics & IT 1)	1,314,767	63,147	1,377,914	–404,963	972,950	934,670	38,280
Group Services	–	10,485	10,485	–9,840	645	–	645
Eliminations 2)	–412,061	–38,162	–450,222	450,222	–	–	–
Galenica Group	1,775,928	81,175	1,857,103	–	1,857,103	1,775,928	81,175

1) Including eliminations of intercompany net sales

2) Eliminations of intersegmental net sales

Net sales first half of 2020

Net sales first half of 2020 (restated)

in thousand CHF	Sale of goods	Sale of services	Total Net sales	Intersegmental net sales	Total Net sales to third parties	of which sale of goods to third parties	of which sale of services to third parties
Local Pharmacies	534,680	28,329	563,009	–38	562,971	534,642	28,329
Pharmacies at Home	162,244	3,887	166,131	–132	166,000	162,113	3,887
Retail (B2C) 1)	696,826	32,216	729,043	–72	728,971	696,754	32,216
Products & Brands	53,854	765	54,619	–26,651	27,968	27,204	765
Services for Professionals	22,621	6,769	29,390	–9,836	19,555	17,799	1,756
Professionals (B2B) 1)	76,482	7,527	84,009	–36,486	47,523	45,003	2,520
Products & Care 1)	770,686	38,337	809,023	–32,530	776,494	741,757	34,737
Wholesale	1,221,604	15,440	1,237,044	–355,962	881,083	876,056	5,027
Logistics & IT Services	867	47,547	48,414	–16,215	32,199	96	32,103
Logistics & IT 1)	1,222,444	60,972	1,283,416	–370,135	913,281	876,152	37,129
Group Services	–	8,852	8,852	–8,207	645	–	645
Eliminations 2)	–375,221	–35,650	–410,871	410,871	–	–	–
Galenica Group	1,617,909	72,511	1,690,420	–	1,690,420	1,617,909	72,511

1) Including eliminations of intercompany net sales

2) Eliminations of intersegmental net sales

7. Financial assets and financial liabilities measured at fair value

Fair value

in thousand CHF	Carrying amount	30.6.2021 Fair value	Carrying amount	31.12.2020 Fair value
Non-current financial liabilities	1,097	1,097	1,097	1,097
Bonds (fair value level 1)	380,361	390,926	380,417	392,560
Non-current financial liabilities	381,458	392,023	381,514	393,657

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

8. Employee benefit assets

Galenica realised in the consolidated statement of comprehensive income a remeasurement gain of CHF 79.8 million which is due to the positive market developments on plan assets and actuarial gains (change in demographic and financial assumptions). As a result Galenica has net employee benefit assets of CHF 18.1 million as at 30 June 2021 (as at 31 December 2020: employee benefit liabilities of CHF 57.4 million).

Due to the remeasurement gain a deferred tax expense of CHF 14.4 million has been recorded in the consolidated statement of comprehensive income, which also resulted in a respective decrease of deferred tax assets and increase of deferred tax liabilities.

9. Contingent liabilities and commitments

Galenica signed purchase agreements to acquire pharmacies and other businesses in the next few years. The purchase prices will be fixed at the time of transfer of ownership on the basis of net asset value and discounted cash flows. The unrecognised commitments are expected to involve payments of CHF 7.8 million at the most. The purchase rights have an estimated volume of CHF 10.4 million. These purchase rights or obligations fall due between 2021 and 2023.

10. Subsequent events

The following business combinations occurred between 30 June 2021 and 2 August 2021, the date that the consolidated interim financial statements were released for publication.

Acquisition of pharmacies. Galenica acquired 100 % of the interests in pharmacies at various locations in Switzerland. The purchase consideration was CHF 5.9 million, the fair value of the provisional net assets resulting from these additions was estimated at CHF 3.3 million at the acquisition date. Since the transactions were concluded shortly before the consolidated interim financial statements were issued, it was not possible to disclose the additional information required by IFRS.

Acquisition of Lifestage Solutions AG. On 26 July 2021, Galenica acquired 100 % of the shares of the Swiss based Lifestage Solutions AG. Lifestage Solutions develops and operates a fully integrated digital trading platform for home care organisations and care homes. The purchase consideration amounts to CHF 48.8 million maximum, of which CHF 24.8 million was settled in cash. The contingent purchase price consideration of up to CHF 24.0 million falls due in 2024.

Due to the fact that the acquisition took place only a short time before the release of the interim consolidated financial statements, the fair value of the provisional net assets at the acquisition date cannot yet be assessed with sufficient reliability. Transaction costs were insignificant.

There were no further significant events after the reporting date.