The Way of Pricing

Leonardo Da Vinci has been credited with designing the first helicopter in 1493. The future is never clear.

CONTENTS

Cristal ball - page 3 When is the Euro crisis over?

Attractive situations - page 7 January 2012 Meyer Burger N°1

Interview with an Entrepreneur - page 8 Author Etienne Jornod - Executive Chairman of the Alexandre R. Kaufmann Board of Directors of Ltd

Noise from the street - page 14 Price Kuehne + Nagel & China CHF 20.-

Kaufmann Kapital AG for Incrementum advisors AG Introduction The idea of this Letter is not to provide you with investment tips. The idea is to remind, present and promote the Way of Pricing, as opposed to the widely spread market timing tendency, that can be practiced alone without the help of any "investment professional". If you invest with the attitude of a businessman, then this Letter is for you. If the share of a listed company represents merely a piece of paper that can be traded in the hopes of making money tomorrow, then this Letter did not land in the right place.

Where to find it? www.kaufmann-kapital.ch section Letter to Investors.

Disclaimer The information presented in this document are provided for your personal information only, and are not to be used or considered as an offer or solicitation to buy, sell or subscribe to any securities. The price of and revenues from any of the securities or financial instrument mentioned in this document can go up as well as down. This document does merely constitute the different assumptions, views and analytical methods of the author who prepared it, and might not necessarily constitute the assumptions, views, and analytical methods of the other partners working at Incrementum advisors AG. Furthermore, the information, opinions and estimates expressed herein reflect a judgment as at the original publication date and are subject to change without notice. Accordingly, Incrementum advisors AG and Kaufmann Kapital AG accept no liability for any loss arising from the use of this document, which has been made available for information purposes only. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability of use would be contrary to law or regulation.

Kaufmann Kapital AG for Incrementum advisors AG CRISTAL BALL

Everybody can hear how the public finances in intervenants to change these bad habits. That is Greece and Italy are deteriorating, to the point where we need to go. that certain policymakers are now questioning this entire "euro-denial". So what are most stock It is crucial to identify correctly the problem, market intervenants trying to do? They are trying otherwise how to protect our purchasing power to assess - speculate would be quite appropriate - over time? And how are we going to do that? when the challenges faced by these countries will be solved, and at which price will the stock market By trying to ancitipate in which form will greed trade by then. appear again in the foreseeable future? Why not protect us from greed in the first place! So when will that be? Let us find out the truth in our magic By trying to anticipate how long policymakers will cristal ball... continue to kick on the can down the road, in the hopes that at some stage economic recovery will Well, to be perfectly clear, I mask the poor management of public finances? am not trying to answer that Why not protect us from denial in the first place! question. Nor should you. Why is that? The good news is that a system designed to Because 95% of the stock market community is maximize profits in the short-term is extremly trying to play that game using more or less the vulnerable, sometimes even self-destroying. Look same sources of information. How likely are we at certain large banks. Are they mostly under going to beat the crowd at its own game, in which pressure because some socialists vote against the we also belong? investment bank or because a bunch of under- washed "indignés" barbecue on Paradeplatz? Of Because when the problems with the Euro will be course not! They are under pressure because of eventually solved, then it will be too late to buy themselves. They are imploding from the inside. our favorite stocks for they will trade already at much higher levels. That comes back to our discussion about corporate culture. If the only culture is to Because when the problems with the Euro will be maximize profits, then some employees will take solved, we will face new challenges that are not yet irrational bets to maximize their own, even if they identified. And these new issues will take have to betray. The problem in banks is not the abnormal dimensions, because we still try to grow efficacy of their monitoring systems. There is no indefinitely in a world of limited ressources. system in the world that can prevent someone from cheating if he wants to. The problem is the The real problem is not the Euro or Italy or the corporate culture, and it is becoming an industry- real estate market in China. These are specific issue. Another good reason not to allocate manifestations of a wider tendency: an exag- money in this industry. gerated use of credits. In other words: greed and distress. But often distress comes as a consequence Where are we in the cycle? of greed. So greed is the fundamental problem, not the Euro. States have realized that the current levels of debts are not sustainable, and they are already The other fundamental problem is denial. That implementing measures - or at least discussing explains why the ongoing period of deleveraging about measures - in the hopes to curb the rising will need some extra time to get completed. The public debt. We are slowly moving from a state of problem with state-subventions: they preserve bad denial to a state of financial repression. Somebody habits. The main benefit of a crisis is that it forces has to pay. Policy-makers probably hope that we

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 3 are going to pay. We, the honest tax payers. By chance some of these entrepreneurs are Governement interventions, liquidity injections, working in some of our companies listed here in all of that "easing" is about to dilute our . By chance because we can take purchasing power. And it is meant to be. financial advantage by buying and holding shares of the companies in which they work, create How to protect us against greed, denial, products, jobs, and ultimately generate share- and financial repression? holder value.

Certainly not by following what policymakers If you have a few people that destroy the invite you to do. If they want you to buy their equilibrium of a complex system, it is up to other government bonds, there must be something fishy people to make up for it. That is why I refer to our about them. Remember: entrepreneurs and their employees, instead of governments tend to be mentioning the stock market and the equities. anything but transparent Behind successes and failures, there are always when it comes to borrowing. people. In the end you don't invest in equities or companies, you invest in people. That is another "The fact that basic data on point of differentiation between those pursuing domestic debt are so opaque and "market timing" and those practicing "market difficult to obtain is proof that pricing". governments will go to great lenghts to hide their books when For those sceptical about the ability of an things are going wrong, just as entrepreneur (or sceptical about their ability to financial institutions have done in identify those suc- the contemporary financial crisis. We see a major role for cessful entrepreneurs) international policy-making organizations, such as the to generate value International Monetary Fund, in providing government debt during long periods of accounts that are more transparent than those available time, there is the today." possibility to invest in real estate. Debt- - Carmen M. Reinhart & Kenneth S. Rogoff, This financed real estate Time Is Different. offer historically a compelling protec- Probably the best way to protect against denial, tion notably during greed and financial repression is to invest in few periods of financial repressions, marked by selected entrepreneurs that will manage to create negative real interest rates. In addition to that my incremental value, and this irrespective of future partners and friends at Incrementum advisors can economic developments. enumerate many reasons why gold and other precious metals offer a sound long-term These entrepreneurs need to maintain or protection against inflation. reinforce the competitive advantages of their companies year after year, in order to mitigate the How much cash in our portfolios? pressure from their competitors. They need to resist the short-term imperatives of Wall Street, One of my friend, Albert from the «Platine- designed to maximize short-term performance at Küste», still believes that cash is king. Why is that? the expense of durable profits. They need to be careful in their acquisition plans, if any, and Because he believes that «in the current maintain sustainable levels of debt. And they need environment», every shares he would be buying to establish brands, in order to have sufficient now might become cheaper in a few weeks’ time. negotiation power towards their customers if their costs are increasing and/or in the event of un- At this occasion I would like to remind about the predictable events such as currency headwinds. dangers of pursuing the way of timing.

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 4 After almost 12 years in this business I never met What is relevant in determining the appropriate a person who got rich by trying to anticipate the level of cash in our portfolios is not to define when short-term erractic moves of Mr. Market. At this the problems that everybody can read in the stage it seems appropriate to quote once again newspapers are going to be fixed. What is relevant Benjamin Graham (1894-1976), recognized as the is the discrepancy between the available price and father of value investing: the calculated intrinsic value of a business that fulfills certain qualitative and quantitative "Since common stocks are subject to recurrent and wide criterias. That is the central idea behind the Way fluctuations in their prices, the intelligent investor should be of Pricing that is being pursued here. interested in the possibilities of profiting from these pendulum swings. There are two Those few practicing these investment philosophy possibilities of profiting from these will not wait for bad economic datas to take out pendulum swings: The way of profits on situations they judge overvalued, in the timing and the way of pricing. By same way that they will not wait for a timing we mean the endeavor to confirmation of economic recovery to consolidate anticipate the action of the stock or initiate positions in attractive situations they market - to buy and hold when the judge undervalued. future course is deemed to be upward, to sell or refrain from buying when The following chart depicts the averaged level of the course is downward. By pricing cash in relation to our benchmark, the Swiss we mean the endeavor to buy stocks Performance Index (SPI). A comparable level of when they are quoted below their fair value and to sell them liquidity was maintained during the fourth quarter when they rise above such...We are convinced that the as compared to the previous quarters. intelligent investor can derive satisfactory results from pricing. We are equally sure that if he places his emphasis 40 % 6800 on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results." - The Intelligent Investor 30 % 6150

Besides... 20 % 5500

"The future is never clear, and 10 % 4850 you pay a very high price in the stock market for a cheery 4200 consensus. Uncertainty is the 19 janv. 2010 1 nov. 2010 17 août 2011 friend of the buyer of long-term values." Chart: Average liquidity level vs. the SPI (Source: Kaufmann - Warren Buffet Kapital AG)

From my perspective the only The debt crisis in and , reason to desire cash is to pay coupled with dubious worldwide economic our bills, give some pocket indicators and uncertainties surrounding money to our kids, buy some economic growth in China are factors likely to stones to our wives, and to further irritate Mr. Market. On the other hand, secure flexibility to finance speculations about further government inter- future compelling investments. ventions could support the market in the short What cash is not: a sound protection against the run. turbulent times that we are experiencing right now. The observation of the behavior of the sell-side analysts gives a hint about the overall mood of Mr. Market. Since January 2010, the proportion

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 5 of "buy" ratings from sell-side analysts averaged Successful entrepreneurs will position their moderate levels, that are not indicative of a companies in such a way that they will gain valuation anomaly accross the board that would market shares particularly during phases of justify higher liquidity levels. economic contraction.

58 % 6800 The ultimate driver of growth is not the economy, but creativity. Creativity lies not only in the design 55 % 6150 of new attractive products, but also in supply chain, production, and distribution. All in all, it 52 % mitigates the importance of an economic cycle. 5500 50 % Why do phases of economic contraction look 4850 47 % always so scarry then? Because some less capable people want you to think that way.

19 janv. 2010 1 nov. 2010 17 août 2011 As some people find it more comfortable to blame Chart: Proportion of buy ratings from sell-side analysts on SMI others instead of putting themselves into question, stocks vs. the SPI (Source: Kaufmann Kapital AG) some "managers" prefer to blame the economic cycle to justify the poor development of their The observation of the investment behavior of operations. our large swiss insurance companies, traditionally an important player in the stock market, rather confirms our assumption. With only 3-4% of total IT'S NOT DENIAL.... invested assets allocated to equities, the latest available data confirms the historical low equity weighting observed during previous quarters.

Don't be scared about economic cycles !

Successful entrepreneurs work beyond cycles, banking crisis, and navigate through currency headwinds and the changing raw material costs. These are factors that affect everybody, in different ways and orders of magnitude, depending on how the ships are designed. ... I'M JUST SELECTIVE ABOUT THE Successful entrepreneurs are able to save a watch REALITY I CHOOSE TO ACCEPT. industy in a country where the salary of a secretary is higher than the salary of an engineer based in the competing country.

Successful entrepreneurs are able to resist the imperatives imposed by some short-term oriented activist or the dogmas proposed by some naive consultants that are only desperate to close a deal.

Successful entrepreneurs are able to build up and establish brands that will allow them to compen- sate the fluctuating currency and raw material movements.

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 6 ATTRACTIVE SITUATIONS

The visual presentation of selected swiss listed We need to discriminate between an equipment companies fulfilling my qualitative and maker such as Meyer Burger, over those quantitative criterias has changed as compared to manufacturing these solar cells and systems. The the previous monthly performance table that business fundamentals are quite different. Meyer appeared in the previous updates. Burger has achieved durable competitive adv- antages because of rare slicing technologies and In fact this monthly performance table only because it provides customers with a full range of encouraged my readers to look at our investments equipment along the entire value-chain, from on a monthly basis, which is contrary to the Way silicon ingots to solar modules. That contributes of Pricing being pursued here. to make the company pretty unique, explaining why it can generate and sustain a high Meyer Burger - new on the list profitability going forward.

During the quarter I have started to take a look at Other sceptics argue the market is cyclical, Meyer Burger. The company is specialized in rendering an equipment maker even more slicing hard and brittle materials for several vulnerable during phases of contraction. applications in the solar, semiconductor and sapphire & opto-electronics industries.

Pictures left and right: w i r e s a w equipment to cut hard materials.

In the solar industry, the company supplies machinery, equipment and system solutions for wafer manufacturing, solar cells, modules and systems.

It is astonishing to notice how quickly Mr. Market That would be a fair statement for a company changed his mind over the past nine months. active in a mature industry. The grid parity is Meyer Burger shares outperformed after the however still in the process of being achieved. unpredictable events that shaked Fukushima, as The process of industrialization has barely the costs of operating nuclear energy increased started. In the case of Meyer Burger, it is further, accelerating the trend towards grid parity. departing from reality to simplify the investment Since May however, the shares have fallen sharply case by considering mainly where the company on the back of a poor industry newsflow hitting stands in the solar energy cycle. the headlines on a regular basis. Other attractive situations It is fair to assume that solar cells and modules manufacturers are exp- Alpiq, Emmi, Espace Real Estate, eriencing a sharp decline in average Galenica, Geberit, IVF Hartmann, selling prices on the back of lower Jungfraubahn, Kuehne + Nagel, Kuoni, silicon prices, little differentiation , MCH Group, Nestlé, Orior, factors and over-capacities. But we Romande Energie, The Swatch Group, shall not put all the eggs in the same Uster Technologies, Warteck Invest. basket. Picture right: a solar module.

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 7 INTERVIEW WITH AN ENTREPRENEUR

Mr. Etienne Jornod, Executive Chairman of to B. Braun (Melsungen, Germany). The name the Board of Galenica Ltd. Vifor was retained for the marketing of OTC products in Switzerland and for the batch production of specific iron-based medicines for foreign companies, such as Byk Gulden and Lucien. Then, in 1991, the Board opted to pursue a strategy which saw the company return to its core business of distribution.

In 1995 we decided to take control of regis- trations and brands of products manufactured for third parties and to create a pharmaceutical company focused on OTC products and iron- based medicines under the name Vifor. We then launched a number of start-ups in the field of information management and pharmacy chains. Etienne Jornod: "There’s no magic solution other than hard work, knowledge of the market and the ability to work as a In order to attain critical mass and accelerate the team." acquisition of expertise which was lacking when we started out, we also carried out quite a lot of targeted acquisitions. Mr Jornod, in 1995 what triggered a change in strategy designed to diversify and internationalise Identifying companies to buy, acquiring them, Galenica? integrating them and managing them while retaining Galenica’s corporate culture posed With a strategy geared towards pharmaceutical many difficult challenges. This has been an wholesale, our future prospects were very gloomy. important element of our business over the past It was obvious to us that margins would decline 16 years. Naturally there have been highs and and that pharmacy chains were about to take off. lows but broadly speaking, we have had many In those circumstances, the future of a wholesaler more successes than failures, as shown by our with a 50% market share in the small Swiss results, which have consistently shown a sharp market was very limited. 70% of foreign markets upward trend (never less than 10% net profit after were already controlled by multinationals at the tax annual growth in 15 years). Our relentless time, so international expansion was not a realistic commitment has played an essential role in prospect either. achieving this. It also requires a certain degree of We really had to do something different, and talent and luck. Luckily, we have all these that’s what we did. ingredients!

The transformation to a diversified healthcare markets prescription drugs as well company was accompanied by several acqui- as consumer healthcare products. The two sitions. How to merge all these different corporate segments face quite different economics. Why not cultures and which major integration challenges allocating more resources in one or the other had to be faced? segment to gain even more critical mass?

The first acquisitions were carried out with a view Batch production, the Uro-Vaxom® and Broncho- to creating a group in the field of hospital supply Vaxom® products and OTC products, CellCept (IV). This strategy failed and the business was sold licences and other local contracts (Helsinn,

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 8 Chiesi, Falk, etc.) contribute to company growth the balance between risks and the financial and risk diversification, and help attain a certain resources necessary to achieve the defined critical mass. objectives.

We believe that it would be wrong for a group If the opportunity presented by the anaemia such as ours to put all its eggs in one basket. In treatment market beyond dialysis is so important, any case, it’s much too soon to do so now. The why promoting Ferinject® almost everywhere in long-term interests of our shareholders, the world instead of tackling one continent after employees and partners far outweigh any the other with more financial resources? individual short-term interests. Our long-term share price performance (+19% per annum for 15 In the field of pharmaceuticals, the notion of years; 4th best performer on the Swiss stock patent protection is key. Ferinject® is protected exchange over this period) and the return on until at least 2023. We have a responsibility to our equity (+20% for the last 10 years) clearly shareholders to maximise the potential this demonstrate this. innovation holds. With this in mind, we created a common company with the global leader in In 1999 Galenica entered into a partnership with dialysis centres, Fresenius Medical Care, in order , a leading international group of to fully exploit the field of nephrology, which is pharmacies. What are the benefits? the largest source of revenue in the short term. At the same time, we have signed a number of As Alliance Boots has its own OTC products exclusivity agreements with major companies organisation, there is no synergy in this area. specialising in certain key markets in order to Synergies do exist, however, in the sharing of develop Ferinject® beyond the field of neph- expertise in logistics and retail and we even have a rology: Luitpold (Daiichi Sankyo) in the US, number of international operational partnerships, Nycomed (Takeda) in emerging markets (Brazil, particularly in European pre-wholesale. Mexico, Argentina, Russia, etc.), Abdi Ibrahim (Turkey), Hikma (North Africa), etc. We have also What’s more, having AB as its main shareholder decided that Vifor Pharma will focus on Europe. with 25% of the capital (20% voting rights) is a Our strategy is therefore highly focused and relies tremendous opportunity for Galenica. It has on strong and valued partnerships. allowed us to work systematically Picture below: samples of the with a view to the long term and Ferinject®. to create a great deal of value for our shareholders. That wouldn’t If the market to treat anaemia is have been possible without AB. that attractive, why are bigger The strongest evidence of this is pharma players not joining the the fact that Galenica has outper- party? How to hold ground against formed all its peers in European new and existing competitors? distribution over this period, without exception. Galenica is now We have opted to work with very worth even more than Celesio, which was the strong regional and global partners, in particular untouchable giant when we launched our strategy Fresenius Medical Care, the global number 1 in 16 years ago… dialysis, Nycomed-Takeda, a global leader in emerging markets such as Russia, Brazil, Mexico, In the prescription part of the business, the focus Argentina, etc., Hikma, leader in Northern is on renal medication and anaemia. The market Mediterranean countries and Abdi Ibrahim, the opportunity in these areas is believed to be leading pharmaceutical firm in Turkey, a country important. Why to diversify further? which harbours a great deal of potential.

Diversification of the Group and of Vifor Pharma The decision to work with the Daiichi Sankyo / is profitable in all its business activities. It provides Luitpold Group in the US is also a very good

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 9 solution. Thanks to these partners, we are now the 24 months by featuring in the world’s major uncontested global leader in iron deficiency medical journals (The New England Journal of anaemia. In this context, there’s no reason to Medicine, The Lancet, Gastroenterology, etc.) change our strategy. and taking part in all the main medical conferences across the world. We have also This strategy of collaborating with top-quality benefitted from the very active support of partners has allowed us to gain expertise in Fresenius Medical Care, with its best-in-class hospitals and academic centres across the world, global network and in particular the ever-growing which have all recognised the quality of our number of opinion leaders who provide essential products. This quality, as well as the safety profile support in raising awareness through their work. of our products and the good reputation they Finally, together with our partner Luitpold, we enjoy in the scientific community, are key assets. carried out clinical trials involving 5,800 patients Galenica and Vifor Pharma are not widely known treated with Ferinject® in which all the end points in international hospital circles, but our products were achieved, which allowed us to file a new are. Our priority has always been to highlight the drug application with the FDA. You cannot deny actual products, and where applicable our local that a number of key milestones have been partner, which we have always selected based on reached in this area. scientific and reliability criteria, rather than on commercial performance. In the long term, this To that end, why spending money to set up your strategy has proven its worth. At any rate, we own subsidiaries? Isn’t it the role of your partners don’t shy away from competition, we respect it. As Luitpold and Fresenius Medical Care to raise we see it, every new quality product which is awareness? marketed by a reputable company helps raise the profile of iron deficiency ill- Allow me to give you a bit of nesses, which remain insuf- history in order to answer your ficiently known. This is a vital question. Ten years ago when support for the many sufferers we started to back the very few of this illness, where all too Swiss opinion leaders who often neither the patients believed that iron deficiency themselves nor their GPs can anaemia was a serious and pinpoint the cause. very important illness, abso- lutely no other pharmaceutical Our strategy is to focus on companies were willing to do niche products and to occupy a so, other than Vifor Pharma leading position on the markets and one or two of our partners. in which we operate. In the past, iron deficiency We then decided to do the same in Europe to anaemia was of no interest to the major demonstrate our commitment to this vision. pharmaceutical firms. We seized upon the International awareness of this illness is only now opportunity and have developed very specific starting to develop. Incidentally, we believe that it products and expertise in this area. We want to will be some time before the snowball effect really pursue this strategy of becoming a leader in takes hold, as we’ve always explained. specifics: our phosphate binder PA21 product, which is currently in the pipeline, is another Let’s now move on to other parts of the business. example of this. It is currently in phase III of More than 12 years ago, the articles of clinical trials and the registration application is incorporation prevented Galenica from buying scheduled for submission in 2012. more pharmacies. Today Galenica owns the 5th largest pharmacy chain in Europe. What How much progress has been made in raising happened? awareness around anaemia? It’s true that Galenica, a company set up by We have made significant progress over the past pharmacists, was not allowed to own pharmacies.

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 10 From 1995 onwards it became clear to us that AB back in 1999 when we decided to approach a wholesaler margins would fall and pharmacy strategic partner in order to implement a very chains would take off. From that time on, it was specific stage in our transformation, namely important for us to enter this market, otherwise setting up a pharmacy chain and strengthening we would have not only been excluded from the our logistics organisation. pharmacy chain market, but also the wholesaler market, and our wholesaler competitors, such as AB works with an operating margin of around Phoenix and Celesio, were not about to shy away 10%, which is comparable with the 5% of Retail, from entering the Swiss market and taking over or although this figure is in fact much higher if you opening pharmacies. We found the means to do include the margin of OTC products that we so before everyone else and thus assumed a have developed under the Vifor Pharma brand in unique position in Switzerland. If you consider Switzerland. Alliance Boots plays on the fact that the value of these companies today, the facts show it offers both retail and OTC products. Personally, that we were right to do what we did. Alliance Boots has always been my role model.

This is an excellent example of the entre- Some investors question the legitimacy of the preneurial spirit that our Group has developed. wholesale business because it generates a This cultural element is embodied by all our profitability below group-average. But isn’t it managers and employees and is something of supporting other activities within the Group? which I’m extremely proud. I take their point, but as you suggested, these non- The pharmacy business operates under different pharma activities deliver profitability in absolute umbrellas, such as Amavita, Sun Store, Coop terms and a cash flow which is highly valuable to Vitality and MediServices. Why to position them us. This year, with the dollar independently and how to exploit the required and euro being so weak, synergies in order to cope with the difficult we’re happy to have these environment? activities in good old Swiss francs… Every brand has a specific positioning, Picture right: distribution so in fact they center in Niederbipp. complement each other. This is very As a pharmaceutical com- important in order pany, we’re still too small to to optimally serve make it on our own! The the market. And I Group’s current diversification strategy has must admit that this is a strategy that has been proven its worth, as shown by the fact that we are very successful for us. The synergies are realised in delivering the promised results and by the stock terms of shared functions (purchasing, HR, etc.) market performance which you mentioned earlier. and IT software operating processes which are the same everywhere once the implementation To what extent is your Information System process is in place. business part of the Group’s core business?

Profitability-wise, who is the best-in-class retailer Two elements must be borne in mind here. and what to learn from it? Information is key in the context of the e-Health strategy defined by the Swiss government. In this Let us take Europe as a benchmark for sense, our pharmacy chains and organisations are comparison purposes. Alliance Boots is the best-in ideally positioned for the future. At the same time, class by far. Galenica and Alliance Boots have we are developing software to manage pharmacy posted the best performance in the industry by a chains and medical practices. Here, too, the long way for the last 16 years – a remarkable synergy is obvious. achievement! We’re very proud that we selected

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 11 These activities already play a very important role Board of Directors and CEO to be the best for us, and will continue to do so in the future. solution given the transformation of the Group, its expansion and its diversity. How to successfully manage such a diversified group? Now, however, we are entering an implementation phase, as we have five major projects that are There’s no magic solution other than hard work, likely to create substantial shareholder value. In knowledge of the market and the ability to work light of this, and on my own suggestion, we have as a team, with entrepreneurial individuals who decided to create two executive positions, one of put the interests of the company and their Executive Chairman and one of CEO. In Dr customers ahead of their own personal egos. After David Ebsworth, we have found someone with all, you can’t achieve anything on your own! exceptional international experience. David is very well prepared to take over his new What would make you start questioning the responsibilities, and the efficient and harmonious legitimacy of certain business units within the working relationship we have had for more than Galenica group? two years now makes me feel very confident about the future. When Vifor Pharma has achieved the very high targets we set out in our long-term plans and Picture right: when the company is capable of continuing its David Ebsworth, development alone. CEO of Galenica Group. You have been successfully navigating the Galenica ship together with Fritz Hirsbrunner for To finish, let’s imagine that you are no longer almost 30 years. I have sensed the chemistry active at Galenica. What would you not like to see between you at numerous occasions. In which happening in the Group which would push you to ways are you complementary? sell your shares?

Sharing our tasks has always come naturally to us, - If its corporate culture changed. with me focusing on strategy, partnerships, - If it started trying to maximise its profits operational management and culture, and Fritz as in the short-term, which is perfectly Deputy CEO and CFO until 31.12.2011 ensuring possible. quality and control and providing all the support - If the Group was split into units which services which are necessary to good manage- didn’t have the critical mass needed to ment. Without him, I would never have played a survive in the long term. useful role for the Group. We’re a great team and are always available for each other, wherever we are in the world. Thank you !

Picture left: Fritz Hirsbrunner, Head Investor Relations, since 1.1.2012.

Succession is probably the biggest operational challenge at the moment. How is the transition progressing?

Since the new strategy was launched back in 1995, the Board of Directors has always considered my dual function as Chairman of the

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 12 About Etienne Jornod Etienne Jornod is a Swiss national born in 1953. He joined the Galenica Group already in 1975 as a Junior Product Manager. He left the Group in 1978, and after obtaining a university degree, returned in 1981 as an assistant to the Corporate Executive Committee, which he joined 8 years later. From 1996 to 2011, Etienne Jornod was both Chairman of the Board of Directors and CEO of Galenica Ltd. Since 2012, he has taken on the role of Executive Chairman of the Board of Directors. Etienne Jornod is also a member of the Board of Directors of Alliance Boots, Galenica's largest shareholder.

Galenica was founded in 1927 as a pharma- ceutical wholesaler. Today, the name Galenica stands for an internationally active, diversified group which, among other things, develops, manufactures and markets pharmaceutical products throughout the world and runs pharmacies, provides logistical services and sets up databases and networks in Switzerland. The strategy of the Galenica Group is characterised by two key elements: firstly a consistent focus on one particular sector - the healthcare market, and secondly, a steady diversification of activities over years with a view to achieve a sensible distribution of risk. In this context, strategic decisions are always geared to the long-term development of the Group. In 2010, the Galenica Group generated over CHF 3bn in sales, with more than 6'600 employees.

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 13 NOISE FROM THE STREET

Kuehne + Nagel & China differently if it is your business or your investments?" As we are discussing about the cycle, here a noise from the street regarding Kuehne + Nagel: some Why the way of timing provides very few chances "financial advisors" recommended lately to sell of success: Kuehne + Nagel shares at levels of roughly CHF 106.- because the Chinese economy is showing so 1. Where do you get to know about the question some signs of fragility, with the idea to buy back marks surrounding economic growth in China? the shares at lower levels. While watching television or reading your favorite newspaper, like everyone else. And What is this, if not the typical and well accepted there is a good probability that when you way of timing in all its glory? The great majority discovered the news, many other people of market participants who don't want to take the discovered it before you. time to really understand and value a business, will always end up forecasting what the market 2. The stock market is always anticipating the will do. And they most of the time end up occurence of an event. When an event occurs, running behind it. it is already priced in, so it is late to react.

If one does not know what he is doing, he 3. If you try to anticipate an event, you must a) will often end up over-simplifying a know for sure if the event in question will complex reality by creating a simple materialize or not, and you must be able to b) mental model just to make it easy to solve. quantify precisely how much of this event is Example: I don't really understand Kuehne + already priced-in (how much probability is Nagel, Kuehne + Nagel is cyclical, I read in the factored in at the current share price). newspaper that the Chinese economy might not do well next year, Kuehne + Nagel is active in 3a) That is pretty hard, the future is never clear. China, so I sell Kuehne + Nagel. That is pretty That is true also to the insiders of a company. You easy, isn't it? Those of you who read regularly my can try your luck, but it might not resist the test of financial updates still have that in mind: time.

"If there is political unrest in Egypt, it will impact 3b) That is literally impossible. You would need to not only Kuoni but the entire holiday travel know the underlying assumptions of all the industry. Is it a reason to like or dislike an intervenants that traded Kuehne + Nagel shares. investment in Kuoni? Yes, some analysts would To put a precise answer on these two points is say. Is it a reason to sell Nestlé because of higher simply not honest. At best, you speculate. raw material prices, or to sell Swatch because of the strong swiss franc, or Kuehne + Nagel And if it would be that easy, and so clear that the because some monthly economical statistics economy in China will go down and hint towards a slowdown in the economy? pressure Kuehne + Nagel shares from 106.- to 90.- or 80.-, why are Would you sell your law firm because of the best informed people in this concerns of a real estate bubble in China? matter - the management and the Do you call your real estate agent to board members - not selling all inquire about the market price of your their shares?* house twice a day? And by not calling your real estate agent twice a day, are you *Any transaction from management and/ preventing the price of your house from or board members in excess of CHF 100'000.- must be increasing over time? Why would you think disclosed and published by the swiss stock exchange.

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 14 THE END

IMPORTANT DISCLAIMER AT THE BEGINNING OF THIS DOCUMENT - Kaufmann Kapital AG for Incrementum advisors AG - page 15