Galenica : Half year report - Health & Beauty Segment

Health&Beauty

745.7

Galenica Group CHF 1,566.1 million

Net sales

in million CHF

54.3

Galenica Group CHF 70.1 million

EBIT

in million CHF

4,639

Number of employees

Galenica Group 6,328

Health & Beauty Segment

Focus on customer service remains the priority

The Health & Beauty segment comprises the Retail andProducts & Brands Business sectors. In the Retail Business sector, Galenica operates the largest pharmacy network in Switzerland, giving it an excellent distribution network that offers unique potential for the sale of own, exclusive andpartner brands. Through its Products & Brands Business sector, Galenica develops and markets own brands and products, as well as exclusive brands and products of itsbusiness partners.

Net sales and operating result

In the first half of 2018, the Health & Beauty segment increased net sales by 2.5% to CHF 745.7 million, CHF 695.8 million of which was accounted for by the Retail Busi-ness sector and CHF 48.7 million by the Products & Brands Business sector. The operating result (EBIT) improved by 9.5 % to CHF 54.3 million, while return on sales (ROS) rose markedly by 0.5 percentage points compared to the prior-year period to 7.3 % (first half of 2017: 6.8 %). This is animpressive result that demonstrates the further improvementin efficiency. Various measures and projects that were launched in recent years are now having a full effect on profitability. These include, for example, the switch to direct invoicing to health insurers, the consolidation of the central functions in the Retail Business sector and the continuing strengthening and optimisation of the pharmacy network. Investments in the Health & Beauty segment in the first half of 2018 totalled CHF 5.4 million.

Expanded online offering

Investments continued to be made in the improvement and expansion of services and product range in the first half of2018. For example, specific training sessions were organisedfor employees of all pharmacy formats on new products such as Adler Schüssler mineral salts, which Verfora has been distributing exclusively in Switzerland since 2017. Furthermore, the range in the online shops and the new ordering and pick up service Click & Collect launched in 2017 were also expanded, and already comprised around 16,000 products as of mid-2018, more than half as manyagain as at the end of 2017. At the same time, additional payment options were introduced for online orders andin-pharmacy purchases.

Retail Business sector

Even closer to the customer

Net sales development

The Retail Business sector increased net sales in the firsthalf of 2018 by 2.6% compared to the prior-year period to CHF 695.8 million (excluding Coop Vitality). By way of com-parison, medication sales (Rx and OTC products) in the Swisspharmacy market as a whole grew by 2.9% in the same period (IQVIA, first half of 2018, Swissmedic therapeuticproducts lists A, B, C, D). By contrast, sales of other products(non-medications) continued to decline.

Nine pharmacies joined the own-pharmacy network in the first half of 2018, including seven acquisitions and two new openings. At the same time, three locations were removed as part of optimisation measures, meaning that Galenica managed 343 own pharmacies as of the end of June 2018. The expansion accounted for 1.0 % net of the sales growth. On a comparable basis, sales increased by a total of 1.6 %. Together with the Amavita and Winconcept partner pharma-cies, the Galenica pharmacy network comprised 500 points of sale throughout Switzerland as of mid-2018.

The sales performance of the Retail Business sector was slowed by the effect of federal price reduction measures as well as the market-wide decline in beauty products. Generic substitution, which is actively promoted by Galenica, alsoaffected sales because of the lower drug prices. By contrast,the Retail Business sector posted good sales for the coldmedicines due to the strong flu season.

New offerings and services

The Retail Business sector continued its efforts to strengthenand enhance customer proximity in 2018. As an important part of this process, collaboration throughout the entire Galenica Group was further intensified, notably with Galexis in the area of online shops logistics or with Verfora repre-sentatives with regard to new product launches. For instance,employees of all pharmacy formats received training on AdlerSchüssler mineral salts after Verfora signed an exclusivepartner agreement in 2017 and added the mineral salts to itsportfolio.

The online ordering and pick up service Click & Collect intro-ducedat Amavita, Sun Store and Coop Vitality in 2017 was progressively expanded with around 16,000 products avail-able at the end of June 2018, more than half as many again as at the end of 2017 (end of 2017: around 10,000 items). The goal is to continually expand the range in the online shops and to be able to offer it to customers, including via Click & Collect. The fact that Click & Collect meets a cus-tomer need is demonstrated by the order volumes, which are growing by the month.

Additional payment tools were introduced in the first half of 2018, meaning that a range of options are available for both online orders and in pharmacies. For example, the paymentapp Twint has been introduced as a cashless payment optionin all Amavita, Sun Store and Coop Vitality pharmacies.

Health & Beauty Segment - Retail Business sector

At the beginning of 2018, Galenica took over Care-product.The company supplies walking frames, wheelchairs, incontinence products and other medical aids both online and offline. The range is geared in particular to older people and people with a disability who want to maintain or improve their mobility level. With Careproduct, the RetailBusiness sector has strengthened its market posi-tion with respect to online sales and expandedits customer offering, as the pharmacy formats are now able, for example, to also supply products that they themselves do not have in stock to their customers via Careproduct, and that are deliv-ered directly to customers' homes.

Growth thanks to more pharmacies

The Retail Business sector also invested signifi-cantly in the further strengthening and optimi-sation of its own pharmacy network in the first half of 2018: it comprised 500 points of sale as of mid-2018.

The second half of 2018 began with the 100% acquisition of the "Bahnhof Apotheke" pharmacy in Zurich main station, which saw Galenica inte-grate the pharmacy with the highest sales figuresin Switzerland, enhancing its network with anextremely successful and strategically well-posi-tioned location.

To make even better use of the strengths and competences of its pharmacies, Coop Vitalityhas developed a new, modern shop layout with a welcoming atmosphere. All locations are to be gradually renovated according to this concept in the coming years, starting with the locations in Biel/Bienne, Rorschach and Matran in the first half of 2018. The Coop Vitality pharmacies now also perform the Diabetes Check, which was pre-viously only offered at Sun Store and Amavita. In turn, Amavita and Sun Store have introduced the Generics Check, whereby customers are person-ally advised about which of their medications can be replaced with generics.

Galenica makes an active contribution to reducing healthcare costs evolution through generic substitution. On a comparable basis, sales of generics thus rose again in the first half of 2018 (+8.3 %). The sub-stitution rate for medications for which a generic is available and for which substitution is also possible increased from 68 % to 70 %. A sat-isfyingly high percentage, taking into account the fact that prescribers often favourthe original product for certain pathologies such as mentalillnesses.

Own pharmacies and shareholdings

30.6.2018	31.12.2017	Change
Amavita pharmacies1)	162	157	+5
Sun Store pharmacies1)	97	97	-
Coop Vitality pharmacies
(Joint venture with Coop)2)	77	75	+2
MediService speciality pharmacy1)	1	1	-
Majority holdings in other pharmacies1)	4	5	-1
Minority holdings in other pharmacies2)	2	2	-
Total own points of sale	343	337	+6
1)Fully consolidated
2)Consolidated at equity level
Independent partners
30.6.2018	31.12.2017	Change
Amavita partnerships	7	8	-1
Winconcept partner pharmacies	150	152	-2
Total independent partners	157	160	-3

Health & Beauty Segment - Retail Business sector

Winconcept, the Galenica service provider for independent pharmacies, not only launched a new website in the period under review, but also revised its customer magazine, which affiliated partner pharmacies can now personalise in orderto strengthen their brand presence. The Process One qualitymanagement system, which is offered to both Winconceptand third-party pharmacies, is registering a growing numberof users. With four arrivals and six departures, the number of Winconceptpartner pharmacies decreased slightly in the first half of 2018, notably as some partners soughtsuccessors and sold their pharmacies, in some cases toGalenica.

The Aprioris pilot project, with its two walk-in clinics at theAmavita pharmacy in Adliswil (Zurich) and the Sun Store Métropole pharmacy in Lausanne, met with a positiveresponse in its first year. The majority of cases were success-fullytreated and resolved thanks to the competence of the staff involved, and more than 95% of customers would rec-ommend the service and use it again. Though customer flow is not currently in line with expectations, Galenica is benefitting overall from the pilot projects thanks to new experience and know-how, for example in the area of duty of documentation, as well as in processes, procedures andcollaboration with partners. Galenica will define further stepsin due course.

Mediservice focuses on distance healthcare

In the first half of 2018, Mediservice further strengthened its leading position as a service platform for the care and support of patients with chronic or rare illnesses, expanding its range of high and top price medications for cancer, hae-mophilia and multiple sclerosis patients. It has alsolaunched services in distance healthcare such as video nursing whichprovides services from a central location via a screen tochronically ill patients at home.

Products & Brands Business sector

Products&Brands

New name, same strategy

Net sales development

In the first half of 2018, Products & Brands generated total sales of CHF 48.7 million, the same level as the prior year.

In the Swiss market, Products & Brands increased sales by a pleasing 3.7% to CHF 37.3 million. By comparison, the OTC market grew by 1.2% (IQVIA, first half of 2018) due to a strong flu season.

The sales performance in Products & Brands was driven by the strong growth of OTC products, particularly Algifor®and Merfen®. It was also boosted in the first half of 2018 by one-off additional sales of stocks to wholesalers: due to the change of name of Vifor Consumer Health to Verfora, from July 2018, Verfora, as a new marketing authorisation holder for pharmaceutical products, was not permitted to sell any products or packaging labelled with its former name. To avoid packaging relabelling costs, wholesalers were sup-plied with large quantities of the products concerned in the second quarter of 2018. It is therefore expected that order volumes will be lower in the second half of the year.

These additional sales of OTC products were offset by lowersales of beauty products, however: the launch of new beautybrands and associated build-up of inventory led to one-off sales in the first half of 2017 that were not repeated in the first half of 2018.

In contrast to the performance in the Swiss market, export sales declined by 10.8 % to CHF 11.3 million, which was attributable in particular to sales generated from the launch of Anti-Brumm®Sun in Germany and Austria in the first half of 2017.

Vifor Consumer Health became Verfora

As part of the division of the former Galenica Group in 2017,

Galenica and Vifor Pharma agreed that Vifor ConsumerHealth would change its name to clearly signal to the marketthat it is no longer part of Vifor Pharma. The company has therefore been rebranded Verfora as of 1 June 2018. Withthe new identity, Verfora is able to position itself distinctivelyas an independent, strong partner for pharmacies and drug-stores with its well-known brands and products. Verforacombines the two Latin terms "Veritas" and "Forum". Veritasstands for objectivity, medical evidence and sincerity in the relationship between Verfora and its customer and between the brand and the consumer. The Forum is symbolic of a commitment to open, professional exchange and dialogue.

The introduction of the new packaging with the Verfora branding is proceeding as planned. The Company's strategy continues unchanged, with Verfora positioned as a strongpartner for pharmacies and drugstores, standing for an attrac-tive product portfolio and dedicated training and support.