Notes to the consolidated interim financial statements of the Galenica Group

1. Group organisation

General information

Galenica is a fully-integrated healthcare service 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 headquarters 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 2023 on 7 August 2023 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 2023, 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 2022 and comply with IAS 34 – Interim Financial Reporting. The consolidated interim financial statements should be read in conjunction with the consolidated financial statements for the year ending 31 December 2022 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 material for the consolidated interim financial statements.

Discontinued operations

A disposal group is classed as a discontinued operation if it represents a separate major line of business or geographical business unit or if it is part of a single coordinated plan to dispose of a separate major line of business or geographical business unit. Discontinued operations are not included in the result from continuing operations and are reported separately in the consolidated statement of income as profit from discontinued operations. The prior period amounts in the income statement and in the consolidated statement of cash flows are adjusted for comparison purposes. Intercompany transactions with the discontinued operations are treated as third parties transaction in the continuing operation. The figures for January to June 2022 have been restated for the purpose of comparison. The restatement has no effect on the statement of financial position or consolidated statement of comprehensive income. Further information of the discontinued operation can be found in note 4, Discontinued operations.

Estimation uncertainty, assumptions and judgments

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.

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 associates and joint ventures.

Details of changes in the scope of consolidation in the reporting period are included in note 4, Discontinued operations and in note 5, Business combinations.

Amendments to IFRS

As at 1 January 2023 Galenica adopted the following new International Financial Reporting Standards:

Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of accounting policies
Amendments to IAS 8 - Definition of accounting estimates
Amendments to IAS 12 - Deferred tax related to assets and liabilities arising from a single transaction
Amendments to IAS 12 - International tax reform Pillar Two rules

This changes have 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.

Galenica has applied the exception to recognise and disclose information about deferred tax assets and liabilities related to Pillar Two Global Anti-Base erosion rules in accordance with the amendments to IAS 12, which the IASB published in Mai 2023.

3. Operating segment information

Operating segment information first half of 2023

With the creation of the strategic partnership with Redcare Pharmacy N.V., the business unit Mediservice Ltd. (incl. Curarex Swiss Ltd.) which was part of the Products & Care segment, is presented as discontinued operations. Operating segment information for the previous period has been restated to conform to the new presentation and is line with the internal reporting. As a result, net sales to third parties has decreased by CHF 205.7 million and EBIT by CHF 5.0 million in 2022. Further information of the discontinued operation can be found in note 4, Discontinued operations.

Operating segment information first half of 2023

in thousand CHF	Products & Care	Logistics & IT	Group Services	Eliminations	Galenica Group
Net sales	804,364	1,518,491	25,733	–497,398	1,851,190
Intersegmental net sales	–50,846	–423,283	–23,268	497,398	–
Net sales to third parties	753,518	1,095,208	2,464	–	1,851,190
Other income	3,387	3,995	1,971	–1,183	8,170
Share of profit from associates and joint ventures	2,812	8	–	128	2,948
Earnings before interest, taxes, depreciation and amortisation (EBITDA)	107,842	34,928	1,168	–38 1)	143,900
Depreciation, amortisation and impairment	–34,098	–15,869	–1,530	118	–51,379
Earnings before interest and taxes (EBIT)	73,744	19,058	–362	81 1)	92,521
Interest income					1,057
Interest expense					–3,564
Other net financial result					–471
Earnings before taxes (EBT)					89,543
Income taxes					–15,056
Profit from continuing operations					74,487

Assets	1,807,984	1,048,016	529,011	-576,067 2)	2,808,944
Investments in associates and joint ventures	138,486	91	–	–1,568	137,009
Liabilities	616,713	681,315	728,105	-546,118 3)	1,480,015

Investments in property, plant and equipment	11,552	5,418	1,669	–	18,639 4)
Investments in intangible assets	1,041	14,943	–	–37	15,947 5)

Employees as at 30 June (FTE)	4,081	1,445	232	–	5,758

1) Including the effects of IAS 19 from defined benefit plans and long-service awards of CHF 1.5 million

2) Of which elimination of intercompany positions of CHF -556.5 million and other unallocated amounts of CHF -19.5 million

3) Of which elimination of intercompany positions of CHF -556.5 million and other unallocated amounts of CHF 10.4 million

4) Of which non-cash investments of CHF 0.8 million

5) Of which non-cash investments of CHF 3.8 million

Operating segment information first half of 2022

Operating segment information first half of 2022 (restated)

in thousand CHF	Products & Care	Logistics & IT	Group Services	Eliminations	Galenica Group
Net sales	771,689	1,434,631	22,352	–474,464	1,754,208
Intersegmental net sales	–46,092	–407,347	–21,026	474,464	–
Net sales to third parties	725,598	1,027,284	1,326	–	1,754,208
Other income	3,992	2,962	1,438	–656	7,736
Share of profit from associates and joint ventures	1,937	20	–	62	2,019
Earnings before interest, taxes, depreciation and amortisation (EBITDA)	105,468	40,345	242	1,074 2)	147,129
Depreciation, amortisation and impairment	–32,951	–14,963	–1,062	147	–48,830
Earnings before interest and taxes (EBIT)	72,517	25,382	–820	1,221 2)	98,299
Interest income					387
Interest expense					–2,636
Other net financial result					–129
Earnings before taxes (EBT)					95,920
Income taxes					–16,922
Profit from continuing operations					78,998

Assets 1)	1,784,254	921,458	320,811	-413,699 3)	2,612,825
Investments in associates and joint ventures 1)	33,975	82	–	–1,375	32,682
Liabilities 1)	604,571	524,903	619,655	-385,765 4)	1,363,364

Investments in property, plant and equipment	4,125	13,400	1,127	–	18,652 5)
Investments in intangible assets	769	11,499	–	–70	12,198 6)

Employees as at 30 June (FTE)	3,831	1,377	216	–	5,424

1) Figures as at 31 December 2022

2) Including the effects of IAS 19 from defined benefit plans and long-service awards of CHF 1.4 million

3) Of which elimination of intercompany positions of CHF -395.6 million and other unallocated amounts of CHF -18.1 million

4) Of which elimination of intercompany positions of CHF -395.6 million and other unallocated amounts of CHF 9.8 million

5) Of which non-cash investments of CHF 0.9 million

6) Of which non-cash investments of CHF 1.8 million

4. Discontinued operations

On 30 March 2023 Galenica announced the combination of the business activities of the specialty pharmacy Mediservice Ltd. (including Curarex swiss Ltd.) and the online pharmacy shop-apotheke.ch in a strategic partnership with Redcare Pharmacy N.V. The closing of the transaction occurred on 16 May 2023.

Through the transaction, Galenica sold 51% of the shares of Mediservice Ltd. to Redcare Pharmacy N.V. The total purchase consideration amounted to CHF 215.5 million, consisting of a 6.1% investment in the listed company Redcare Pharmacy N.V., Netherlands with a fair value of CHF 109.5 million and the retained 49% participation in Mediservice Ltd. (including the online pharmacy shop-apotheke.ch) with a fair value of CHF 106.0 million. The 49% participation in Mediservice Ltd. will be accounted for as an investment in an associate.

The purchase consideration is reduced by an estimated amount of CHF 10.6 million which is contingent on net working capital developments as well as certain market developments and will become due between 2023 and 2026. The transaction resulted in a gain on sale of CHF 111.8 million. As the purchase considerations received are non-cash items, the net cash flow from the disposal amounted to minus CHF 2.1 million which includes CHF 1.3 million cash disposed and CHF 0.8 million transaction costs and is shown as net cash flow form sale of subsidiaries in the consolidated statement of cash flows.

With the transaction Galenica lost control over Mediservice Ltd. (including Curarex swiss Ltd.) and therefore deconsolidated the assets and liabilities of the business unit. The business of Mediservice Ltd. (including Curarex swiss Ltd.) represented a separate major line of business for Galenica and was therefore classified as discontinued operations and the prior period was adjusted accordingly.

Gain on sale of discontinued operations

in thousand CHF	16.5.2023
Fair value of received equity instruments	109,456
Fair value of retained at equity investment in former subsidiary	106,011
Contingent considerations	–10,594
Total considerations received / interest retained	204,873

Carrying amount of net assets disposed	–86,776
Transaction costs	–755
Income taxes related to the sale of the discontinued operations	–5,515

Gain on sale of discontinued operations	111,827

The table below shows the financial performance of the discontinued operations.

Statement of income of discontinued operations

in thousand CHF	1.1.– 16.5.2023	1.1.– 30.6.2022
Net sales	164,487	215,250
Other income	18	21
Expenses	–163,238	–210,316
Earnings before tax (EBT) from discontinued operations	1,266	4,954

Income taxes	–251	–828

Net profit from discontinued operations	1,015	4,127

The table below shows the financial position of Mediservice Ltd. (including Curarex swiss Ltd.) at the date of disposal.

Financial position of the discontinued operation at the time of disposal

in thousand CHF	16.5.2023
Cash and cash equivalents	1,330
Trade and other receivables	49,444
Inventories	18,168
Other current assets	2,583
Current Assets	71,525

Property, plant and equipment	681
Right-of-use assets	4,025
Intangible assets	67,517
Financial assets	50
Other non-current assets	43
Non-current assets	72,316

Total disposed assets	143,841

Financial liabilities	24,143
Lease liabilities	647
Trade and other payables	24,817
Other liabilities	1,999
Current liabilities	51,607

Lease liabilities	3,581
Deferred tax liabilities	1,637
Employee benefit liabilities	240
Non-current liabilities	5,458

Total disposed liabilities	57,065

Disposed net assets	86,776

5. Business combinations

In the first half of 2023, the scope of consolidation has changed as a result of the following transactions:

Acquisition of Padma AG. On 30 January 2023, Galenica acquired 100% of the shares in the Swiss company Padma AG. Padma AG is the parent company of the Padma Group with its two operating companies Padma Europe GmbH (Austria based) and Padma Deutschland GmbH (Germany based). Padma specialises in the manufacture and distribution of herbal formulations derived from Tibetan medicine.

The total purchase considerations amounted to CHF 23.3 million, of which CHF 20.9 million was settled in cash. A contingent consideration in the amount of CHF 2.4 million was recognised, which is due in 2026 if certain financial and operational targets are achieved. The fair value of the net identifiable asset amounted to CHF 14.2 million at the acquisition date. The goodwill of CHF 9.1 million was allocated to the operating segment Products & Care and corresponds to added value based on the acquirer-specific synergies expected to arise from the acquisition in expanding its complementary medicine portfolio and expanding its range of reimbursable medicines and the know-how of the employees gained. Transaction costs were not material.

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

The total purchase consideration amounted to CHF 9.7 million, of which CHF 9.1 million was settled in cash. A deferred consideration in the amount of CHF 0.6 million was recognised, which is due in the second half year of 2023. The fair value of the provisional net assets amounts to CHF 0.8 million at the acquisition date. The goodwill of CHF 8.9 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 not material.

Business combinations

in thousand CHF	Padma	Pharmacies	Total
Cash and cash equivalents	3,170	600	3,770
Trade receivables	1,156	210	1,366
Inventories	3,362	676	4,039
Property, plant and equipment	177	–	177
Right-of-use assets	3,815	1,873	5,687
Intangible assets	9,333	–	9,333
Other current and non-current assets	275	88	363
Trade payables	–418	–450	–868
Lease liabilities	–3,815	–1,873	–5,687
Net deferred tax assets/(liabilities)	–1,871	–	–1,871
Employee benefit liabilities	–378	–	–378
Other current and non-current liabilities	–596	–282	–878
Fair value of net assets	14,211	842	15,053
Goodwill	9,074	8,863	17,937
Purchase consideration	23,285	9,705	32,990
Cash acquired	–3,170	–600	–3,770
Deferred consideration	–	–630	–630
Contingent consideration	–2,385	–	–2,385
Net cash flow from current business combinations	17,730	8,476	26,206

Pro forma figures for acquisitions made in the first half of 2023

Since their inclusion in Galenica's scope of consolidation, the businesses acquired contributed net sales of CHF 6.3 million and an operating result (EBIT) of CHF 0.4 million to the Group's results. If these acquisitions had occurred on 1 January 2023, they would have contributed additional net sales of CHF 1.8 million without a material effect on EBIT.

6. Net sales

Net sales first half of 2023

Based on the classification of the business unit Mediservice (incl. Curarex swiss) as discontinued operation, 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. Further information of the discontinued operation can be found in note 4, Discontinued operations.

Net sales first half of 2023

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	599,617	40,534	640,151	264	640,416	599,893	40,523
Pharmacies at Home	36,864	2,197	39,060	–125	38,935	36,738	2,197
Retail (B2C) 1)	636,355	42,731	679,086	265	679,351	636,631	42,719
Products & Brands	89,190	808	89,998	–41,807	48,191	47,383	808
Services for Professionals	30,516	8,108	38,623	–12,664	25,960	24,303	1,656
Professionals (B2B) 1)	119,721	8,905	128,627	–54,476	74,150	71,687	2,464
Products & Care 1)	754,684	49,680	804,364	–50,846	753,518	708,334	45,184
Wholesale	1,452,285	4,999	1,457,284	–398,552	1,058,732	1,054,982	3,749
Logistics & IT Services	169	70,249	70,418	–33,942	36,477	169	36,307
Logistics & IT 1)	1,452,455	66,037	1,518,491	–423,283	1,095,208	1,055,152	40,057
Group Services	–	25,733	25,733	–23,268	2,464	–	2,464
Eliminations 2)	–443,657	–53,741	–497,398	497,398	–	–	–
Galenica Group	1,763,482	87,708	1,851,190	–	1,851,190	1,763,482	87,708

1) Including eliminations of intercompany net sales

2) Eliminations of intersegmental net sales

Net sales first half of 2022

Net sales first half of 2022 (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	590,444	37,503	627,947	–12	627,935	590,432	37,503
Pharmacies at Home	35,076	2,273	37,349	–188	37,161	34,888	2,272
Retail (B2C) 1)	625,417	39,776	665,192	–97	665,096	625,321	39,775
Products & Brands	74,136	960	75,097	–38,302	36,794	35,834	960
Services for Professionals	27,075	7,169	34,244	–10,660	23,584	21,672	1,913
Professionals (B2B) 1)	101,250	8,091	109,341	–48,963	60,378	57,506	2,873
Products & Care 1)	725,103	46,586	771,689	–46,092	725,598	682,850	42,748
Wholesale	1,374,463	4,963	1,379,426	–385,819	993,607	990,615	2,991
Logistics & IT Services	325	63,469	63,794	–30,117	33,677	324	33,353
Logistics & IT 1)	1,374,789	59,841	1,434,631	–407,347	1,027,284	990,940	36,344
Group Services	–	22,352	22,352	–21,026	1,326	–	1,326
Eliminations 2)	–426,104	–48,361	–474,464	474,464	–	–	–
Galenica Group	1,673,789	80,419	1,754,208	–	1,754,208	1,673,789	80,419

1) Including eliminations of intercompany net sales

2) Eliminations of intersegmental net sales

7. Fair values of financial assets and financial liabilities

Fair value

		30.06.2023		31.12.2022
in thousand CHF	Carrying amount	Fair value	Carrying amount	Fair value
Bond (fair value level 1)	419,872	419,820	380,194	370,830

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

As per 30 June 2023 Galenica holds equity instruments designated at fair value through other comprehensive income including a 7.9% (previous year: none) investment in the listed (level 1 of the fair value hierarchy) company Redcare Pharmacy N.V., Netherlands, with a fair value of CHF 148.8 million (previous year: none) and other investment in non-listed (level 3 of the fair value hierarchy) companies with a fair value of CHF 6.3 million (previous Year: CHF 4.6 million). These investments were irrevocably designated at fair value through other comprehensive income as Galenica considers these investments to be strategic in nature. Galenica recognised in the consolidated statement of comprehensive income a remeasurement gain of CHF 10.6 million (previous year: none).

Fair value of financial instruments (level 3 of the fair value hierarchy)

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

in thousand CHF	30.06.2023	31.12.2022
1 January	49,180	24,000
Arising from business combinations	2,385	26,256
Change in fair value (recognised in profit and loss)	–2,061	–1,077
30 June / 31 December	49,504	49,180

Fair value of equity instruments designated at fair value through other comprehensive income (level 3 of the fair value hierarchy)

in thousand CHF	30.06.2023	31.12.2022
1 January	4,561	–
Addition	1,950	4,561
Change in fair value (recognised in other comprehensive income)	–193	–
30 June / 31 December	6,318	4,561

Fair value and sensitivity analysis of contingent consideration liabilities from discontinued operations

Determining the contingent consideration liability in connection with the sale of Mediservice forecasted gross margin and further development of net working capital of the discontinued operation were identified as key assumptions. Galenica has recorded the amount of CHF 2.9 million as other liability based on the expected future gross margin for the years 2024-2026. The future cash outflows range between zero and CHF 3.1 million. Furthermore, Galenica has recorded the amount CHF 7.7 million as other liability based on the expected further development of the net working capital of the discontinued operation which will be due in the second half year of 2023. Further information of the discontinued operation can be found in note 4, Discontinued operations.

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

in thousand CHF	Lifestage Solutions	Bahnhof Apotheke Langnau	Aquantic	Padma
Fair value of contingent considerations	20,914	22,916	3,275	2,399
Minimal payout	–	–	–	–
Maximal payout	24,000	29,000	5,500	4,000
Key assumption	forecasted net sales 1)	forecasted net sales 1)	forecasted EBITDA 1)	forecasted sell out prices 1)
Year of relevance	2024	2026+2027	2025+2026	2025
Sensitivity analysis
Impact on fair value by 5% increase of key assumption	2,220	2,000	400	1,000
Impact on fair value by 5% decrease of key assumption	–2,220	–2,000	–400	–1,000

1) of the acquired business

8. Contingent liabilities and commitments

In March 2017, the Swiss Competition Commission (COMCO) issued a ruling, which imposed a fine of up to CHF 4.5 million on Galenica. The ruling relates to an investigation from 2012. Galenica regards the ruling issued by COMCO as incorrect in fact and in law. Galenica has taken the ruling to the Federal Administrative Court. With a decision delivered in February 2022, the Federal Administrative Court reduced the fine to around CHF 3.8 million. Galenica has taken this case to the Swiss Federal Supreme Court. Although the case is still pending before the Federal Supreme Court, COMCO obliged Galenica to pay the CHF 3.8 million penalty in June 2023 and therefore Galenica expensed the amount. Galenica remains confident of winning the case before the Federal Supreme Court.

In September 2020, the Swiss Competition Commission (COMCO) opened an investigation against Markant Handels- und Industriewaren-Vermittlungs AG and its customers, inter alia Galexis Ltd. The COMCO secretariat presented its preliminary findings at the end of June 2023. On this basis, Galenica estimates the amount of a possible sanction, including legal costs, to be around CHF 3.5 million. As Galenica remains convinced that a sanction is not justified, Galenica will not raise a corresponding provision until further notice.

9. Subsequent events

The following business combinations occurred between 30 June 2023 and 7 August 2023, the date that the consolidated interim financial statements were released for publication.

Acquisition of pharmacies. Galenica signed contracts to acquire 100% of the interests in pharmacies at various locations in Switzerland. The net assets of these acquisitions will be consolidated beginning on the date control will be obtained. The total purchase considerations is estimated to CHF 11.1 million and are due with the closing of the transactions. Since the transactions were not concluded yet, it is not possible to disclose the additional information required by IFRS.

There were no further significant events after the reporting date.