Management report - Galenica Group
The growth of sales of the Galenica Group in the first half of 2023 was pleasing, rising by 5.5% to CHF 1,851.2 million.
Impact of the joint venture with Redcare Pharmacy N.V. on the 2023 half-year financial statements
With the implementation of the joint venture with Redcare Pharmacy N.V. (formerly Shop Apotheke Europe N.V.) mid-May 2023, Galenica deconsolidated Mediservice Ltd. The sales and costs of Mediservice Ltd. are therefore no longer included in the income statement of the Galenica Group. In order to improve the comparability of the figures and in accordance with IFRS, the comparative period, that of the first half of 2022, has been adjusted accordingly.
As a result, Galenica Group sales decreased by 10.5% to CHF 1,754.2 million and sales of the “Products & Care” segment by 21.8% to CHF 771.7 million.
Adjusted1 EBIT of the Galenica Group fell by 5.0% to CHF 95.0 million and EBIT of the “Products & Care” segment by 6.6% to CHF 70.8 million.
The detailed adjustments from the comparative period of the first half of 2022 are presented in Note 4 (Discontinued operations) to the 2023 consolidated interim financial statements.
The new joint venture is included in the consolidated financial statements at equity from the time of completion of the transaction mid-May 2023. The balance sheet values for the comparative period as of 31 December 2022 were not adjusted as a result of the transaction.
As a result of implementation of the transaction, the Galenica Group recorded a high extraordinary profit of CHF 112.8 million.
This is reported separately in the income statement as profit from discontinued business activities and has no effect on cash. The profit arose primarily from the sale of Redcare Pharmacy N.V.'s 51% stake in Mediservice Ltd., the revaluation of Galenica Ltd.'s 49% stake in Mediservice Ltd., and the price gain on the shares of Redcare Pharmacy N.V. received in return from the time of signing at the end of March 2023 until completion of the transaction in mid-May 2023.
Galenica Group CHF 1,851.2 million
Galenica Group CHF 90.2 million
Galenica achieves strong sales growth in the first half of 2023
Galenica Group net sales developed positively in the first half of 2023 with a growth of 5.5% to CHF 1,851.2 million. Growth in the first half of 2023 was driven in particular by the “Logistics & IT” sector, which achieved growth of 5.8% to CHF 1,518.5 million. The “Products & Care” segment also performed well with sales growth of 4.2%, supported by the strong performance of 19.8% in the “Products & Brands” sector.
Adjusted for the exceptional sales related to COVID-19 (self-tests, COVID vaccinations and rapid tests) in the prior year period, growth of the Galenica Group amounted to 6.6%, with COVID-19-adjusted growth in the “Products & Care” segment at 5.7% and in the “Logistics & IT” segment at 6.8%.
By way of comparison, the Swiss pharmaceutical market grew by 6.0% in the reporting period. This growth was driven by increased sales of high-priced medications, with sales volumes growing by just 2.3% (IQVIA, Pharmaceutical Market Switzerland, first half of 2023).
The adjusted1 operating result (EBIT) of the Galenica Group, i.e. excluding the effects of the IFRS 16 (Leases) and IAS 19 (Employee Benefits) accounting standards, fell by 5.1% to CHF 90.2 million. The adjusted1 return on sales (ROS) fell year on year from 5.4% to 4.9%. Reported EBIT decreased by 5.9% to CHF 92.5 million.
This negative EBIT development was due to special factors totalling CHF 9.8 million. Adjusted for these special factors, adjusted1 EBIT would have increased by 5.2%.
Firstly, an extraordinary expense of CHF 3.8 million had to be recognised at HCI Solutions in respect of a well known ruling issued by the Swiss Competition Commission (COMCO) in 2017. Further information on this case can be found in this half year report and in the 2022 Annual Report.
In addition, extraordinary allowances on customer receivables of around CHF 6.0 million occurred in the first half of 2023, especially in the wholesale business with physicians.
The special factors impacted EBIT in the “Logistics & IT” segment. Adjusted1 EBIT fell by 25.1% to CHF 19.0 million. Adjusted for these exceptional charges, a very pleasing EBIT growth of 13.4% would have resulted. The EBIT margin could have been increased from 1.8% in the previous year to 1.9%.
With an increase of 3.2% to CHF 73.1 million, EBIT in the “Products & Care” segment remained slightly below the sales performance of +4.2%. The EBIT margin fell accordingly from 9.2% to 9.1%. The additional costs resulting from important measures to combat the shortage of skilled workers, such as wage increases and staff expansion, as well as investments in the digital omni-channel infrastructure, could not be fully compensated by the growth in sales.
The Galenica Group’s profit from continuing operations amounted to CHF 74.5 million (-5.7%, first half of 2022: CHF 79.0 million). On a comparable basis, adjusted1 net profit amounted to CHF 73.7 million (-4.5%, first half of 2022: CHF 77.2 million). Investments in the first half of 2023 amounted to CHF 34.6 million (first half of 2022: CHF 30.8 million). They were mainly attributable to the introduction of the new ERP (Enterprise Resource Planning) system at Galexis, the rebuilding and renovation of pharmacies and other operational sites, and investments in the development of the digital infrastructure in connection with the strategic “Omni-Channel” programme.
The Galenica Group’s balance sheet remained strong. Adjusted1 shareholders’ equity increased compared to 30 June 2022 to CHF 1,349.3 million (+14.2%), positively impacted by the transaction gain of CHF 112.8 million in connection with the establishment of the joint venture with Redcare Pharmacy N.V. However, adjusted1 net debt, i.e. excluding leasing liabilities, increased by CHF 100.2 million compared to the end of June 2022 and amounted to CHF 502.5 million, which corresponds to 2.1× adjusted1 EBITDA. The increase in net debt can be attributed in particular to the ordinary investments in non-current assets, the establishment of the strategic investment in Redcare Pharmacy N.V., acquisitions of subsidiaries and the building up of stocks to ensure the ability to deliver and guarantee security of supply for medications.
Adjusted1 operating cash flow was negative at CHF 21.0 million due to the increase in net working capital (first half of 2022: CHF +13.0 million). In addition to the growth effect and the aforementioned increase in stock, the increase in net working capital is primarily due to seasonal effects. Free cash flow after acquisitions amounted to CHF -81.7 million (first half of 2022: CHF -34.7 million).
Due to the special factors of CHF 9.8 million in the first half of 2023, Galenica is lowering its EBIT guidance for 2023 and now expects adjusted1 EBIT to be roughly at the prior-year level based on the adjusted prior-year figures. Galenica previously assumed EBIT growth of between 4% and 7%.
On the other hand, Galenica confirms its 2023 outlook for consolidated sales (growth between 3% and 6%) and dividends (at least at the same level as the previous year).
1) Excluding the effects of IAS 19 and IFRS 16. See chapter “Alternative performance measures”.