Galenica AG (GALE) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. I cordially welcome you to the conference call on Galenica's Half Year Results 2022. We can once again present very good results. In the first part of today's call, we will comment on a few highlights and on the key figures. After that, we will be happy to answer your questions. To start, I now hand over the floor to Marc.

Thank you, Felix. Ladies and gentlemen, welcome to our Half-year Call 2022, the first half-year in which we have regained a bit of normality after 2 years of pandemic. This means that the corona-related extraordinary additional sales, such as self-tests and COVID-19 vaccinations, have declined sharply. On the other hand, people are on the move again, and customer flows at high-frequency locations have increased again. Demand for products whose sales have softened in the last 2 years due to corona have also risen again. Because protective measures have been lifted, there has been an increase in colds. And people are traveling abroad again and stocking up their first aid kits. And finally, acquisitions and internal growth have also contributed to the fact that we are able to increase sales by 5.5% and EBIT by 4.4% in the first half of 2022. Here are a few insights. We have 30 million customers. Customer contacts our pharmacies every year. Every day we look about 100,000 patients. They all increasingly appreciate our advice and services. In the first 6 months of 2022 alone, it provided around 43,000 primary care consultations in our pharmacies. This is 60% more than in the previous period. This figure is impressive per se and even more so when you consider that the patients have to pay for the consultations and medications they receive out of their own wallets. If they had seen a doctor first, in most cases, the health insurance would have covered the costs. [indiscernible] have recognized the advantages of primary care and offer the health consultations in their insurance models. We would be pleased if we could also win additional health insurers for this model. It is a model that not only offers patients great added value, it relieves other service providers and contributes to reducing the overall costs of treatment. Health checks, vaccinations or the primary care consultations are great examples of how pharmacies can position themselves as the first point of contact for health issues and demonstrate their expertise. For this, specific professional expertise is needed. And that is why we invest a lot in additional training for our employees. To further improve the quality and range of training, we have taken a 50% stake in [ Medifilm ]. [ Medifilm ] is a leader in pharmacy training, offering 50 [indiscernible] FPH courses for pharmacists and pharmaceutical assistance. In addition, [ Medifilm ] successfully offers concepts for specialized pharmacies from skin pharmacies to children's pharmacies to pharmacies specializing in respiratory care. Our employees are proud that they can provide comprehensive and specialized advice and care to customers. It enriches their work and gives them the opportunity to use their full expertise. For Galenica, this is an additional strong evidence of positioning ourselves as an attractive employer. We are also experiencing the consequences of the shortage of skilled workers and have even had to temporarily close the pharmacy in recent months simply because it will not have enough employees to ensure proper operations. At the beginning of the year, we therefore formed an interdisciplinary working group. The team have developed various measures, some of them have created unconventional ideas at short notice to ease the current situation at least a bit. For example, retired employees temporarily support their former colleagues in the pharmacies. For students, a so-called temporary specialist in training. We also developed special programs for newcomers, and later on entrants and offered students positions for the mandatory assistantship year. It is not only the demand in stationary pharmacies that has grown. By the way, 4 new locations were added in the first half of 2022. The home care offers have also developed positively, above all MediService with a 16.2% increase in sales. With the new software from Aquantic which we acquired in July, we are making the billing of specific medicines much easier. The [ self-dwelling pharmaceutical companies, health insurers and doctors involved in such a process. This is not a new digital offer from Galenica for professionals who gain efficiency, thanks to the digital solution. At the same time, we are increasing quality throughout the entire process and everyone in the health care system, partners and patients will benefit from this. This mainly concerns the reimbursement of medicines that are not listed on the federal speciality list. Often, these are medicines for the treatment of rare very severe or chronic diseases. MediService is the market leader in these specific therapeutic areas. Aquantic is therefore an ideal complement to MediService. Together, they will be able to explore numerous synergies. With the joint venture Emeda, which we founded together with Medicall, we have also expanded the range of services for professionals in this case, especially for retirement and nursing homes. The mobile doctors of Emeda are specialized in the outpatient geriatric medical care of the residents of nursing homes. We bring logistical and pharmaceutical expertise to the joint venture. And together, we have one goal, to provide all around health care for the residents of retirement and nursing homes and to support the carers. Home care and care homes, both are markets that are strongly influenced by the demographic aging of society and the cost pressure in the health care system and more and more also by the increasing shortage of family doctors and currently also specialists in general. We want to offer attractive solutions for the growing demand for outpatient and inpatient care and thus grow in the future markets. In the second half of the year, we will also be able to offer professionals innovations in product range. As of October, therefore, I will exclusively take over the swift distribution of products from [indiscernible], a leading global manufacturer and distributor of homeopathic medicines. The specialized rate will benefit from an extended attractive range in the field of complementary medicine, including training expertise. The basis for growth is also our investment in digitalization. This includes digital health care platforms. They are an important element if we, as Galenica, want to be a leader in the field of digital health care services and the networking of on and off-line offerings. That's why we are not only developing our own platform, but also partnering with others. After we launched a successful flu vaccination pilot with Well in 2021, our participation in the health platform is a logical next step. In parallel, we are working on development of our own platform, the customer dashboard as we call it at the moment. We will introduce the first small innovation step by step. After 2 years of corona lockdown, the first half of 2022 was challenging for many online jobs. Worldwide e-commerce sales declined by 5% and order volumes even by 11%. Sales at our webshops declined by 12%. This in comparison to an exceptionally strong first half of 2021. Nevertheless, the consistent linking of the online and off-line channels is showing clear initial successes. We have invested in the visibility of our webshops, for example, in search engines, where we have achieved a significant improvement. In the process, we have also clearly seen that better online visibility also leads to more presence in the stationary pharmacies. Compared to the first half of 2021, this year, 20% more customers who visit our webshops have subsequently gone to a stationary pharmacy. And when we talk about digitalization, the e-prescription should not be forgotten. In the first half of the year, we continued to work intensively on our solution and the link with the e-mediplan. In the second half of the year, we will start further pilots with doctors, pharmacists and patients. We want to put our solution through its phases and tests, how it performs in everyday life. In addition to the various projects we develop for our customers and for the market, we invest in digitalization of our own process. All of these -- all of those are investments in the technical foundations for the future. It will take some patience before we can reap these rewards. However, we will complete a major investment this [ Autumn ]. After about 3 years of renovation and modernization work, we will officially open the new distribution center in [indiscernible] in September. During the entire construction work, operations continued in parallel, a great challenge which the whole team has mastered superbly. Some facts, the entire building shell was completely renewed. 10,000 [ commitment ] of new storage capacity was created by raising the height of the building. At the same time, the degree of automation was increased from 30% to 70%, thanks to new picking order system, the so-called carousel for those who have already been [ done it that way ] before. In addition, a new solar system was installed on the roof on an area of 300 square meters, which will contribute an important part of the building's required energy. Last but not least, we have also efficiency gains in office space. State of the art workstations have been installed in [indiscernible], allowing us to close the offices at the former site in said cities. We are aware of our role and responsibility for the security of the supply of medicines in Switzerland. The investment of around CHF 35 million is therefore also a strong commitment by Galenica to the western part of Switzerland. The good results we were able to present to you today are thanks to our employees. They have been very challenged in the recent months, especially in the pharmacies where there have been repeated staff shortages. I would like to take this opportunity to thank them all for their great commitment, bravo and thank you. We have made strong progress in the first half of 2022 with the financial key figures, and thanks to the consistent implementation of our strategy. We will maintain this focus in the coming months. And with that, I hand over to our CFO, Felix.

Thank you, Marc. Galenica grew strongly in the first half of 2022. The growth of 5.5% was achieved even though, as expected, sales from COVID-19 initiatives such as self-tests, vaccinations and testing were much lower than in the first half of 2021. Adjusted for these extraordinary sales, growth would have amounted to 8.7%. The main growth driver were sales of OTC medications. This was thanks to a normal flu season, which was practically absent in the prior year period and additional Omicron infection waves. MediService continues to grow strongly in the area of orphan drugs. Last year's acquisitions, [indiscernible], solution the products of [indiscernible] and Spagyros as well as some pharmacies also contributed positively to sales growth. And finally, the pharma wholesale business continued to develop well. Let's look into the various business areas. At first glance, growth in the stationary pharmacies of Amavita and Sun Store was only moderate at 1.8%. However, if we adjust for the extraordinary sales of COVID-19 initiatives in the local pharmacy sector, we get a rather impressive growth of 7.5%. As already mentioned, high demand for cough and cold medications was the key driver of this growth. As people are on the move again, sales of pharmacies at high-frequency locations are also recovering. In June, sales were about 12% below the pre-corona period of 2019. In December last year, this shortfall was still about 20%. Pharmacy network expansion contributed 1% to growth. Again, pharmacies at home grew stronger than local pharmacies. The reported growth of the pharmacies at home sector was 16.1%. This includes a one-off effect from an insignificant change in segment reporting. Adjusted for this special effect, growth was still a very high 11.3%. This growth was again driven by the specialty pharmacy MediService. With medicines for rare diseases in combination with home care services, MediService achieved high growth of 16.2% and thus gained further market share. [indiscernible] home care services in the area of clinical nutrition also grew by a pleasing 5%. On the other hand, the webshop sales of Amavita and Sun Store declined by 12.5%. As the online sale of OTC medications continues to be prohibited, this business was unable to benefit from the growth of cough and cold medications. On the contrary, sales have decreased such as customers have again purchased more locally in stationary pharmacies and not online after the corona restrictions were lifted. The sector that benefited most from the flu and Omicron base was Products & Brands. Sales growth in Products & Brands was exceptionally high at 26%. Half of this growth resulted from the integration of [indiscernible] products in June '21 and Spagyros in September '21. The other 13% growth was driven in particular by high demand for cough and cold medications due to seasonal flu and Omicron. Travel-related products which suffered heavily in the corona years have also recovered. Thanks to the expansion and this above-average performance, [ Verfora ] has continued to gain market share and further strengthen its position as clear market lead. In the consumer health care market, only the OTC category grew strongly with 10.1%. Within OTC, there were subcategories such as cough remedies that practically doubled sales. The other categories, personal care, patient care and nutrition developed more or less stable. Market sales of [ Verfora ] products in pharmacies and drug stores grew by 17.2%, thus well above the market average. Thanks to the strong focus on the cough and cold range, Verfora ] was able to benefit from the above-average development of this product categories and, therefore, gained market share. Let us now move on from the Products & Care segment to Logistics and IT. The wholesale sector achieved a pleasing sales growth of 3.8%. Adjusted for the sales of COVID-19 self-tests, growth was a high 6.9%. The Physician segment realized again the highest growth. Adjusted for the one-off effect of a minor change in segment reporting, sales physicians grew even by 8.4%. Adjusted for COVID-19 self-tests, the Pharmacy segment also achieved pleasing growth of 7.8%. Let us now have a look on the development of the pharmaceutical market. All channels have grown strongly from hospitals with 5.4% to drugstores with 12.6%. The impact of the flu and Omicron waves can be seen in particular in the development of the volumes, which grew faster than sales everywhere. The high growth with OTC medications primarily drove the volume development at the local pharmacies with 14.7% and drug stores with 17.2%. Only the mail order pharmacies were not able to take advantage of this development also for the well-known reason that OTC medicines may not be supplied by mail order. In terms of volume, this channel even declined by 1.7%. Thanks to the strong growth of high-priced prescription medicines, sales nevertheless rose by 8.2%. Overall, this resulted in a strong market growth of 7.1%. Now let's leave sales development and talk about results. The operating results are almost at the same level as the previous year's period, both on group and segment level. We succeeded in compensating for the extraordinarily high income from the COVID-19 initiatives in the first half '21 with growth and expansion of the business, a very good result above our own expectations. Return on sales has normalized as expected of the COVID-19 boost last year and is back at the same level as in the pre-corona financial year 2019, also a solid result. But why have we not been able to further improve return on sales as in the previous years? On the one hand, in the last 2 years and in the first half of this year, we have grown above average in the wholesale sector and with the specialty pharmacy MediService, both low-margin businesses. But of course, we're very happy to accept this kind of pressure on the EBIT margin. On the other hand, as expected, additional costs have a dampening effect on EBIT development in the first half of 2022. In the EBIT guidance 2022 published in March, we referred to the increasing challenges with issues such as inflation, supply bottlenecks, shortage of specialized personnel and investments in digital infrastructure. How did these current trends impact the results in the first half year? Personnel costs have developed normally at 4.9%, slightly slower than the net sales with a growth rate of 5.5%. The increase is mainly related to the expansion and growth of the business. We have planned higher personnel costs. But unfortunately, we could not spend them because we were not able to recruit enough specialized employees. Especially in IT, the missing staff was partly compensated with additional external resources which was translated into higher other costs. Apart from the normal growth related increase in other OpEx, the additional investments in the digital Omni-channel infrastructure were clearly the most important driver. The measures against the lack of skilled employees and the inflation impact accounted for a smaller part of these additional costs. Regarding the supply bottlenecks, to date, we have still been able to overcome the challenges without any significant negative impact on our results. Our digitalization initiatives are also reflected in CapEx. Investments in intangible assets were $6.4 million higher than in the prior year period. We continue to invest in the SAP implementation at the [indiscernible] and additionally, in the digital omni-channel infrastructure. Total investments as a percentage of sales have remained stable at 1.6% compared to the full 2021 financially. This brings us to cash flow. A double negative effect led to the high cash flow of CHF 95.9 million in the increase of net working capital, on the one hand, a seasonal effect. It is normal that the net working capital is higher in the middle of the year than at the end of the year. In addition, net working capital was exceptionally low at the end of last year. Thanks to the very strong business performance in November and December 2021. In the 2021 half year financial statements, these 2 effects did not accumulate, but compensated each other. At the end of 2020 financial year, the net working capital was extraordinarily high because of the corona-related poor business performance at the end of the year. By mid-2021, the corresponding cash inflow from the reduction in net working capital has offset the negative seasonal effect. Regarding the end of this year, we still expect a negative effect which should, however, be somewhat lower than minus CHF 95.5 million due to seasonality, depending on the business performance at the end of the year. In addition to the higher investments in tangible and intangible assets, we also invested CHF 9.8 million in financial assets in the first half year. Particularly worth mentioning here are the participations in the Well platform and in the Emeda joint venture. The negative free cash flow together with the dividend payment of CHF 104 million led to an increase in net debt from CHF 258 million at the end of 2021 to CHF 402 million by mid-2022. Compared to the extraordinarily low level of net debt at the end of 2021, this can be considered as a normalization. Net debt remains practically unchanged compared to mid-2021. Leverage also remained at the level of 1.6x EBITDA. Finally, let's look at the guidance update. Sales growth in the first half year was clearly above our expectations. In the second half of the year, we expect growth to slow down considerably as the second half of 2021, especially the last quarter was very strong. We now expect sales growth of 2% to 4% for the full financial year of 2022. In parallel to the increase in sales guidance, we are also raising EBIT guidance to plus 8% to plus 12%. Based on adjusted EBIT 2021, excluding the extraordinary contributions from the COVID-19 initiatives and the real estate sale at our headquarters in Bern. To summarize, we can look back on a successful first half year with strong sales growth and solid results, and we are confident that we will also deliver the expected performance in the second half of the year. Thank you for your attention. We will now be happy to take your questions. If you have a question, please raise your hand virtual on Zoom.

First question on Zoom is from Mr. Jan Koch. [Operator Instructions]

Great. Good afternoon. Can you hear me?

Yes, we can hear you.

I've got 3, please. Firstly, on your supply chain, I saw -- I heard from several pharmacists here in Germany that it is increasingly difficult to get sufficient supplies of certain OTC medicine. Are you witnessing similar issues? And -- if so, does that slow down your sales growth in the second half of the year? And then secondly, on the potential impact from a recessionary environment, have you started to witness a softening of customer demand in recent months on the back of some limitations of discretionary spending, especially in your Products & Brand business? And then thirdly, in view of the current inflationary environment, in which segments are you able to offset higher costs from inflationary trends by passing on higher prices to customers? And by what amount have you increased these prices so far?

Thank you, Jan, for these questions. The first one, supply chain problems with OTC medicines in the first half of this year, we can say this effect didn't slow down the sales of OTC medications in our pharmacies. As mentioned, we have supply chain challenges at Verfora to really supply to that our third-party manufacturers who can't produce enough products. There, we had some challenges. We missed some sales because of these problems. But as I mentioned in the presentation, this to date has -- hadn't had any material impact on our results. How it will develop in the second half, we don't know, but we assume that it will remain a challenging situation for our businesses. The second question there, I can answer. We haven't seen a softening customer demand over the last months. So there, we haven't seen a measurable impact because of this potential future economic problems. And the last question was how can we -- how we are able to offset higher inflation costs? It's clear, let's say, half of our business is regulated business. There the cost of goods sold are regulated and sales prices are regulated. So on one side, we have no pressure with the buying of the product. On the other hand, we have no chance to pass on higher cost to customers. On the other half of our business, OTC medications, other products, we are able to pass on, depending on competition, higher costs to customers. We can also, for example, in the logistics business, we have possibility to pass on higher costs with higher tariffs for our logistics solutions. I hope that was in answer for these 3 questions.

Yes, it was. One follow-up, if I may, have you started to increase your prices so far and by what amount in the 50% where you are able to increase prices?

We have started to increase prices. I can't tell you to which amount. But hopefully if we get higher prices from our suppliers, then we also if possible, adapt our selling prices. And so it's really an ongoing process.

The next question comes from Sebastian Vogel at UBS.

Can you hear me?

Yes. Sebastian, we can hear you, yes.

I've got 3 questions. I would ask them one by one. The first one would be with regard to the net working capital in that regard to payables. Seems to have not kept the pace that receivables on inventory side that we have seen there. What was the driver that your payable position was not getting higher, so to say?

Sorry, that was too quick as a question. It was too far for me to really get the question. Can you perhaps a little bit slowly repeat your question? That would be really appreciated.

Of course, yes. With regard to the net working capital, I mean, your receivables were picking up. Your inventory was picking up, payables were not really picking up a lot. So in that sense, the question, what was the driving factor why payables were not really getting higher, and therefore, you have this higher net working capital in that regard compared to last year?

Well, at the end of last year, payables were exceptionally high. They were exceptionally high because in November, December, we sold a lot. Business was very, very strong, and we had to, let's say, refill our stock and all purchases in December, they weren't paid yet at the end of the year. So payables at the end of the year were very, very high. That's the main reason why net working capital at the end of last year was exceptionally low. In combination receivables, they are , that is the seasonality impact. They are always lower at the end of the year because normally, Galexis our wholesaler invoices once a month to the customers. Always in December, Galexis' invoice is twice a month. That means at the end of year, we have lower receivables than normal and more cash. And now as the business was exceptionally strong last year, this seasonal impact was also exceptionally strong, and that these were the 2 reasons why end of last year, net working capital was very low. And now this can be considered as a normalization now the level we have now at mid of this year. Does that answer your question?

Yes, that helps a lot. With regard to the second question, your second question, you mentioned there were some accounting changes that have impacted pharmacies at home and retail in H1, the top line. Is that something that we lose in the second half? Or will it be accompany us also in the second half? Or how should we think about this effect going forward?

We will see a similar impact in the second half of the year. I can explain you what it was. And we have -- pharma pool is a doctor's wholesaler in the segments, logistics and IT. There is -- since the acquisition, a small mail order pharmacy into pharma pool business. Until last year, we have consolidated pharma pool as a whole in the logistics and IT segment. Now since this year, we report the small mail order pharmacy or pharma pool in the Products & Care segment. And for this change, we haven't done a restatement of the accounts because of materiality. That's to analyze the sales, we transparently show now the impact, and we will have a comparable impact in the second half.

Got it. And the third question would be on the distribution margin and the proposal by the Ministry of Health. What -- how do you see that impacting -- potentially impacting you, if it would be becoming enacted in a way that it is currently proposed?

You know there are so many proposals. It's very difficult to answer your questions. We said that -- you remember, we said -- if the proposal of [ curafutura ] and pharmacies [ would pass ] and we said, we assume that this should be profit neutral with a challenge for mail order pharmacies they would have to adapt their business model because they don't charge for fees for services. That was the answer. And it's still the answer for this proposal of curafutura and the pharmacies. Then there was another proposal from the Federal Office of Public Health, with another solution with different margin steps and the main proposal was to have a unique margin, the lowest margin for the same active ingredients in a medication. This proposal, it's very difficult or we are not able really to forecast the impact on our profit because, first of all, it's very difficult to make a forecast based on this model. And there is no proposal with which lower contract, this would be combined. And if we don't know what would be then the proposal for the fees for services, we can't calculate an overall impact on our margin. So we can't forecast for this model. And then in June, Federal Counsel launched a third consultation based on a similar proposed margin a schedule of office public health proposed together with additional proposals for a reduction of generic prices and other measures that also this proposal, which is now in consultation is not specific enough. There are too many question marks in this proposal. So we are not in a position to calculate potential impacts. And we also can't give you an update on the discussions. It's really open. That what is for sure that at least until mid of next year, even at the end of the year, we don't expect any changes to be implemented.

The next question comes from Ms. Virendra Chauhan.

Yes. Can you hear me?

Yes, Virendra. We can hear you. You can pose a question.

Yes, I did unmute and I think you can hear me now. Okay. So the first question is around the guidance. So just as a reminder, what I understand that -- there's about [ CHF 34 million ] impact of one-offs in the earlier year based on the commentary that we have issued CHF 25 million coming from the COVID tailwinds last year and about 9-odd million coming from the one-off gain on the sale of property. So that puts me at a base of CHF 179 million. So firstly, I just wanted to confirm if that's right? And so -- and the guidance is obviously based off that for 8% to 12% growth. Now with about 19.8% that have gone on a normalized level in H1 and my belief is that the OTC sales are really going to be strong with the COVID-19 and flu really blurring in terms of the treatment option because the lines are blurring between the two and the feedback that we are getting from the market is that there's going to be ongoing demand for these OTC medicines. And also the fact that high-frequency locations are now recovering there but about 12% below pre-COVID versus about 20% at the year-end. So it's just seeming that the H2 will probably be up in terms of EBIT at about 5%. But with this kind of moving part that seem to be positive. What's really driving the seemingly cautious outlook?

Thank you for your question. So first of all, I can confirm that the basis is around CHF 179 million, and our guidance is calculated on this basis, you are right. Now it's clear in the first half of this year, adjusted for all these extraordinary impact, EBIT growth was very strong. But we also have to take into account that adjusted for the extraordinary impact the first half of 2021 was a very weak half year without any flu season. So the comparison period was low. If we now look forward to second half of this year, there we compare with a very strong second half of 2022. 2022 is mainly the last quarter, November, December, as I already mentioned, was very strong with the flu season, with already Omicron infections. So if we can, let's say, repeat that the results we have realized without the extraordinary impacts in H2 '21. In H2 '22, this will be a very good result. And that is finally the basis for our guidance. So we really need a good second half year to reach the guidance.

Okay. So particularly tough comp, that's the color? So just quickly to understand tough comps, particularly in Q4, so that is what, I guess, is driving the question. Tough comparables, particularly in Q4.

Yes, sure. Sure. Thank you. Tough comparable. You got it. Exactly. That's the difficulty.

Okay. I have a few more questions, so I'll just go one by one. In one of the pages on your report, you also see -- I'm sorry, it's not -- it's in the full version of the report that I was reading. You called out laboratory analysis that Galenica will undertake or offer as a service incrementally in its pharmacies. So is that something that Galenica will do on their own or will these be outsourced? And are these already contributing to the business.

So I believe that Marc announced perhaps later afterwards. I believe you refer to the expansion of our services we offer in our pharmacies and there -- we have health care services, you have primary care, and this could also be some diagnostics. But if there, we do the diagnostics, but we are not a seller of diagnostic material or supplier of diagnostic materials. We are really the service provider.

For example is online doctor space and derma, what is the Spanish term, dermatology, for example, we started about a couple of months ago with a company called [ Online Doctors ], that we do the service in our pharmacies. And of course, more services, now pharmacies is clearly one of our strategy because we want to have more services more additional -- as I mentioned, my speech primary care, we increased primary care by 60% in the first half year of 2022. And that's been going on like this and the deal we look for order services to be more, I would say, to have on one part, of course, the classical pharmaceutical business and on the other hand, also much more services. I guess, for 2 reasons. It's that the business reason, of course, and also the reason for our employees. Because we -- as I mentioned, it's gone -- it's quite tough to get enough employees to get enough pharmaceutical employees. And it's very important for them to really -- can do everything for a patient in our pharmacies and doing services is something they love to do, and that's also that makes Galenica also more attractive as an employer. And it's very good for the business and it helps also the doctors because, as I mentioned, also my speech, we don't have enough doctors in Switzerland. We don't have enough physicians. It helps also to help the physicians that they have enough time for the illnesses, which they really need a doctor and not for the other illnesses.

So what I understand is, will Galenica be providing these tests or diagnostic tests to customers?

We apply the test in our pharmacy. That's the main service we offer in our pharmacies.

Tests, vaccinations, blood tests, whatever, allergic tests test for your -- tests for asthma, for different allergens -- that's all the services we provide in our pharmacies. All inclusive, I guess, we have 28 algorithms in our pharmacies right now.

Okay. And just 2 smaller ones, maybe is that on the local pharmacies subsegment, is it fair to say that Galenica in this half underperformed the 8.5% growth in the broader target market?

We would say that local pharmacies developed more or less in line with the market. You mentioned the pharmaceutical market growth of 8.5%. This includes only medications. On the other hand, you have seen it was 6.4% growth consumer health care market, where without prescription medications, but there other categories sold in pharmacies are included. So somewhere in between market growth for pharmacies would be. On top of that, you have to take into account that in the Galenica pharmacies, prescriptions with high-priced medications are transferred for efficiency reason to MediService. So this strong growing category of high-priced medications. They are not accounted for, let's say, in our local pharmacies. And so if we compare with market growth, we have also to take into account this impact. That's why, overall, we would say we have developed with the market.

Okay. And just one last one. Sorry for the very long list of questions, but are the production issues at the Bichsel Group sorted? Or will that continue to be an overhang into H2?

You referred to Bichsel where we have some -- yes, there we are solving all the issues. It's an ongoing process, and we are confident that by the end of the year, we will have resolved these problems. Thank you for these questions.

Next in line is Christoph Gretler from Credit Suisse.

Yes. Can you hear me?

Yes. We can hear you.

Thanks for taking the question. I have actually 2. First, I wanted to come back to this new proposal by the FOPH on -- for distribution margin. I think that is this Slide 38 that you have in your new presentation pack. And I was just wondering, is it not possible to quantify approximately how much this would impact you? Because if I look at just this red and the blue line, that shows the current and the new proposed model, it looks as if there is a substantial cut in distribution marginally implied. Maybe if there was any chance to quantify that to some degree? And what essentially would have to recuperate from the managed care companies in terms of improved lower, that would be really interesting. And the second question relates to your personnel situation, and I noticed your comments that you had to close one of your shops, unfortunately, for a couple of hours. Is this something we would need to expect more in the coming months, given the low unemployment rates we have here? And maybe could you discuss what kind of wage inflation you included in your budget for the current year and maybe for the next or what kind of outlook you have for that part? That would be great.

Thank you for these interesting questions. The first question, this proposal on Page 38 of our new investor presentation, it's clear, the chart you see we can calculate and forecast quite easily. What it makes more complicated is the sentence, the uniform margin for medications with the same active ingredient. So there, it makes it a little bit more complicated because then we have really to look product by product with which generic you have to compare and then calculate the lowest margin and look what is the impact overall. So that makes it somewhat more complicated. Just the lines are easy. And what makes it not possible to calculate is the fact, as I mentioned, that we don't know with which proposal for the lower and the lower contract for the fiscal services, this proposal would be combined. If we compare this margin proposal, just for the product margin, with the proposal from pharmacies and curafutura this proposal from Federal Office of Public Health would probably be even more attractive for us. But you know with the proposal of pharmacies and curafutura the loss in the product margin would be compensated with higher tariffs in the lower contract. And this impact of lower contract, we don't know if this also would apply or which version would then apply together with this new margin proposed by the Federal Office of Public Health. Is that clear enough as an answer?

Yes. No, that's very clear. I think as good as one can get here. Thank you. It's complicated. I understand, but it's really helpful, yes.

And the second question, perhaps, Mark, for the situation in the pharmacies, what's your expectation? I can then perhaps answer for the inflation.

Of course, we started a couple of months ago start internally a task force where we consider all possible measures and new ideas how we can resolve the problem. But to be honest, of course, that's I guess, that's not just a problem in the pharma business. As you know, it's a problem also in IT in other businesses. The shortage of staff, person in the next couple of months in couple of years will be remain challenging situation, of course. But if that -- it's our job, and we will do everything that we do not have to close a pharmacy because of personnel shortage, that's for sure. But I would never say that will never happen again. That would not be honest. But of course, we implemented a couple of new ideas. We talked about how we can resolve the problem, what can we do to be more attractive for pharmacists. But as I mentioned, it will be a remaining challenge, not just for the next couple of months, for the next couple of years, I guess.

If you look at wage inflation, I would say, from '21 to '22 the increased salaries and, let's say, other staff costs, insurance, pension fund, contribution overall by around 2%. So I would say from last year to this year, there is a wage inflation overall of plus/minus 2%. Now guidance for '23, we will release in March next year. It's clear we believe that we will have pressure on wages, it's clear on salary, on costs, on personnel costs because of inflation and because of the shortage of staff every day that we are not yet able to give an outlook or forecast in this regard.

Next question comes from Maja Pataki.

Yes. I have 2 questions as well. And trying to understand your comments around the comparison base with last year. And you mentioned that Q4 was a normalized -- I think you said more normalized stronger flu season after things have started to open up. Yet, commentary from around the globe on the Southern Hemisphere suggests that we could be in for co-infections of the flu and COVID. I guess, a real severe respiratory season could provide upside to your numbers. Is that the correct way to read it? Since you said that if you have similar levels to last year, that's embedded in the guidance?

You're right. It's clear. If the flu season or corona season would be more severe, as you mentioned, this is an upside potential. Our guidance is based on a, let's say, normal second half of the year with a normal let's say, flu season. That's the hypothesis, that's the basis for our guidance.

That's perfect. And then the second question is on MediService. You had yet again a very strong result when we look at growth. And I remember that you've been talking about that growth can be very volatile depending on the pricing of the drug. Now we've seen a couple of really strong quarters. Is there anything in the book that you can already anticipate where you feel like you would expect MediService growth to decelerate based on the pricing that you see in the market?

So first of all, this business is still volatile, as you mentioned. But it's still, as we always said, a niche which is very attractive, and we are convinced that this niche will continue to grow, but it will remain volatile. You have perhaps also seen that, let's say, prices action impact was over 4% in the first half of the year. So there, we are also exposed to stronger price cuts on the medication. So it's an attractive niche, but it remains volatile.

Okay. Understood. And then my last question is with regards to growth in logistics wholesale where you've seen very strong growth to physicians in the first half of the year. And I was wondering whether you can break it down. I guess, there was an uptake as well from more flu-related drugs that people were getting at physician offices of the self-dispensing and clear market share gains. Do you -- could you share with us what your current market share is with regards to the physician office?

We released this figure end of last year. We showed our market share, which was, I think, by around 30%. We are a clear market leader. I can't give the exact split, what was, let's say, overall growth, but -- so normal growth you can -- let's take market growth in the doctor's channel as a basis. And then on top of that, we have seen that we won new customers. So there, we also gained some market share, the exact new market share figure we will again release with the year-end figures.

We have one last question in line, which comes from Mr. Urs Kunz.

Hello.

Urs, you can pose your question.

Can you hear me now?

Yes.

Okay. I have 3 questions. First question regarding primary care. There, I mean you give us this nice numbers of rising consultations to 43,000. You had mentioned that 2 insurances pay for that. But as far as I understand, this insurance is paid only in some additional insurance models for that, not in the basic insurance. So my question is, is there also hope that we will see that in basic insurance paid? And the second question regarding to primary care. You mentioned this personnel shortage. You have this high growth rate. And how is it possible to grow this consultations in this amount of 50%, 60% in the future with personnel shortages? That's my first question.

Okay. Thank you for the question. We have now 2 insurance. Test was the first one. You're absolutely right, it's in the additional insurance. And with [indiscernible], it's a little bit different. But honestly, I can't explain in detail. But of course, you're absolutely right. For us, it would be great if it would be included in the basic insurance, but this process is very complicated and that you can create the new services, which is included in the basic insurance that's a long process. It takes I guess a couple of years.

It requires a change in law.

It's required a change in law. And to be honest, we don't -- we even don't calculate with this. And for us, it's even great if a couple of more enduring companies take this primary care in additional insurance because in Switzerland, most of the people have additional insurance service that's why that's quite enough for us, basic insurance, it's even not a dream. Personnel shortage, of course, that's a big challenge, you are absolutely right. And even if you have personnel shortage, as I mentioned, the especially the pharmacies, but also more and more pharmaceutical assistants are able to make this primary care for patients and for customers. And even if you have personnel shortage that's kind of -- it's part of the consultation for something in a pharmacy. And that's why it's kind of included in the whole product portfolio we have today in the pharmacy. And until today, there is not really a huge problem because of the personnel shortage -- because, as I mentioned, we include more and more pharmaceutical assistants, and they are also capable to do the services, these kind of services.

Then the second question is on ERP systems. As far as I understand, Alloga will be completed second half. Galexis is the question, how long will that take until it's completed? Together with [indiscernible] is also completed by September, you said -- so this leads me to also the question regarding investments in tangibles and intangibles, will they come down in the future years because this big cornerstones are down or how do you see that?

So first of all, the ERP project will end will finalize by the end of '24 for Alloga and for Galexis. That's the plan. What we will finalize this September is the renovation and modernization of the distribution center in Lausanne-Ecublens, that will be finalized by the end of, let's say, this year. Next year, we plan as a part of the ERP implementation to implement the new ERP system first in the smaller distribution center in Lausanne-Ecublens and in 2024 then in the main distribution center in [indiscernible] in order to finalize the project by the end of 2024. And in parallel, that's what we will -- what we expect then in the investments in CapEx.

And then can you give me kind of a -- so the investments in CapEx will stay at this [ 1.6% ] or wherever we are from...

We believe that's still a reasonable number to assume for the next 2 years.

Okay. Then I only have one small finishing questions regarding the back shops where you saw this drop of sales of I think 12%. Do you think they are coming back to growth again in the near future? Or do we have to wait till OTC will go online to see them growing again?

They will come back even without OTC but of course, it still remains small numbers without OTC. It's still a small part of our product portfolio, which we are able to sell as webshops that even if it's minus 12%, it's a pity. And of course, we do everything that we can go in the next couple of months or next year with our online shops. But total is still in a very small number, and we don't expect an OTC adjustment of regulation before, I would say, 2024, maybe 2025. Until then, the total amount where we are able to sell to our online shop is still not a very high figure. But of course, our ambition is not to have a minus compared with last year. That means the minus 12%, of course, with everything to grow even on the small product portfolio we can sell.

That was the last question in line. I think, Felix, you can close the half-year call.

Thank you very much, ladies and gentlemen. We thank you all for your active participation and your interest in Galenica. Goodbye, and have a good afternoon.