Edited Transcript of GALE.S earnings conference call or presentation 4-Aug-20 12:00pm GMT

BERN Aug 5, 2020 (Thomson StreetEvents) — Edited Transcript of Galenica AG earnings conference call

BERN Aug 5, 2020 (Thomson StreetEvents) — Edited Transcript of Galenica AG earnings conference call or presentation Tuesday, August 4, 2020 at 12:00:00pm GMT

UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst

Bank Vontobel AG, Research Division – Executive Director, Head of Life Sciences Team & Pharmaceutical Analyst

Ladies and gentlemen, good afternoon. I cordially welcome you to the telephone conference on Galenica’s Half Year Results 2020. In the first part, we will present you the highlights and the key figures. After that, we will be happy to answer your questions. By we, I mean our new CEO, Marc Werner; and myself, Felix Burkhard, the CFO.

With that, I hand over to Marc.

Thank you, Felix. Ladies and gentlemen, also from my side, I would like to welcome you at this conference. As Felix mentioned, this is my first conference with Galenica, and I’m very much looking forward to this [excellent result].

I will start with a few key figures on the first half year, not just in IFRS numbers, but also some specific numbers from COVID-19. Then I would like to say a few [personal] about my first month at Galenica and, to conclude, give an insight into the current strategic considerations and work.

So let’s start. COVID-19 accelerated our business development in terms of sales during the nationwide lockdown, but also in the weeks after. On the one hand, at the Retail Business sector, but especially at the Products & Brands Business sector.

In terms of EBIT, due to additional costs, for example, additional investments in protecting employees and customers as well as additional staff and high degree of coordination and organization. Also, we have had some projects postponed.

For example, the U.S. launch activities of the Verfora innovation practice had to be canceled, with some delays in ongoing projects, for example, delay in terms of the construction work at the Galexis distribution center in Lausanne or regarding planned pharmacy conversions and [divestments]. However, the way we dealt with these challenges was the highlight for the entire management, and especially for me as a newcomer.

While a few facts to show the uniqueness of the situation. Handling of never-before-seen volumes at Galexis, on certain days, volume were 60% higher than the previous year. Despite the massive additional workloads, the basic supply of medications in Switzerland was ensured or had on time. Thanks to the great and flexible commitment of our own employees, customers have hardly observed the capacity limits and distribution centers were increased.

Sales by digital channels increased strongly, up to 220% during the lockdown, creation of stronger links between online and offline world with home delivery services via Click & Collect. With these measures, we could give our customers the possibility to procure their medicines on the way, which was trying for them in this situation.

Or finally, the Bichsel Group was classified as systemically important company by the Federal Office for National Economic Supply for its production of infusions and irrigation solutions as well as disinfectants, especially for hospitals. By the way, both our pre-wholesale company, Alloga, as well as the wholesaler, Galexis, are systemically important companies, too.

Considering the challenges that COVID-19 brought with it, as well as offline finances, too, such as the officially imposed price reductions, I can say that we can be very proud of our results. Of course, Felix will go into all detailed numbers later on.

As said at the beginning, a few current figures, which would have no relevance in a normal half year report. For example, the Retail Business sector saw a high need for fast information. Precise discussions, especially regarding security measures for employees and customers, were required.

On average, companies were provided with the latest developments and informations once a day. Major investments were done in security measures, such as plexiglass, safety barriers, dispensable disinfection products and masks. Finally, we saw a huge increase in demand for online offerings.

And some more COVID-19 figures. Generally speaking, the market growth was driven by higher product sales in connection with COVID-19, such as product to preventively boost immune system and disinfections. Within Verfora’s broad and balanced range, some product areas were in higher and other in much lower demand due to COVID-19. Demand for individual products, in particular, disinfectant products from Septo Clean, jumped almost overnight.

As a result, the demand for hand cream also increased. In our example, Eubos, with plus 49%. In contrast, other products suffered from the lockdown. Algifor recorded an initial high increase in sales. However, demand declined sharply in the second quarter. Anti-Brumm, which is typically part of a travel first aid kit, suffered from the lockdown, with minus 25%. And also Perskindol was negatively impacted by lower frequencies in pharmacies, with a sales decline in March by minus 14%.

And the last slide is COVID-19-specific figures. The increase in online orders at the pharmacy e-shops is also reflected in the Services Business sector. At Unione Farmaceutica Distribuzione, where online orders are prepared and sent. Galexis, too, unprecedented figures. On certain days, volumes were 60% higher than in the previous year period, and the number of packages per day increased from 150,000 on average, up to 700,000 a day.

To best manage these volume peaks and ensure the security of supply of medication for the population, extra shifts, Sunday work and the strengthening of logistics by administrative staff were required. In addition, operations and distribution center in Lausanne-Ecublens were ramped up again for a short period, even though work on the renovation and modernization had already started.

A short summary from my side of this special first half year 2020, which, I guess, we will remember forever. During this period, Galenica has demonstrated how stable and reliable we are, and how we are able to make an important contribution to health care in Switzerland at all times, even in difficult and volatile times. It has also shown that our strategic priorities are the right ones. The online offerings, but also Click & Collect and home delivery, have been important elements in these months. And they have all absorbed the following increase in volumes.

Also in COVID-19 times, the normal business continues, of course. Even despite the strong additional burden of the corona pandemic, we successfully further developed our operational business. The pharmacy network was extended by 6 new locations. In fact, we acquired 5 pharmacies and opened new ones. As part of the optimization of the network, 4 locations were closed, resulting in the net expansion of 2 POS.

In spring, the pilot with the new mail-order pharmacy called Vitality was initiated. Through this new service, pharmacies can also send prescription medicines to their customers at home. In the future, not only MediService, but also the other pharmacy formats, are allowed to send prescription medicines.

Verfora also strengthened its position in the period under review, thanks to new distribution partnership with Angelini Pharma for the brand Bucco Tantum and Thermacare, as well as with the Institut Allergosan for Omni-Biotic. Finally, the acquisition of the Hedoga Group as of July 2020 adds well-known complementary brands in the current portfolio and enables Verfora to consolidate its leading position in the Swiss market.

A brief outlook on business 2020. Within the Retail Business sector, we will continue to further develop our pharmacy network. We keep our guidance of 5 to 15 new pharmacies per year. 3 new pharmacies have already been integrated as of July 2020, including the well-known Adler pharmacy in Winterthur, which very successfully operates its own online shop and has a mail-order license.

In parallel, we want to consistently expand the digital market presence by improving the online offering, increase the user friendliness and all the services in the back office. This also includes the initial pilot in spring 2020 with a new mail-order pharmacy of Coop Vitality that will be followed by the broad launch of the new mail-order pharmacy for Amavita. Therefore, we focus its attention in the second half of the year on integrating the new distribution products and, in particular, the Hedoga Group. Furthermore, Vita-Merfen will be relaunched on the market.

Alloga will focus on continued ERP implementation. And based on their experiences, implementation is also being started at Galexis. At the same time, consumption work at the Galexis distribution center in Lausanne-Ecublens is being continued.

They were my comments on the first half year, with the focus on COVID-19 and business outlook.

I continue with the information about the change in the executive board. After 14 years of service, Christoph Amstutz has decided to gradually withdraw from the operational business to allow him to focus more on his activities outside the Galenica Group. Chris has joined the company in 2010 with the acquisition of Globopharm. He was appointed Head of Alloga in 2011; and 2015, Head of Service Business and Head of Galexis. Since the IPO in 2017, he was also a member of the group executive board.

Until the end of 2020, Christoph can support Andreas Koch during the induction to his new role and will continue to hold individual mandates for Galenica until he takes early retirement at the end of 2021. Even though we have only been working together since April this year, I would like to thank Christoph very much for his support and his long-standing commitment for the company.

Andreas Koch will take up his assumption as Head of Service Business sector, as a member of the group executive board on 1st September, while continuing to head Galexis. Andreas joined the Galenica Group in 2009 and headed up the supply chain management of Galexis. Later on, he also performed this role at Alloga. In 2015, he took over as Head of Alloga, and he has been Head of Galexis since 2019.

I’m very pleased that Andreas joined the executive board. He’s logistics specialist with many years of experience and extensive knowledge of the Swiss health care market. In addition, he’s transferring over expertise, complemented by strong affinity for technological and digital change, as Andreas will need to further develop the activities of the Services Business sector, in line with the group strategic priorities.

Thank you, Christoph, and welcome on board, Andreas.

And today is my first official conference at Galenica. I would also like to introduce myself a little bit more personally and to say a few words about myself. I started the end of the last millennium in a small interim startup, which had just been taken on by Swisscom. I was able to make wonderful journey within the Swisscom Group, holding many different positions.

For the last 8 years, I have been a member of the Group Executive Board at Swisscom, responsible for the B2C and the SME business. And one day, you celebrate your 50th birthday. At that moment, I had almost 20 years of Swisscom behind me, and I started to think about certain things.

My conclusion was that I wanted to do something else in my life. It was clear that it had to be something that had a social benefit, a social relevance. And what would be better than health care? And what could be better than Galenica?

Galenica is a key player in the Swiss health care market, with proven track record, impactful business model and based on an excellent strategic and financial foundation. I’m very proud to be part of the Galenica family. And I’m very pleased to lead the company into the future, together with a highly professional and committed team, a future that will bring many changes.

Change in itself is nothing new, but the speed of technological and digital development and the speed at which customer needs and behaviors change is increasing rapidly. It is also a challenge for Galenica, which brings me finally to a few strategic considerations that I would like to share with you.

In the first weeks, I have dealt very intensively with the growth strategy, marked a conclusion. Galenica has a proven strategy, a company that has built up a strong position in the market over many years, a company networking all playing (inaudible). My job is, together with the Galenica team, to further develop this strong base so that Galenica is poised for the future and can continue to observe itself so successful and continue to play important and central roles in the Swiss health care market.

How do we stay fit for the future? I first studied existing strategies intensively, trying to understand also at many discussions with many people. Furthermore, together with my colleagues of the group executive team, we analyzed and categorized the existing strategic projects. Then based on the previous and existing strategic work, we defined which areas and activities we have to give more or additional priority in order to achieve our short, medium and long-term business goals. The result of these considerations is a demand to work on 4 strategic programs.

First, and with great priority and focus on the omnichannel program. Secondly, we see in the field of care, order work for care or, for example, patient journey, services journey or care services, a great potential to use our skills and our infrastructures even better.

Digital programs are mainly confirmed with patient and end consumer or B2C business. However, let’s not forget that Galenica originally came out of the B2B business that still plays an important and strong role. In order to manage this business even better and to understand it potentially even better, we defined the strategic program professionals.

And last but not least, efficiency. It is an ongoing theme for every company and every management team. In this program, we want to deal with technological and conventional efficiency and define and implement appropriate message.

It is what we want to do and where we want to focus our efforts. Several initiatives and projects, such as the omnichannel program, are not new. However, from now on, all strategic projects, those already underway and new ones, will be integrated in the framework of these 4 strategic programs.

As I said at the beginning, Galenica has a good and proven strategy. It is important to prioritize, adapt and focus and to pay attention on the implementation. The best strategy is only as good as its implementation and then comes the how part. That’s the transformation and organizational development part.

As I said at the beginning, the world is changing rapidly. Customer needs are changing. Technology is changing. Within Galenica as an organization, we must be prepared to shape, exchange, to play an active role in order to avoid being shaped. It’s not topics like consistent growth and customer retention, it’s not topics like digitization, it’s not things like edge aggregation, time to market and so on, which is the how part.

So that’s it from my side. I’m looking forward to the exchange with you all, today or in the future, and thank you very much for your attention. I would now like to hand over to the CFO, Felix Burkhard.

——————————————————————————–

Felix Burkhard, Galenica AG – CFO & Head of IR [3]

——————————————————————————–

Thank you, Marc. Marked by the coronavirus pandemic, we had an extraordinary and challenging first half year. When we look at the results, we can proudly say that we have performed very well. Not only in operational terms in the pharmacies and operations, as Marc has already explained, but also financially. We were able to achieve strong sales growth of 5.6%. Despite COVID-19 burdens, adjusted operating profit improved by 3%. And last but not least, we generated a positive free cash flow, thereby further strengthening our already solid balance sheet.

Now let’s first look at how the corona pandemic has affected the market’s development. The pharmaceutical market as a whole grew by 2.9% in the first half of 2020. In contrast to the previous years, the hospital channel and the physicians channel did not grow faster than the rest of the market at 3.5% and 2.1%, respectively. This is an indication of the reduced and postponed surgeries and interventions in the hospitals and with physicians due to COVID-19. This assumption is supported by the decrease in volumes in these channels.

The pharmacy channel grew by 2.8% in value and by 2% in volume. Interestingly, mail-order pharmacies could not benefit from COVID-19. On the contrary, the mail-order channel declined both in value by 1.7% and in volume by 1.3%. Obviously, patients remained loyal to their local pharmacy even during the coronavirus pandemic. Stationary pharmacies grew by 3.3% in value and by 2.1% in volume.

These market figures actually look rather unspectacular overall, but how they came about is indeed spectacular. On this chart, you can see the development of the total market per month compared to the previous year. The massive outbreak in March due to the announcement of the lockdown was truly extraordinary. Equally exceptional was the downturn in April due to the lockdown and the sharp reduction in activity in hospitals and doctor surgeries.

In June, the market as a whole returned to normal. The additional sales of March were fully compensated for in April and May. The consumer health care markets grew by 3.9% in the first half of 2020. With the exception of personal care products, which suffered heavily from the lockdown, all product categories grew strongly.

Growth in the large OTC segment was driven by prevention products, such as vitamins, minerals and disinfection products, whereas cough and throat remedies and masculine joint pain relievers lost sales in the market. The categories patient care and nutrition were boosted by COVID-19-related products, such as protection masks, thermometers and healthy food.

Let us now move to the Galenica performance. As Marc has already pointed out, with 5.6%, Galenica posted significantly stronger growth than the market. This performance was possible, thanks to the strong growth of 7.9% in the Services Business sector. In order to understand sales development of the first half year, we have to analyze this period at Business Sector level. So let’s look in the details.

Net sales in the Retail Business sector grew by 2.9%. This was due in particular to the pleasing expansion with a total impact of 4.3%. The Bichsel Group, acquired on 1st May 2019, contributed with 3.2%, the largest share. Organic growth, excluding expansion effect, was minus 1.4%. Excluding the impact of the government-mandated price reduction measures for medications, which had a negative effect of 1.9%, organic growth would have been plus 0.5%.

In addition, the sales development in the first half year was burdened by a onetime effect. As a part of process optimization, various intra-group commodity transactions were discontinued at the beginning of 2020, which reduced sales of the Retail Business sector by around 1.3% year-on-year. Without price reductions and this onetime effect, organic growth would have been a pleasing 1.8%.

The coronavirus pandemic had an estimated 1% negative impact on net sales in the Retail Business sector. The massive additional sales in the Amavita and Sun Store pharmacies in March were more than compensated for by midyear. This was due to the lockdown, with the temporary government-imposed closure of the perfumery department and the drop in customer frequency, particularly in pharmacies in shopping centers, railway stations and airports.

On the other hand, the good tripling of the online sales of the Amavita and Sun Store web shops and a pleasing 3.2% growth in specialty pharmacy, MediService, compensated for this decline in sales and contributed 1.3% to sales growth. In contrast to the other pharmacies, the sales of pharmacies in high-frequency locations in airports and railway stations have not yet returned to normal, even in the middle of the year. They are still significantly below the pre-corona level.

These high-frequency pharmacies generate a share of sales of about 10% of all Amavita and Sun Store pharmacies. We expect that the situation in these high-frequency locations will only slowly return to normal in the coming months. This is the main reason why we are reducing the EBITDA outlook for the whole of 2020.

The Products & Brands Business sector grew slightly by 1%. The sales growth is based on the strong development of the export business, with a growth of 14%, driven by stockpiling of Perskindol, in view of the introduction of the new Medical Device Regulation in the EU. In the challenging environment of COVID-19, sales in Swiss markets declined by 2.6%, despite encouraging pharmacy, in particular, the successful launch of the distribution of Omni-Biotic contributed positively to sales growth.

However, as already explained by Marc, the corona pandemic has left clear traces in the sales development of the Products & Brands Business sector. The various beauty products, but also other products such as Itinerol, Anti-Brumm or Perskindol lost sales. The Services Business sector posted very strong growth of 7.9% in the first half of 2020. Even without the technical onetime effect of 1.9%, growth was very high at plus 6%.

In connection with the new ordinance on integrity and transparency in the field of therapeutic products, agreements with suppliers as well as invoicing models were revised, in line with the new transparency obligations. These adjustments increased the sales in the Services segment by plus 1.9% without affecting the result. Consolidated sales at group level were not affected by this technical effect either.

Additional sales due to the corona pandemic contributed an estimated 3% to sales growth. Growth was again slowed down by government-mandated price reductions, with an impact of minus 1.8%. In particular, wholesale sales to physicians developed very dynamically at plus 10.4%. Market shares were gained, especially among specialists, although this was largely due to high-priced but low-margin products.

Wholesale deliveries in the pharmacy market also grew strongly at 5.9%. Around half of this growth was achieved, thanks to the expansion of the pharmacy network in the Retail Business sector, with independent third-party customers contributing the other half.

Let us now move on from the sales figures to the results. EBITDA improved by 2.1% year-on-year. Reported EBIT was slightly lower than in the previous year at minus 0.6%. The reported results are affected by the employee benefit accounting standard, IAS 19, and the lease accounting standard, IFRS 16, from a purely technical, that’s not from an operational point of view.

And that leads me to the reconciliations to the adjusted key figures that best reflects our operating performance. IAS 19 had a negative impact of CHF 2.4 million on earnings in the first half of the year. This is an additional booked personnel expense due to lower discount rates, which will in no way lead to additional operating costs.

In the adjustment, we are charging EBITDA with rental payments again, which are, of course, very relevant in the retail business, in particular, and have increased year-on-year due to the expansion of our pharmacy network. At EBIT level, only the interest effect from IFRS 16 needs to be adjusted. The depreciation on the right-of-use assets is already included in the reported EBIT.

Both EBIT and EBITDA developed well on an adjusted basis. Despite COVID-19 burden, we achieved pleasing results with an EBIT growth of 3%. Due to a nonfavorable development of the sales mix and COVID-19-related costs, the EBIT margin decreased from 5.1% to 4.9%.

The strong sales growth was achieved in Service Business Sector with the lowest EBIT margin, whereas the Products & Brands Business sector with the highest EBIT margin may — hardly grew at all. In addition, earnings in all business sectors were negatively impacted by additional costs incurred in coping with the corona pandemic.

The Health & Beauty segment was able to improve EBIT by 2.5% in parallel with sales, thereby maintaining the EBIT margin at the high 7.7%. This is a very pleasing result in view of the missing sales, particularly of beauty product and in the pharmacies at high-frequency locations, as well as the additional costs incurred to protect employees and customers and to maintain operations during the coronavirus pandemic.

In the Services segment, we were not successful in increasing EBIT despite strong sales growth, which is why the EBIT margin declined from 1.9% to 1.8%. However, we can present this result positively without hesitation. EBIT was maintained at the previous year’s level despite significant additional costs due to COVID-19 and the renovation and modernization of the distribution center in Lausanne-Ecublens.

This project was launched in the second half of 2019 and, therefore, did not yet affect the prior year period. In addition, a large part of the growth was achieved by specialists with high-priced but low-margin medicines.

Last but not least, higher costs for IT security should also be mentioned. We have taken additional measures to protect our IT infrastructure and networks in response to the constantly increasing risks associated with cybercrime. In summary, a good result in a very challenging environment.

Let’s move on from operating results to financial results. We note the positive development in the first half of 2020, both financial and tax charges, decreased compared to prior year. Taxes include CHF 0.7 million reduced expenses due to changes in tax rates. Without this effect, tax rate would be at 17.9%, a rate that seems sustainable from today’s perspective.

Thanks to the solid operating result and the positive development of financial and tax expenses, the reported net profit increased by 2.2% to CHF 66.3 million. On a comparable basis, excluding the effects of IAS 19 and IFRS 16, net profit even grew by a good 5.3%. We continued to invest for the future. Investments rose slightly year-on-year to CHF 26.7 million. This figure now also includes investments in the renovation and modernization of the distribution center in Lausanne-Ecublens. COVID-19 is causing delays of several months in the strategic efficiency projects in the Services Business segment.

Regarding the introduction of the new ERP system in the wholesale and prewholesale business, we currently expect the project to last until 2023, with investments to be made of around CHF 13 million. Regarding the renovation and modernization works at the distribution center in Lausanne-Ecublens block, there will be extends to 2022, with investments to be made of around CHF 22 million.

That brings us to cash flow. Cash flow from operating activities before changes in net working capital, adjusted for payment of lease liabilities, decreased by CHF 1.7 million to CHF 94.3 million. As in the previous year, the cash flow was burdened by an increase in net working capital of CHF 53.9 million in the first half year. Due to very strong sales in December 2019 net working capital was exceptionally low at the end of 2019. Together with the fact that for seasonal reasons net working capital is always slightly higher at the midyear than at the end of the year, this led to this imported cash outflow of CHF 53.9 million.

We expect this counter movement in net working capital also at the end of the year, although due to seasonal factors, to a lesser extent than in the first half year. Despite this increase in net working capital, a positive free cash flow of CHF 16 million remains. At CHF 406 million, net debt, excluding lease liabilities, corresponds to 1.9x adjusted EBITDA compared with 2x a year ago. Including lease liabilities, debt coverage even decreased by 0.2x to 2.4x EBITDA. Despite the coronavirus pandemic, we continue to have a strong balance sheet with a high degree of financial flexibility.

Let me conclude my presentation with the outlook. We expect the situation at high-frequency locations such as airports and railway stations, to return to normal only slowly over the coming months. On the other hand, we continue to expect a positive development in the Services Business sector, although at a somewhat flatter rate than in the first half of 2020. The pleasing expansion at mid-year with the Hedoga Group and Thermacare in the products and brands business sectors and several new pharmacies in the retail business sector will continue to support sales in the second half of the year. On this basis, we are raising our sales outlook from 2020 from 1% to 3% up to new plus 2% to plus 5%.

In view of the results achieved in the first half of 2020 and the ongoing COVID-19 impact, especially at high-frequency locations, we reduced the outlook for operating profit and now expect adjusted EBIT to remain at approximately the prior year level compared to plus 3% to plus 6% before. Against the background of the strong balance sheet and the positive results, we maintain our guidance to propose the 2021 General Meeting a dividend for the financial year 2020 at least at the previous year’s level.

This concludes my comments on the first half year results. Thank you for your attention. Now we are happy to answer your questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) You already have a first question coming from Jan Koch.

——————————————————————————–

Jan Koch, Deutsche Bank AG, Research Division – Research Analyst [2]

——————————————————————————–

This is Jan Koch from Deutsche Bank. I have 2, please. Firstly, on your largest pharmacy, Bahnhof Apotheke Zurich, you have moved the pharmacy temporary to a new location for the next 3 years. Ignoring COVID-19, could this have a negative impact on frequency and therefore, on sales over the next few years?

And secondly, with regard to the sales generated by your online web shop in H1, is CHF 12 million a fair assumption? And could you share your expectations for the next 18 months?

——————————————————————————–

Felix Burkhard, Galenica AG – CFO & Head of IR [3]

——————————————————————————–

Thank you, Jan, for these questions. Let’s first start with Bahnhof Apotheke Zurich. In March, they moved into the provisional location in the Bahnhof in the main station in Zurich because of the construction work, which will last that you mentioned until 2023. It’s clear that on top of the COVID-19-related drop in customer frequency. This transferred into a provisional location on top of COVID-19 led to additional loss in frequencies.

Now as in other railway station locations, the sales already improved in the last month. And as mentioned, we believe that over the next months, only slowly, the situation should return to a normal situation. But it’s clear until 2023, we will continue to feel the impact of the provisional location compared to the location before and after the transformation.

With regard to online sales. You remember last year, we said that the online sales, the sales of the web shops of Amavita and Sun Store, that they were in the range of a large pharmacy. Now we said that we tripled the sales. That means you can compare the sales, the online sales with 3 large pharmacies, which is, let’s say, a low double-digit million amount on an annual basis. So your assumption is not wrong. It’s even, I would say, at the lower end.

——————————————————————————–

Operator [4]

——————————————————————————–

Next question is coming from Maja Pataki.

——————————————————————————–

Maja Pataki, Kepler Cheuvreux, Research Division – Head of Med Tech Devices Sector [5]

——————————————————————————–

I have 2 questions relating to online as well. I was just wondering if you could give a bit more explanation or color on why you think the online’s — the performance of the online sales for the market were negative. And with that, when you talk about the significant growth that you see in your online services, is that comparable like apples-to-apples? Or is there something different that it is more like a Click & Collect, which is now a home service, and therefore, one should not put it in the same category?

Second question relating to online services. I mean we have seen with COVID-19 definitely that there is a certain need for online services also beyond the Rx products. Do you think that this is going to cause an acceleration in the legislative change, which allows online sales of OTC products? And if yes, what would that mean for you?

——————————————————————————–

Marc Werner, Galenica AG – CEO [6]

——————————————————————————–

Thank you, Maja, for these questions. I’ll start with the first question. It’s very important to distinguish between the web shops and the mail-order services. You refer to the market figures that I showed a decline of the mail-order sales of 1.7% in the first half. These are really the sales of the mail-order pharmacies in the market, mail-order pharmacies with only prescription products. And this mail-order market is our MediService, specialty pharmacy MediService, which is a part of these mail-order sales. So it’s not to compare with the web shops. The web shops, they sold, let’s say, nonmedication products, but that’s not yet a prescription product, due to the legal restrictions that you don’t can sell OTC products. So that’s for the first question.

The second question, it’s clear that the situation around COVID can accelerate or will accelerate the political discussion around the mail-order, the online sales of OTC medications. We still believe that this OTC regulation will be liberalized in the future, but only by guaranteeing the patient security, patient safety to be clear. And we at Galenica, we continue to develop corresponding solutions, so really solutions to be able to sell OTC medications by guaranteeing at the same time the patient safety. Does that answer your question, Maja?

——————————————————————————–

Maja Pataki, Kepler Cheuvreux, Research Division – Head of Med Tech Devices Sector [7]

——————————————————————————–

Kind of. Could you give us an example for what you mean exactly that you’re working on models that are aiming to ensure the safety of patients? Are you referring to the phone services whereby you call a pharmacy and therefore — or you place an order and the pharmacy is calling you up? Or how should that — how would that look?

——————————————————————————–

Marc Werner, Galenica AG – CEO [8]

——————————————————————————–

Exactly. That — you exactly mentioned the 1 possibility we develop, let’s say, virtual call center then where we can call back the patient and advise him. So that could be a solution. We have already detail nursing for to MediService. That could be another solution. So we don’t know yet this solution will be allowed in the future by the regulation, but we will be prepared. That’s important. And we really invest in these solutions to be ready when it will be possible to sell out this online.

——————————————————————————–

Maja Pataki, Kepler Cheuvreux, Research Division – Head of Med Tech Devices Sector [9]

——————————————————————————–

Can I just follow-up on that? Would it be then correct to assume that any OTC liberalization would require some safety measures, as you say, and therefore, a massive price discounting in the market could be excluded?

——————————————————————————–

Marc Werner, Galenica AG – CEO [10]

——————————————————————————–

Sure. A good question. If I would know the answer, I would be very happy. I don’t know. I don’t know that. It’s our assumption that it will not just be a liberalization, that, as I mentioned, it will be a liberalization with guaranteeing patient safety. What then will be the impact on price pressure and so on, it’s too early to predict for us.

——————————————————————————–

Operator [11]

——————————————————————————–

We should have Chris up next.

——————————————————————————–

Christoph Gretler, Crédit Suisse AG, Research Division – MD in Equity Research [12]

——————————————————————————–

I actually have a question with respect to your Retail Business. Still struggle somewhat to reconcile your performance in the first half. I mean you basically indicated sales down organically 1.4%. And even if you strip out this onetime effect of 1.3%, you’re still kind of flat. But if I look at your slide with the market values essentially stationary, or even pharmacies, sales are up somewhere around 3%, can you elaborate on this relative underperformance? I mean the impact, the COVID impact should have hit the market as well. So I’m struggling a bit on that.

And also then on Page 25, basically, you indicated growth of around 5.9% for pharmacy wholesale market. So it looks like from various angles that you’ve been losing market share here. Could you elaborate on that topic, please?

——————————————————————————–

Marc Werner, Galenica AG – CEO [13]

——————————————————————————–

Thank you, Chris, for this question. In the pharmacies, Amavita and Sun Store pharmacies, we clearly lost market share in the first half. We have — in average, we have a clearly above-average part of beauty sales, beauty assortments, perfumery department in our pharmacies compared to the market average. Especially at some store, we have very important perfumery departments, which lost a lot of sales due to the closure — temporary closure of these departments, which lost sales in the first half. That’s one reason.

The other reason is, as I mentioned, we have a clearly above-average part of attractive high-frequency locations, which were clearly over the last 20 years the growth drivers in our business. But now in the first half, it’s clear, they were exposed to massive losses in frequencies, mainly starting with airport and also in railway stations. And it’s clear there, overall, these 2 impacts led to a slow organic development than in the market. You’re right.

On the other hand, the second question, I don’t know to which slide do you refer, but it’s still, on the other hand, in the Services Business segment, that means in the wholesale business, we clearly gained market share. Not related to COVID-19, we really gained customers in the physicians channel but also in the pharmacy channel.

——————————————————————————–

Christoph Gretler, Crédit Suisse AG, Research Division – MD in Equity Research [14]

——————————————————————————–

No, I was more — yes, I was more kind of implying that apparently the kind of other pharmacies grew better than your own organization kind of — that was probably kind of — which kind of ties in what you — how you explained it.

Maybe I have a second question. Is it at all possible to kind of quantify that extra cost you incurred for coronavirus-related measures like protective equipment and all the installation, et cetera, by any chance?

——————————————————————————–

Marc Werner, Galenica AG – CEO [15]

——————————————————————————–

It’s very difficult to give a reliable estimate in this respect because cost allocation is very difficult in this context. However, I think on the group level, it should be — it should remain a single-digit million amount. More is not possible to say.

——————————————————————————–

Operator [16]

——————————————————————————–

Next question is coming from Virendra Chauhan.

——————————————————————————–

Virendra Singh Chauhan, AlphaValue – Analyst [17]

——————————————————————————–

So I had a couple of questions around the guidance. So your new guidance, first of all, on sales, the 5.6% growth in H1 and your 2% to 5% FY ’20 guidance implies the H2 growth of between — of a decline of 1.6% to nearly a growth of 4.5%. Then I also look at the return on sales, which could be implied from your guidance is the — somewhere in the range of 4.8% at the midpoint versus 4.9% in H1. So it does come across as being conservative because I would assume that the business is currently on a trajectory, which is improving vis-à-vis what we saw, let’s say, April to May to June. So just 2 questions. One, could you give us some color on what’s been the monthly trajectory on a sales perspective?

And secondly, any underlying reason why you expect H2 to be worse than H1 on a comparable basis. So that’s it from my side.

——————————————————————————–

Marc Werner, Galenica AG – CEO [18]

——————————————————————————–

Thank you for this — that’s a lot of questions, actually. So I try to answer as good as possible. The sales guidance is based on, as I mentioned, the dynamic development mainly in the Services Business sector, which we continue — will continue dynamically in the second half, but as mentioned, on a flatter rate. It’s also important to take into account that the second half of 2019, so the competitive and — period last year was very, very strong. And the sales — the strong sales growth in terms already continued in the second half of 2019. So that’s regarding the sales guidance.

Then the EBIT, as I already mentioned in the first half, the sales development was really strong, where we have lower EBIT margins. And this was, I would say, rather weak in areas where we have high EBIT margin — margins. And due to the expectation that the situation, mainly in high-frequency locations, will only slowly return to a normal level. That is really the key — the main reason why we reduced the EBIT guidance to a level more or less at the same level of last year. Also, taking into consideration that also on an EBIT level, second half 2019 was very strong. Does that answer your question?

——————————————————————————–

Virendra Singh Chauhan, AlphaValue – Analyst [19]

——————————————————————————–

Yes. So maybe if I can just have a follow up to that. Please you give us some sense of the numbers in terms of business at your high-frequency locations, like, how much are we down on a year-on-year basis, maybe at the end of the half on the Q2?

——————————————————————————–

Marc Werner, Galenica AG – CEO [20]

——————————————————————————–

Well, first of all, I can — as I said, it’s around these high-frequency locations. They account for around 10% of the Amavita and Sun Store pharmacy sales. And these — it’s 16 pharmacies, which means about 6% of the number of pharmacies of Amavita and Sun Store pharmacies. It’s clear that in average, the locations, high-frequency locations, that they are large pharmacies, large than the average.

And let’s give you a magnitude. In June, these pharmacies at high frequency locations, they were, let’s say, a low to mid double-digit percentage behind last year, 2 months. In July, it was already a figure percentage closer to a low double-digit percentage. So we see development goes in the right direction. It improves month by month. But if you look at the development of the travel habits of the population, so we believe it will remain a negative impact also in the second half year. And that was the main reason really to adapt our EBIT guide.

——————————————————————————–

Operator [21]

——————————————————————————–

This was the last question. I have a further question coming on, sorry, from Sebastian Vogel.

——————————————————————————–

Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [22]

——————————————————————————–

I’ve got one question left from my side. Can you outline your view on the regulation and the latest development linked to the LOA and the distribution margin?

——————————————————————————–

Marc Werner, Galenica AG – CEO [23]

——————————————————————————–

Thank you, Sebastian. Well, in May, May 15, curafutura and pharmaSuisse, the Association of the Pharmacists, they submitted a proposal to the Federal Council for a revised pharmacy tariff, that means a low of 5 contract proposals, and together with the new model for the calculation of the distribution margin for medication. And we believe that the probability that the authorities will accept this proposal, this compromise, is quite high. And so we expect an implementation, not at the beginning of 2021. We believe that’s too optimistic. But the mid of 2021 or beginning ’22, we believe it’s possible that the new model, that the new tariffs and the new distribution margin model could be implemented. Does that answer your question? Or are you looking for further details?

——————————————————————————–

Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [24]

——————————————————————————–

Just one follow-up. I mean if I can understand it correctly. The review of the LOA is quite unfavorable for your MediService business. Do you think you will, going forward, change in the sort of how you define your services that you also charge for LOA services from your MediService? Or how do you see the situation, in particular to MediService?

——————————————————————————–

Marc Werner, Galenica AG – CEO [25]

——————————————————————————–

It’s clear, the proposal, which is the proposal to the Federal Council contains new and higher tariffs at the cost of lower distribution margin on the product. So it’s clear pharmacies with a business model without invoicing the tariffs, they have a big challenge. And it’s also clearly for MediService, our mail-order pharmacy, if we don’t adapt the business model to the new situation, it happens, we wouldn’t be profitable anymore. And it’s not acceptable for us. So it’s clear we already started to think about solutions to adapt the business model to the new situation by invoicing tariffs or whatever. That’s — it’s open, how we will adapt, but it’s clear that we will adapt our business model.

It’s the same for Sun Store, there. If customers pay cash, tariffs are not charged. For certain models with insurance — health insurance companies, tariffs are not charged. Also for these models, within some store, we will find alternatives to compensate these losses and to find solutions in order to remain attractive for our customers.

——————————————————————————–

Operator [26]

——————————————————————————–

There are actually no further questions. No, sorry. Next coming up already from Mr. — or Mr. Schneider.

——————————————————————————–

Stefan Schneider, Bank Vontobel AG, Research Division – Executive Director, Head of Life Sciences Team & Pharmaceutical Analyst [27]

——————————————————————————–

Just a short one, particular retail sales. Intersegmental sales were down to CHF 4 million for the first half. It was pretty stable over the last half year. So for instance, 1 year ago at 13.8%. Can you explain that?

——————————————————————————–

Marc Werner, Galenica AG – CEO [28]

——————————————————————————–

Sorry, we didn’t get the question. We really don’t know to which figures you referred. Could you…

——————————————————————————–

Stefan Schneider, Bank Vontobel AG, Research Division – Executive Director, Head of Life Sciences Team & Pharmaceutical Analyst [29]

——————————————————————————–

Yes. So it’s intersegmental sales for retail. So it’s CHF 4.55 million.

——————————————————————————–

Marc Werner, Galenica AG – CEO [30]

——————————————————————————–

All right. From Page 46 of the half year report. In the segmental sales of retail decreased from around CHF 14 million to CHF 4 million this year. That’s what you mean? That’s exactly what I mentioned when I said that intergroup transaction were discontinued in order to — in this process optimization. Until last year, still retail sold products to other business sectors, and we stopped this beginning of this year. That’s why these intersegmental sales are around CHF 10 million lower than in the first half of 2019. But that’s on a consolidated level or profit level, has really no impact. It’s a purely technical change, but that’s exactly what I explained before.

——————————————————————————–

Stefan Schneider, Bank Vontobel AG, Research Division – Executive Director, Head of Life Sciences Team & Pharmaceutical Analyst [31]

——————————————————————————–

Okay. Just — sorry, maybe I skipped that. But are you going to resume that? Is that — or is — was that it?

——————————————————————————–

Marc Werner, Galenica AG – CEO [32]

——————————————————————————–

No, it was a process optimization, and we will keep that. So it will have, again, in second half, a similar impact. And from next year on, you won’t see any impact anymore if we compare with the prior year.

——————————————————————————–

Operator [33]

——————————————————————————–

Okay. I’m waiting for a few seconds to see if there are any other questions. Otherwise, this was the last one. Okay. It was definitely the last question. Back to you, Felix Burkhard.

——————————————————————————–

Felix Burkhard, Galenica AG – CFO & Head of IR [34]

——————————————————————————–

Thank you. So this was the last question, and we close our call. If we were not able to answer the questions during this call or if you have further questions, please contact us via e-mail at investors@galenica.com. We thank you all for your active participation and your interest in Galenica. Goodbye, and have a good afternoon.

——————————————————————————–

Operator [35]

——————————————————————————–

The conference recording has been stopped. Dear participant, your conference call has come to an end. Thank you for attending. Goodbye.

Source Article