Home Care Expansion And Digital Initiatives Will Drive Future Success

Key Takeaways

• Expansion in home care and pharmacy digitization promises revenue growth and improved market positioning through service integration and enhanced customer engagement.
  
• Strategic investments in logistics, personnel, and acquisitions are aimed at boosting operational efficiencies, profitability, and net margins.
  
• Regulatory and market challenges, including increased generic substitution and online sales limitations, may hinder Galenica's revenue growth and strain margins without strategic adaptation.

Catalysts

Operates as a healthcare service provider in Switzerland and internationally.

• Galenica is focusing on expanding its presence in home care, which is considered a clear-cut growth segment due to demographic trends and increasing health costs. This could drive future revenue growth as the integration of services like Medifilm and Emeda, coupled with increased market share, positions Galenica well in the home care market.
  
• The company is pursuing digitization and omnichannel strategies in its pharmacies, including investments in e-prescription capabilities and the development of consumer-friendly technologies. This approach is expected to improve customer engagement and potentially increase revenues, while enhancing operational efficiencies can impact net margins positively.
  
• The ongoing integration of new acquisitions and optimization of pharmacy locations aim to enhance market share and profitability. By refining the network of locations and focusing on more profitable sites, Galenica can strengthen revenue streams and operational margins.
  
• Significant investment in the switch to SAP for logistics centers is expected to result in operational efficiencies and increased resilience, which, once fully scaled up, can lead to better cost control and improved net margins.
  
• The strategic focus on personnel cost management, including reducing dependency on external stopgap hires, coupled with efficiency gains from digital infrastructure enhancements, is expected to maintain or improve EBIT and net margins, supporting profitability growth.

Galenica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Galenica's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.7% today to 4.5% in 3 years time.
• Analysts expect earnings to reach CHF 195.7 million (and earnings per share of CHF 4.09) by about April 2028, up from CHF 183.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the GB Healthcare industry at 22.6x.
• Analysts expect the number of shares outstanding to decline by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.82%, as per the Simply Wall St company report.

Galenica Future Earnings Per Share Growth

Risks

• The pharmaceutical market experienced a modest growth rate of 3.5% last year, significantly hindered by increased generic substitution, a weak flu season, price reductions, and currency effects. Continued influence from these factors could impact Galenica's future revenue growth.
  
• The company's shift towards relying more on consultations and non-medication segments, which faced a decline last year, may create pressure on revenue growth if these areas do not perform as expected against traditional medication sales.
  
• The online shop sales have been low due to limitations in being able to fill only non-medication orders online, which constrains potential revenue increases from digital sales channels unless further progress is made in regulatory acceptance of e-prescriptions.
  
• Regulatory changes could affect business activities, especially if there's increased pressure to reduce healthcare costs and potential barriers in expansion initiatives. Such changes could impact net margins if new regulatory measures demand operational shifts or cost absorption.
  
• The ongoing transformation projects, such as the ERP system switch, while essential for future efficiency, present risks tied to execution and potential additional costs over the medium term, which could temporarily inflate costs and impact net earnings.

Valuation

• The analysts have a consensus price target of CHF80.25 for Galenica based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF90.0, and the most bearish reporting a price target of just CHF72.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF4.4 billion, earnings will come to CHF195.7 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 3.8%.
• Given the current share price of CHF82.5, the analyst price target of CHF80.25 is 2.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.