DocMorris AG

Welcome to the ROSE half-year results conference call. I am together with Marcel Zivica, CFO, who will discuss the details of the results, and Olaf Heinrich, who will give you an update on the developments around the electronic prescription opportunity, integration, and synergies. I will start with a short strategy update as well as an update on our progress on our journey of building Europe's leading healthcare ecosystems. Let me first briefly look back at the first half year and give you a broad review of the progress we made before handing over to Marcel. The first half year was very active and successful and clearly marked by the exceptional situation in relation to the COVID-19 virus. The biggest news for our industry in the first half year actually came in on the 3rd of July when the German Bundestag passed the PDSG law, ultimately making e-script in the mandatory format for scripts in Germany starting in 2022. With our active approach, We are aiming for some traction for the electronic prescription ahead of the mandatory rollout. In this context, we have signed a number of partnerships, most importantly with Technical Krankenkasse and Medaptix. We will explain this approach in detail later. The acquisition of German leading telemedicine provider Teleclinic is a strong addition to the group's ecosystem strategy and will further support our electronic prescription initiatives. We are convinced that there is a significant synergy potential between telemedicine and electronic prescriptions. which we aim to capture. Our top line developed in line with guidance and with excellent organic growth on our DocMorris and Medpacks brands in the OTC segment. The acquisition of Aputal instantly extends our leadership position by adding 1.1 million customers to the group, raising our customer base to now more than 9 million on a European level. including Aputal, our market share in Germany is now at 40%. We have also made significant progress on our path to profitability with improving the gross margin and are well on track to achieve our full-year targets. I'm thrilled that the first pieces of our ecosystem are coming to life and that we are able to demonstrate via the acquisition of teleclinic that we are well on the way to becoming the healthcare ecosystem in Europe. The combination of the digital doctor visit and our electronic prescription marketplace platform will allow us to offer solutions along the digital patient journey from awareness to diagnosis to treatment to adherence. For the second half of this year, our main focus is on the electronic prescription, And within this topic, the highest priority is the launch of our customer-facing app, which we expect to go live not later than in the fourth quarter of this year. Our financial position was strengthened by the issuance of convertible bonds as well. as the capital increase on the 16th of July. With that, we can now focus on the rollout of electronic prescriptions from a position of financial strength. With these openings, opening remarks, I will now hand over to Marcel, who will explain the financial development.

Good afternoon, and thank you, Walter. Food sales increased by 19% in local currency as already communicated on the 16th of July. This is in line with our expectations and with Q1 being more dynamic while Q2 was lower due to COVID-19 effects in certain areas. Starting with Switzerland, we achieved an H1 goal rate of 5.5%, which is in line with our strategy of sustainable growth in the mid-single-digit area. The stock billing in Q1 and the COVID-related restrictions for doctor visits in Q2 balance out each other. In our largest segment in terms of sales, Germany, we were able to grow, including Netflix, by 88.5% in local currency. This was mainly driven by our strategic position to decentralize marketing on paper prescriptions. and also includes a strong performance in our core OTC brands. Taking Netflix as an example, sales growth came in at a very strong 36% delivering best-in-class performance across the board. Part of our strategy has always been focused on achieving goals via AdMate. Our analysis shows that the volume of grown and seasoned customer cohorts is very attractive compared to new customers acquired via price search engines and Google Shopping, where our quality is lower. In line with this strategy, we have acquired Apotal, the number five player in the German market, with sales of 175 million euros in 2019, extending our market share to 40% in Germany. As communicated, we just closed that transaction and are expecting ApoTal to be accretive in the second half. The revenues will, similar to Medvex, not be fully consolidated in our reported numbers in the beginning. Regnand Europe came in with a very strong performance in H1, with sales up 90.5% in local currencies. The translation effect overall on reported group sales was minus 4%. Next, I want to share the development of the KPIs of our E2C and marketplace business across all segments. The number of active customers rose from 6.1 million to 9.2 million, increasing by 51.2% compared to the 12-month period ending 3rd of This was driven by a strong organic increase in customers of 2 million and the customers added by the Avotale acquisition. Due to higher growth in the German OTC as well as the marketplace business, which typically commands slightly lower baskets, which more commoditize the products compared to prescription drugs and also B2C Switzerland, the average overall basket size decreased from 59 to 54 euros. The same holds true for the order frequency, which is now at 2.4 times per year. Our repeat order rate remains at the high level at 77%, which shows the extraordinary high loyalty of our customers. The decrease mainly results from the high number of new customers, especially in our Europe and Germany segment. In terms of site visits, we saw an increase from 276 to 243 million in the third month period ending 3 June 2020. Operating performance has clearly improved in comparison to last year's number. After adjusting for extraordinary expenses, the ETA margin has improved by a strong 1.5%. This improvement was mainly driven by an expansion of the cross-margin, which has improved from 15.7 to 17.4% on group level. The largest contribution came from the improvements in the German OTC cross-margin. Stronger growth in business models will lower market prices, as we have seen on the KPIO view before. lead to increased cost margin but also to increased variable cost ratios such as personal expenses and distribution. Marketing expenses were slightly higher as a percentage of sales because of an increasing marketplace UROC business with a higher marketing ratio. The finance expenses increased due to the interest rate on the bond and convertible bonds Additionally, the development of the Swiss franc zero exchange rate led to some foreign exchange losses. For transparency, we decided to define an adjusted ADPA level to show the operational performance compared to the previous year, irrespective of the influence of special items. These charges and income are currently related to acquisition and integration. Last year, we had the re-evaluation of Ernaut components, especially Medpacks. And this year, we share this retention package for founders, which are included in the M&A bar on the right-hand side of this chart. We got approximately 2 million Swiss francs integration costs are on a similar level as last year. At the operating level, we see an improvement of 8.9 million Swiss Francs compared to last year. Our financial target for 2020 is to achieve break-even on our established businesses in Switzerland and Germany, resulting in an adjusted EBITDA before expenditures on additional growth initiatives like electronic prescription, and also segment Europe. And for H1, at minus 2.6 million Swiss francs, we are on track to achieve our profitability target for the full year. With our one-way analysis, we'd like to show what our profitability would look like assuming completion of the planned integration steps. On the first line of the chart, you see our 2019 figures, including positive one-offs of 29 million. We have reached an EBITDA margin of minus 1%. The second line shows our run rate based on the current sales. The improvements are driven by increasing cost margins, lower picking costs in a more efficient logistics setup, a higher marketing efficiency by steering the segment with one leadership team, as well as from the realization of organizational synergies. The realization of this synergy will lead to an ABTA margin between 2% and 3%. With our half-year results, we are fully in line with our task to profitability. Firstly, we managed to improve our cost margin. Secondly, we implemented one organization for the German segment and integrated further service functions. Thirdly, we focused our marketing expenses on DocMorris and MedPax and are pursuing profitable growth. The key changes in the balance sheet were driven by the launch of the convertible bond in March, leading to a higher cash position and also higher financial liabilities. On top of this, the capital increase after the end of H1 in July further strengthened our equity base by $213 million. On the other hand, the negative free cash flow of 105 million Swiss francs included the payment and closing of the MedPax earn-out of roughly 42 million, temporarily increased inventories taken by COVID-19, and recurring investments of 17 million reduced the cash position. Overall, the balance sheet clearly has the financial strength to invest in our strategic initiatives and growth opportunities on which we will elaborate in the next part of the presentation.

Thank you very much, Marcel. Let's discuss future and let me explain our plans for the second half of the year on our three key initiatives with regards to our eHealth ecosystem ramp up. We are innovating to ease consumer health journeys via the acquisition of TeleKlinik, the leading German telemedicine provider. We are also in negotiations with a number of digital solution providers to establish partnerships to get closer to our vision of creating a place for every consumer to manage their health within one click. This place will be enabled by our leading technology, that we are developing via our tech hubs in Barcelona, Berlin, and Winterthur, with a growing team of our 100 tech-focused employees. I will provide a little more detail on this initiative in just a minute. In the German market, we hold the player number one position in terms of active customers and are in the pool position ahead of the electronic prescription introduction. Transferring our leading position in the OTC market with more than 8 million active customers in Germany into electronic prescription is our target as soon as scalable electronic prescription pathway opens up. Our first mover strategy and active approach towards scaling ahead of the schematic launch is gaining momentum with the partner network already built up, ready for the rollout. On the integration and synergy side, we have already seen some tangible progress in the first half year, driven by the segment-wide steering of marketing activities. The MapBase team, which has taken over all responses, has demonstrated their unmatched competence in this space, as you will see in the numbers that Olaf will show later. The integration of the acquired businesses is fully on track, with the communicated steps of integrating VitalSana and integration of further service functions through the rest of this year. The remaining locations will run as operational hubs. The group-wide branding strategy will be finalized during the second half of this year. Let me now give you an update on the digital healthcare ecosystem. As communicated during the last calls, we are in the process of building Europe's leading digital healthcare platform, building on our cutting-edge technology, unmatched links to a broad area of partners like insurance companies, our customer base of now more than 9 million on a group level, as well as the highest brand awareness is to create a world where everyone can manage their health in one click. This is the vision we are working towards from a transaction and distribution company to a unifying e-service platform enabled by leading technology with multiple revenue and also profit streams with the ultimate goal to ensure the efficacy of medication with the help of digital solutions. This motivates all of us as it will bring real value to the customers as well as to the healthcare systems. Based on seamless and personalized solutions, we want to make it easy, particularly for chronically ill patients to receive the optimal treatment and benefit from innovative solutions. They can trust us to plan their treatment pathways with controlled and effective medication along the way, and primed access to products and services, thereby disrupting an 800-year-old gilded system. On this slide now, you can see a typical customer journey through the digital healthcare system. We are working on innovating consumer journeys from awareness, to diagnosis, to treatment, to adherence by partnering with relevant providers of solutions along this journey and integrating their offering in a seamless way for the customer. We will do so by leveraging best-in-class solutions and convenient access to products to enable better lives for the consumers. A chronically ill patient can track their fitness or heart rate with a connected device and if a need to consult, the doctor rises directly access to the telemedicine service of teleclinic within the same app. After the doctor has decided on the treatment for the patient, the patient can take advantage of the best-in-class digital solutions tailored to his needs via our platform. If a medication need arises, a new script can be issued and redeemed as the pharmacy of choice by the consumer. Convenient adherence management apps help the consumer to monitor their health in an easy way. Within our ecosystem approach, we aim to leverage our existing assets to evolve our core business. Online pharmacy remains at the core and drives revenues. With our marketplace and platform business, we are opening up for local pharmacies to extend the product and service offering. Integrating partners, for example, digital health solution providers will drive customer acquisition and retention for the online pharmacy and marketplace business and advance our business models. As said before, we will evolve from selling pharmaceuticals to bringing the efficacy of medication to the consumers, especially the chronically ill. The acquisition of TeleKlinik has added an important building block to the consumer journey offered by the group. TeleKlinik is a pioneer in offering reimbursable consultation services compliant with the German National Health Insurance Scheme. The usage of rates of telemedicine have increased significantly since COVID-19 outbreak and teleclinic has also seen a large uptick in usage rates. Based on the current experiences, we estimate that e-scripts will be issued for up to 50% of all consultations on the teleclinic platform. This chart now demonstrates the momentum that telemedicine has gained over the past few months. According to BitCon, every second user prefers video consultation over visits to the doctor since COVID-19. Entrepreneur.com titles that telemedicine is laying the roadmap for healthcare's future. whilst data published in their own health reports that 62% of Germans are open to telemedicine. A projection by McKinsey shows that in mid-term, already up to 10% of all consultations move towards telemedicine, resulting in a significant revenue and earnings potential for teleclinics. With that, I hand over to Olaf to give you an update on the electronic prescription opportunity and our progress on integration and realized energies.

Good afternoon to everyone and thank you, Walter. I'm moving now to the long-awaited and much-discussed move to the ERX in Germany. This will be the big game-changer for the market. On the regulatory side, we saw a very important development on July 3rd of this year when the German Bundestag passed the PDSG law, which includes a sentence that makes the e-script the mandatory format of scripts in Germany starting in 2022. This is a big step. As before, e-scripts are only introduced as an alternative format in which scripts could be issued. The mandatory introduction speeds up the adoption curve of the e-script probably by years. Additionally, and with regard to recently discussed implementation within the gematic rollout, the following progress has been made. All market participants, including EU mail order pharmacies, will be able to connect to the telematic infrastructure and will be enabled to access e-scripts on the national ERX server. Matic will provide a service solution and is also targeting to provide a standard app, which is planned to have connectivity features to other apps developed by market participants. There will be a competition between platform providers about winning customers for their platform. Value-added services will become the key differentiator in this competition. Just to remind you of the size of the opportunity you can see on this chart, the size of the online market in different online penetration scenarios. Today, the online RX market is roughly 600 million in size, which equals an online penetration of 1.4%, and we all know the reason for that is the inconvenience of the paper script. If this moves to 5%, the online market would be at 2.1 billion, at 10%, at 4.3%, and at 20%. which equals the online penetration on the OTC side in Germany. The online market would be 8.6 billion. So we are talking about a big market and a huge opportunity ahead of us. On the next chart, this shows our assumption of the adoption curve of platform usages in an e-commerce only approach versus marketplace approach. We have learned from our customers that they are looking for the options of choice, to decide based on their current situation whether they want to use a brick-and-mortar pharmacy or an online pharmacy. This is something we can't determine. It's the choice of the customer. An offer that combines both makes it more likely that they will use a platform rather than continuing to walk straight to a brick-and-mortar pharmacy. While we think that an e-commerce-only approach can also be successful,

strongly believe that a marketplace approach with value-added services will increase the adoption curve significantly.

Let us have a look at our own approach towards DRX. As you might know, the German focus of Bob Morris as innovator and first mover has always been Rx. The current management team has a long-standing history on shaping the Rx market in Germany, especially when it comes down to the core drivers. which are legal, regulatory, reimbursement scheme, and payers. And because of this know-how, we strongly believe that we cannot simply wait until RX2 happens, but we have to take our own initiatives, and this results in what we call the two-phase approach, shape and build pre-geomatic, and then harvest within geomatic. Let's talk a little bit about the pre-geomatic phase. We are partner and ERX technology provider for the most relevant ERX initiative in Germany led by the largest insurance companies like TK, Barmer, DAK. They are representing more than 35% of the total market. Within this corporation, we enable more than 50% of brick-and-mortar pharmacies in Germany to connect to our ERX services via a deep integration into their primary IT ops systems. And even more important, we signed the Medartix deal, as I already talked about, which gives more than 27% of the German doctors access to our ERX services, also via a deep technology integration into their IT ops system. So that means from, let's say, a partner perspective, technology perspective, and product perspective, we are best prepared to boost the business already in the pre-gammatic phase. The potential of this case depends heavily on the question of the ERX reimbursement scheme. The question is, do customers need to register in a two-step or one-step approach for the new ERX service? In the two-step scenario, customers first have to register with their insurance company. The legal term for that is called a 140 contract, just from a legal perspective. And then afterwards, they have to register also with DocMorris. In the one-step scenario, they can directly register with DocMod. And of course, as you know, in terms of conversion, there's a significant difference between the two scenarios, and this will also determine how quickly and how fast we can manage to grow. The current regulatory status determined by the Selbstverwaltung, we'll talk about the Selbstverwaltung in a second, requires the two-step registration process and also applies only to participating insurance companies. The intended regulatory status of the GSAV, this is the law which passed last year in July, for fees only a one-step registration process. So from a legal perspective, it looks all good. The one challenge ahead of us is ZEB surveillance. This is a body consisting of the doctor associations and pharmacy associations and payers associations. And they are usually governing the implementation of health care laws in Germany. They have, in this case, not implemented what is required by the GSAV law. But we see a good opportunity that this regulatory framework is going to change into the direction of what's required by law. And this might already happen in the upcoming months and will then, of course, bring us into a pretty good starting position in terms of boosting the business prior to the gematic. In the gematic phase, we will, of course, then profit from our experience, especially on product and partner level, and then we'll harvest whatever we have done in the last month. After talking about enabling the stakeholders to provide and access this, I would now like to explain how the different apps will be connected during the two phases. In the pre-gammatic phase, our own marketplace app, as well as the apps of the network partners, will be directly connected to the ERX server. Other competitors will only be able to connect their application to the ERX server via the e-health tech basis app or not at all. Within the gemmatics framework, it is currently defined that only the gemmatics basic app will have direct connection to the national ERX server. This basic app will provide connectivity for third-party apps going forward. On the roadmap for the implementation phase, our roadmap for the implementation phase consists of launching our customer-facing ERS marketplace which I will talk about in just a minute, and subsequently become the first mover in ERX opportunity in the pragmatic phase in 2020, but mainly in 2021. Here we see three opportunities. First day is test and learn. If we have this two-step approach via the 140 contract set up, for this one, we should be ready once we launch the marketplace app. The second one is the scaling via the digital prescription service of teleclinics. like I was talking about earlier, in which no 140 contract is needed, as there will be a paper RX flow in the background. So that means from a customer perspective, it's a fully integrated service. It looks and feels like an e-script, but in the back, there's a paper flow. And then the third and largest opportunity, as just described, of course, is if we can switch to the one-step registration process. and then we can significantly boost based on the partners that we have set up the ERX business. After the implementation of the pre-geomatic framework and the mandatory implementation, we will focus on building our great starting position on the pre-geomatic phase and on leveraging our unmatched customer base of more than 8 million customers in Germany with a clear distance to the number two target. and other competitors. And I think it's important to say that those active customers are not only OTC customers, but because of the size of those customers, they pretty much reflect the average situation in Germany, meaning we have 25% of those are chronically ill by definition, so it's a great starting point into this journey. We believe that the key to success for the ERX scaling is creating a customer benefit for the end user, which we are convinced to deliver with our patient-facing marketplace solution. The marketplace will connect the offering of e-commerce pharmacies and local pharmacies. The customers will be able to choose between a number of delivery and pickup options and show the whole range of RX, OTC, and BPC products within the app. Another key feature that we are developing is a repeat script function through which the customer can connect with his doctor to ask him to issue a repeat script. We also aim to combine the marketplace offering with our recent acquisition of TeleKlinik, as Walter pointed out earlier, allowing patients to connect with a doctor within the app and choosing among the partner pharmacies to fill their scripts. We're looking to build upon our existing marketplace technology from Pomo Pharma, combined with our ERX know-how from eHealthTech, and we are pretty much on track to launch the first version of the app in Q4 this year. And also, of course, we will make use of the tech capabilities of teleclinic for combining all of those into this one marketplace will give us a competitive edge. Our focus also lies on integration of our very active acquisition track record. The different pillars of our integration strategy remain unchanged. Firstly, we are moving to a simplified brand structure to maximize marketing efficiency. This year we will finalize our group-wide brand strategy. In the meantime, you know, we have more than six brands out in Germany. We are already focusing. Some of them are more growth brands. Some of them are more brands, let's say, for price comparison. And other brands we use to learn in different marketplaces. So we just launched two or three days ago our market the presence of one of our bands on the Douglas marketplace. So we use different brands for different purposes to learn more about how marketplace works going forward. Secondly, we are embedding a culture with the same DNA across the group. Here we have expanded our segment management team during H1, as we explained in the full year results call and are currently streamlining the organizational structure. which I will explain further on the next chart. Thirdly, we are creating a single unified IT platform to ensure digital leadership in the coming years, and are starting this with the launch of the ERX marketplace in Q4 this year. And finally, logistics, where we are developing an efficient and customer-centric strategy, taking the learnings from COVID-19, meaning it makes sense to be very close also to the customer, on our business, but also the views of our new COO, Bernd Scheider, into consideration. In 2020, we are working on the expansion of our existing Helen site while continuing to work on the ramp-up of our new DC2 in Helen as well. As part of the integration efforts in 2020, we are shifting to a fully centralized organization in Germany across all brands. All relevant functions, including marketing, tech, ops, and support, will be centralized in Herlen and Mannheim. On top, we only keep currently the logistics hubs in Bremen and Halle. We are evaluating currently the best logistics strategy going forward, as just mentioned. Socially acceptable solutions in the form of severance packages to take adequate account of the interest of the 47 employees in total, we laid off. who have, in total, who are affected has been developed. We expect to realize synergies from these measures starting next year, getting us one step closer to the runway margin that Marcel explained earlier. I want to end my presentation by highlighting another integration success, the Medpacks team, which is now fully onboarded after the EARNOUT settlement we achieved by the end of last year. achieved great results in the first half of 2020. We are starting to see results from applying their leading know-how in the German OTC market to our entire OTC business within the German segment. During the first half of 2020, MedTechs achieved a growth rate of 38% versus last year, while increasing gross margin to an impressive 28.7%, close to 3% higher than last year, and achieving an EBITDA margin of 4.4%. With these metrics, we have best-in-class growth, gross margins, and EBITDA margins under our roof, highlighting the potential of our business. The realization of synergies across the segment started at the beginning of this year with a focus on profitable revenue growth across all brands. With that, I would like to hand over to Marcel for the financial outlook. I'm looking forward to answering any questions you might have during the Q&A session.

Thank you, Olaf. The latest acquisition strengthened the market position of 2 years ago, and taking into account the revenues of AppoPay, DailyClinic, and also Mutex, the management has set a growth of more than 10% for the whole year 2020. and before expenses for additional growth initiatives, especially the discussed area of electronic prescriptions and European opportunities, the company aims to break even at EVTA levels in 2020. The group expects growth in the prescription medicine business to accelerate significantly from next year and confirms its medium-term base expectations over previous years. The medium-term ABTA target margin adjusted for both initiatives is around 6%. The implementation of the healthcare ecosystem and especially the mandatory introduction of electronic prescriptions from 2022 on offer further relevant sales and earning potential. As the developments are very dynamic and Bundestag just passed the law in July, we need some more time to be able to quantify the impact of this RX online penetration going forward. Our actual medium-term sales outlook includes RX online penetration of only 5%. With that, I would like to conclude the presentation and open the Q&A session.

The first question is from Gerhard Ogunes of Burenberg. Your line is now open.

Good afternoon. I have some questions about the investments into growth and the integration costs. Could you give us a little bit more detail in the investments in growth, especially the European part of 6 million? What kind of investments this relates to? And second part to this question, do you expect further M&A and integration and growth costs in the second half of this year in 2021 as well?

Yes, to start with the investment in growth initiatives, we have our marketplace business in Spain and France where we go with 90% in the first half 2020. And this 6 million is related to this business to grow this and to increase growth in these European countries outside Germany. The integration costs. I think your question is more related to the second half of this year. There we just communicated the integration of Vitalzana and also integration of some service departments of other companies. This cost in this regard is estimated in... in a lower single-digit million amount for the second half of this year in terms of integration. Then your question was also about growth cost in the second half of this year. This depends on the implementation of the electronic perception and marketing campaign we want to launch after We established our e-commerce marketplace app in the fourth quarter, and we are starting nine to 15 days. This is easy. There will be some marketing expenses, but it also can be that we start with this one early next year.

So marketing expenses related to ERX, if you make a big push there, that would be growth costs for your investment into growth initiatives.

into the electronic description, yes, that would be on this side. Okay. And your question was also about the M&A impact in the second half. You mean the already high up and close acquisitions of upper talent teleclinic?

That's right, yes. Because these were in July and August. Is this already mainly in the H1 M&A cost of 10.9 million or is there more coming?

There is more to come because the closing was from teleclinic end of July and for Apotal mid of August. And these closing costs are not included in the first half of this year.

And it says it's a share-based retention package. This is for the founders of Apotal and teleclinic, basically, or?

No, that was the result in the first half of this year, so these retention packages are for medpacks and promopharma.

All right, okay. And maybe just a second question on a different topic. In teleclinic, how many consultations do they carry out currently?

Marcel, do you want to say something or shall I give an answer? Yes, if you can. Well, I think we do not really want to give too many details on the telekinesis. The one thing we can say, there's a strong growth and this strong growth also continues after COVID-19. So the acceptance, like I mentioned earlier, we can see that in the numbers. And right now, it's about bringing more and more doctors online. So we see a huge demand and ongoing demand on this business.

Okay, thank you.

The next question is from Olivier Calvé of Capri-Chevreux. Your line is now open.

Yeah, hi, thanks very much for taking my questions. I have a few, maybe one by one. First one would be kind of related to capacity utilization. I'm just wondering, a bit surprised, I mean, not totally surprised, but just in the context of your main peer posting very good Q2 sales, could you comment on your capacity in Q2 and perhaps the... whether you were able to ship dog moist orders from other warehouses than Helen as well or Yeah, that would be the first question, please Or would you provide an answer?

Yes, I will try to give an answer to this so um as we pointed out We we are growing on not on all of the brands, but on some we are going very successfully so medpacks has clearly outgrown our competitor and And so we are focusing our marketing growth budget currently on DocMorris and on MedPax. And in both cases, we do not have, let's say, a capacity issue. I mean, we can serve all of the orders generated by MedPax from the MedPax side and the orders generated by DocMorris from the DocMorris side. It's more about how much do we want to put into growth And again, profitable growth. So our focus has not been very high growth rates, but also a combination of growth and gross margins. And we saw a great, great improvement on the gross margin side. So it's a combination from both things.

Thanks very much. Then just wondering about the marketplace you were talking about. Could you talk about your view on the commission levels that you would apply on RX in this business or is it too soon or sensitive? Could you perhaps help us in our thinking about that level?

I think that's a very good question and we at this point in time we cannot really give a price list out there because This is a very sensitive topic, especially on the RX. Let's put it this way. On the OTC, we probably take what is market standard. And then on the RX, we have to find a model which works from, let's say, a regulatory perspective. and then also generates a win-win situation. And how to generate this win-win situation, we cannot give any details at this point in time.

Okay. But would it be possible for you to think of a situation where you would just keep the customers in your ecosystem and make essentially no margin on those sales?

Well, I think, I mean, this is not the idea. The idea is to provide an overall service our partners and this is a service this is not we don't want to measure this service on an rx script because first of all that's not allowed from a legal perspective and secondly that's not the right thing to do it's in this partnership it's going it's about generation win-win situations and i mean for example i mean the um if a customer shows up in the brick and mortar pharmacy at one point in time and at the other point in time in the online pharmacy and if all of that those data's are collected, let's say, in one database. And the brick and mortar pharmacist can use all of the data as well as we can use all of the data to provide better medication services. That is what I call a win-win situation. And of course, I mean, based on that win-win situation, there has to be some kind of, let's say, split of the profits generated by this one. But it's clearly not clearly not for an Rx script.

Okay, thanks. Thanks a lot. And then just on the Swiss business, it's not usually the focus of this call, but I'm just wondering if you could please perhaps, Marcel, comment on the profitability levels that you still see there. Is this in line with the history that you, well, we don't have any history for 2019, but past history in terms of EBITDA or?

Yes, the Swiss business is still profitable, and we do not disclose the EVTA level on the segment, but the assumption that we can improve the EVTA model in the Swiss business is true.

Okay, thanks very much. And finally, just on coming back on the teleclinic acquisition, I'm just wondering, you know, I mean, there's obviously this... the prohibition of forwarding a prescription by a doctor directly to a pharmacy. I'm just wondering to what extent this plays a role into your thinking. Do you view any risk at all that your initiative to market your Doc Morris brand on the teleclinic app or this kind of thing could go against the German regulation on forwarding prescriptions?

Well, I think the idea is to build, let's say, a one-stop platform in terms of healthcare. And by doing so, we think this becomes the most relevant platform our platform will become the most relevant platform in the market, meaning you bring down customer acquisition costs, retention is higher, and all of those things coming with this. We all know the advantages of having an integrated solution rather than looking into different pockets of solutions. And, of course, on the flip side, I mean, we have to follow all of the German regulation, and it has been clearly laid out in the latest laws So there will always be the choice of the customer. So the customer will always have the choice. Say, I want my script being forwarded to either Morris Pharmacy, to one of our partner pharmacies, or I just want to receive it in a different app. So that means we will strictly follow the regulation, but I think the advantage is really having it all in one click. And from a customer's perspective, it simply makes the difference. And again, following all of those legal requirements.

Okay, thanks very much.

The next question is from Michael Heider of Barbox Research. Your line is now open.

Yes. Hi, good afternoon and thanks for taking my questions. I have two questions. Can you help me a bit here on the Medpacks growth? You said it's 36%. Are you here now just talking about the growth in the OTC business of Medpacks? How did you calculate that? Because obviously you give us the figures including and excluding Medpacks and I come to a much, much lower growth rate if I just take the MedPax figures by itself. And so maybe you can shed some light on this, please. And then I have a second question on the platform that is actually in relation to your – sheet 26, where you said that 50% of pharmacies already today have the ability to connect to your pre-geomatic solution. Can you explain this again? Because this is like a technical issue here you're talking about, or why is it that 50% of pharmacies that have already the ability to connect. And then on this one as well, you mentioned briefly that Barmer is also joining this pilot now. Did I understand that correctly? So it's not only Technica Krankenkasse, but it's also Barmer, and you also, I think, mentioned another health insurance joining that platform. Can you maybe give an update there? Thanks.

I can start with the MedPax goals. This is part of the sales of MedPax in the reported numbers, such as services or part of product delivery. And so you cannot just take the difference between these two numbers. And this 36% is on a sales towards customer basis, and with Medpacks, it's purely OTC business.

So then I will try to answer the question number two and number three. Yes, what is meant by the 50% capability? So within the project of TK, which is Technica, the largest German payer, and they are driving this eScript project in Germany as the most relevant one. And one of our, I mean, we are providing the ERX technology within this project. And that means we are connecting doctors and pharmacies via an eScript server. And the pharmacies, the way we connect the pharmacies is we use their operating system. So that means our solutions and the eHealth tech solution is deeply integrated into the, it's like a socket. Yes, it's a socket. It's deeply integrated into the operating systems of the pharmacies. And so far, and this is all information you can also get from the technical press release. So far, the technical integration has been achieved for the software of 50% of the pharmacies in Germany. meaning they have a convenient access to an e-script. The e-script comes in via our technology and they see this in their screen and they can serve it directly out of the screen. They don't have to retype it or copy it or scan it or anything like this is deeply integrated into their system. And then the payers, you asked about that one. So the project is led by Technica and then of course, right now it's gaining momentum. and other payers are joining this one. And you just mentioned a couple of names and that is correct. They are joining that initiative of Technica and right now capturing up 35% of the entire German market. So it's gaining momentum and it's getting bigger and bigger.

So who is this then besides Technica? It's Bama obviously and did you mention another name? Yes, it's a DAK as well. Okay, thanks a lot.

The next question is from Alexander Thiel of Jefferies. Your line is now open.

Good afternoon Walter, Marcel and Olaf. Three questions from my side. The first one regarding your gross margin. What has been the main driver of the 170-bit increase and would you say this level is sustainable? My second one would be on your sustainable strategic advantage derived from your pre-gammatic system. For me, it is clear that you can start transforming your OTC customer base earlier and probably have a centric marketing approach. But could you give us more color on your thinking? That would be very helpful. And a follow-on for this one, how would you classify the risk of losing customers as they transition to DocMorris in terms of giving the permission? And my last one would be on your midterm guidance. My understanding is that you baked in 5% ERX penetration in your guidance, with the PDSG law now in place and telemedicine providing further upside. Do you believe your midterm guidance of $3 billion might be slightly outdated? Thank you.

Thank you. Maybe I can start with the cross-margin. That's because we are growing on the high-margin business, B2C, And that's OTC in Germany as well as prescription drugs in Germany or also the marketplace in Europe have higher margins. So we expect also to increase the cost margin on group level over the next time. And so it's going into the future.

Yes, so then I will try to answer the second question. I'm not sure 100% if I understood the question right, but my understanding of the question was about how can we utilize the customer base we have in the pre-geomatic phase. Yes. Yes, and I mean, as I pointed out earlier, we have such a huge amount of active customers So they reflect average population in Germany, meaning 20 to 25% of those are chronic. And once we have our pre-diagnostic phase set up and we have Medartix doctors issuing script, then of course we will promote this service within all of our customer populations. In the good news is most of that customer population is based in Germany, in the acquired companies, and they have right now an RX share of zero. So that means we can offer to them an additional service right from the beginning, the right service, meaning an e-script and not a paper script. And by doing so, we think we can convert already in the pre-grammatic phase a lot of those customers. Again, it comes down to what I explained earlier. If it's a two-step registration process, meaning they first have to register at the insurance company or the payer, then, of course, that always brings down conversion. If it's the one-step registration process, meaning we have the general reimbursement scheme, then actually I see huge potential already in the pre-gammatic phase because, again, no RX share with those customers right now, and 25% of those are chronic. And the third question was on transferring customers into the DocMorse brand. So we will finalize the brand strategy by the end of this year. And, of course, then there will be a transitional phase. So it's not that we will have a hard cut, but there are smart ways to transfer customers, and this is part of the brand strategy going forward. So an example could be, you know, you have, let's say, Upper Road is a branch of Doc Morris or whatever the brand strategy is going to look like. So there are ways to convert customers. in the, let's say, in the order process via opt-in so that you don't have a hard cut out there. And we have some experience from the past on that one, so we feel pretty comfortable that we are not going to lose a lot of customers by transferring into a one-brand strategy.

And then the last part of your question about the midterm guidance, of course, the latest development has strengthened our position, and this military e-script from 2022 increases the possibility to increase online penetration. And as I mentioned, our assumption is 5% in this more than 3 billion sales targets. And if you compare to Sweden with 10% within five years, or if you compare to the OTC market in Germany, where 20% online penetration is already the case, then, of course, the downside potential here is given. We just need more time to quantify this in an absolute number with our financial targets. So we decided to keep this more than 3 billion, which also opens the number to more than 3 billion or to more than 5% online penetration.

Okay, thank you very much. One follow-up regarding the full reimbursement with the one-step registration. How confident are you that we will see this kind of change in the law already this year or end of this year? Thank you.

Well, that's a very good question. And just to clarify, I mean, there's no change of law required. The law clearly says, this is the law which passed last year in July, clearly says there has to be a reimbursement scheme starting April of this year. But obviously, there is no reimbursement scheme. So it comes really down to what is, how relevant is this for the different stakeholders? Again, the ZEPSA I planned earlier, I mean, they so far agreed on we will only start reimbursement scheme once the gematic is in place. But on the other hand, again, we have this law clearly stating that it should have happened already this year, April. And you cannot really give, let's say, you cannot really give a very good answer to this one right now. But I mean, we feel comfortable that based on the overall development and the market, digital solutions are being pushed forward. COVID-19 is coming back. But we see there's a good opportunity to get this general reimbursement scheme. And as a fallback option, we should not forget that as a fallback option, we have what I call the two-step registration process or the 140 contracts. I mean, this is reality. It can be done. So there will be e-scripts already. in 2020. That is a given. The only question is to which extent, and that is something that we cannot answer to 100% right now.

Okay, thank you very much. The next question is from Audira Rall of Barclays. Your line is now open.

Good afternoon. Thank you for taking my question. I've got two. First, can you help us understand your Q2 growth rate in Germany a bit better? You've said that you're not spending on marketing behind the paper, script, and Rx. So are you able to tell us how much OTC revenues grew in Germany, excluding MedTech? And second, looking at the Marketplace app on the OTC side, how will you control pricing on the app, if at all? And more broadly, will there be a conflict of interest between your first-party e-commerce and local pharmacies in the app? And if so, how will you manage that?

Marcel, do you want to answer the first question? Can you start with the second one and then I'll come up with the next one? Okay, so then I will try to give answer to the second question first. Yes, on the marketplace, of course, we also intend to sell OTC because the idea is a full one-click solution. one-click experience. And in the marketplace, there will be different pricing on OTC. That means all of the listed pharmacies, online pharmacies, and also brick-and-mortar pharmacies can offer a different OTC price, and they will offer a different OTC price, yes. Probably, but this is just guessing, I think. I mean, because the larger pharmacies, they have better negotiating power on OTCs. they will probably have better prices on OTC, but this is up to the individual pharmacy, brick and mortar pharmacy. They can also compete on OTC if they want to. And of course, there's a contract on OTC, as I explained earlier on the OTC, it's more like a market standard kind of contract, meaning we will get some kind of commission for the OTC which we sell on our marketplace and actually which sellers sell on our marketplace for a standard kind of commission.

So then on the gold rate in Germany, the development was clearly impacted by COVID-19 with a very strong increase in March with the starting of the crisis, with the stock peeling from the customers and also a peak in new customers. And in the second quarter, there was a release of the demand, and also that the customers with their stock at home first used this product. And so the second quarter was clearly weak. But now we see that it's coming back to normal. Yes, we see from the third quarter ongoing that we go just like before, Corona on a slightly higher level because of the higher demand of online business.

Maybe in addition to that, I mean, we have switched also the go-to-market strategy in Germany based on the MedPax experience. more into a combination of growth and gross margin. So we're increasing gross margin on OTC and still maintaining a good growth level on OTC. And then you pointed this out, the real focus going forward is the e-script and not the paper script. So that's why we are focusing a lot of activities on making ERX happen.

Thank you. And the last question is from Nadezhda Zunina of Financial Press Agency, AWP. Your line is now open.

Hi, thank you for accepting my question. I had a question about, well, I just wanted to know how you could explain the net loss in the first semester because it was a bit unexpected. at least if we believe in the expectations that were published before. Can you explain it, and how do you consider managing it in the future for the rest of 2020 and next year? That will be my first question. Thank you.

We see our results of the first half year in line with our expectations and also in line with our communicated targets for the full year 2020. The loss is also because we have all the acquired businesses and not realized all the synergies which come out of integration. But together with our announcement today, we also announced further steps of integration and integrating service functions and reducing number of locations. And so, as I tried to explain earlier, we see that we are on the way on our path to profitability and in line with our expectations.

Okay. Thank you very much. Regarding the... Are you at all concerned by a second wave of COVID? Can it impact your business in a positive or a negative way?

So we expect to have a positive impact. I mean, the negative would be if physicians would close down their practices again, like in the first period of COVID-19. And so we don't see such a scenario for the second half of this year. But we clearly see an increase of the virus situation and therefore an increased change of online behavior or of customer behavior towards online. And for such reasons, we rather see a positive effect on the second half of this year.

Sorry, I didn't get the second part about the second half. That's why you are pretty positive.

Yes, that's the reason why the COVID-19 is again increasing. But on the other hand side, we do not see the risk that physicians will have a shutdown again like in the first period.

All right.

Thank you very much. What is this effect?

Okay, so as time is advancing, we close the Q&A session for now and I hand back to the speakers for the conclusion.

Okay, thank you very much for attending this call and hopefully all the questions have been answered successfully and see you next time. Thank you very much.