Note: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 4Q17 Earnings Flash Update
Prev. Ed.: Nov 24, 2Q17 Earnings update with estimate revisions
Flash Update [Note: Earnings update in progress; final report to follow]
Fresenius Medical Care posted adjusted earnings of 69 cents per American Depositary Share (ADS) in the fourth quarter of 2017 (4Q17). Earnings per ADS increased 9.5% on a year-over-year basis (y/y).
In 4Q17, revenues increased 11.3% y/y to $5,216 million. At constant currency (cc), revenue improved 8% y/y.
Segmental Details
Health Care Services revenues rose 8% at cc y/y. The segment gained from increased organic revenues from Care Coordination, growth in dialysis services and contributions from acquisitions.
Health Care Products revenues increased 8% at cc y/y. Higher sales of dialyzers, machines, peritoneal dialysis products, renal pharmaceuticals, bloodlines and products for acute care were the driving factors.
Geographical Growth
North America Revenues
By geography, North America revenues rose 8% at cc y/y and accounted for 71.4% of total revenues. Health Care Services in the region grew 8% at cc while Health Care Products revenues improved 9% at cc y/y. 4Q17 organic growth at the segment was solid at 19% y/y.
This was fueled by higher dialysis treatments and an increase in U.S. revenues per treatment. The Dialysis Care business grew 3% at cc y/y in the region. Meanwhile, the Care Coordination segment delivered an improvement of 24% at cc.
Unfavorable foreign exchange rates partially offset solid growth in the region.
EMEA Revenues
Revenues in the region increased 6% y/y at cc. Health Care Services revenues from the EMEA segment increased 4% at cc y/y. Health Care Products revenues rose 7% at cc in 4Q17.
The Health Care Services segment was primarily driven by growth in same-market treatments, partially offset by a decline in organic revenue per treatment. The growth in Dialysis Products revenues in the region was boosted by higher sales of products for acute care, products for peritoneal dialysis and machines. However, this was partially offset by lower sales of dialyzers.
Asia-Pacific Revenues
Revenues from Asia Pacific grew 12% at cc y/y. Net Health Care Services Unit increased 17% at cc. Meanwhile, Health Care Products Business increased 7% at cc y/y.
The Health Care Services segment in the Asia-Pacific region was supported by the acquisition of Cura Group in Australia. Dialysis treatments in the region increased 7% at cc, which drove Health Care Products sales in the segment.
Latin America Revenues
Revenues in the region increased 16% at cc y/y. Notably, Health Care Services segment at the region increased 16%, while Health Care Products increased 15% y/y.
Solid sales of machines and disposables and Dialysis treatments drove revenues in Latin America.
Guidance
For full-year 2018 (FY18), Fresenius estimates revenue growth of 8% at cc. Net income attributable to shareholders is likely to increase around 13-15%.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON FMS
Portfolio Manager Executive Summary[Note: Earnings update in progress; final report to follow]
Fresenius Medical Care (FMS) provides renal dialysis products and services to over 286,000 patients around the globe. It is also one of the leading providers of dialyzers.
Of the fourthreeratingFresenius Medical, two firms (33.3%) assigned neutral ratings, while the remaining two firms (67.7%) conferred positive ratings. Target prices range from $56.00–$57.00, the average being $56.50.
Neutral or equivalent outlook (1/3 firms): Neutral firms have pinned hopes on the company’s incredible business model of portfolio optimization by acquisitions and divestments. Firmsview the core trends as encouraging in both North America and international markets. Per the firms, Fresenius’ cash flow remains robust with a solid balance sheet, leaving the company well positioned to enhance core growth through merger and acquisitions. The company witnesses solid growth on the products side, courtesy of strong peritoneal dialysis (PD) sales in North America, strong demand for dialyzers in EMEA, increased sales of machines, dialyzers, bloodlines and PD products in Asia-Pacific. However, Fresenius Medical’s earnings growth over the past few quarters has not been very promising.Also, unfavorable foreign exchange rate is expected to be a major headwind.These firms are also apprehensive about the fact that the company faces a highly regulated environment in almost every country in which it operates. Furthermore, the company has to fulfill specific legal requirements everywhere that includes the tough antitrust regulations.Specifically, the Dialysis Patient Safety Act, which was passed by the California Assembly committee and is likely to be a major setback affecting the company’s growth.
Positive or equivalent outlook (2/3 firms): Bullish firms are hopeful about Fresenius Medical’s solid core volume trends, diversified business model and strong free cash flow generation capability. Growth at the care coordination segment has been robust as well. Additionally, the firms believe that accelerating investments will pave the way for growth. They arealso positiveabout the company’s core dialysis business and believe integrated carepresents significant growth opportunity over the long term. Furthermore, firms are bullish about significant margin expansion and strong core dialysis trends in the coming quarters. The company's high financial flexibility is likely to strengthen business. Firms believe acquisitions have been a key catalyst for the company. In an initiative to boost its long-term strategy or the ‘Growth-Strategy 2020’, Fresenius Medical Care has signed an agreement to acquire all outstanding shares of NxStage Medical for $30 a share. Fresenius Medical Care expects the acquisition to prove accretive to earnings within three years from deal closure.Positive firms are also hopeful about the divestiture decision of its Shiel Medical unit to Quest Diagnostics in September 2017.
Negative or equivalent outlook (0/3 firms):
Conclusion:The firms believe that investments in the Care Coordination segment will open up significant opportunities. However, heavy spending will dent the bottomline in the near term.
Sep 11, 2017
Overview [Note: Earnings update in progress; final report to follow]
Based in Bad Homburg, Germany, Fresenius Medical Care (FMS) is one of the largest integrated providers of products and services for individuals undergoing dialysis following chronic kidney failure, a condition that affects more than 2.6 million individuals worldwide.
Through its network ofover 3,361clinics across more than 45 countries, Fresenius Medical provides servicesto over286,000 patients around the globe. Fresenius is also one of the leading providers of dialysis products such as hemodialysis machines, dialyzers and related disposable products.
Acquisitions have been a key catalyst for the company lately. In an initiative to boost its long-term strategy or the ‘Growth-Strategy 2020’, Fresenius Medical Care has signed an agreement to acquire all outstanding shares of NxStage Medical for $30 a share on Aug 7.
The transaction has been valued at $2 billion and is subject to close by 2018, on approval from NxStage stockholders and other customary conditions. Fresenius Medical Care expects the acquisition to prove accretive to earnings within three years from deal closure. Furthermore, the deal is expected to provide annual pre-tax cost savings of $80 million to $100 million over the next three to five years. Fresenius Medical care also expects integration costs of about $150 million over the next three years from the time of announcement in Aug 2017.
Per management, the takeover will boost revenues at the Care Coordination segment. We believe the latest development will help the company counter the pressure on margins. Furthermore, the latest development is expected to fortify the company’s foothold in the Home dialysis market, particularly in the renal care space. Per data from News 12 Long Island, the global renal dialysis market is expected to see a CAGR of 7.1% and reach a worth of $26.6 billion by 2023.
In an initiative to optimize its portfolio, Fresenius announced the divestiture of its Shiel Medical unit to Quest Diagnostics in September 2017. Notably, Shiel is a clinical laboratory provider primarily focusing on non-renal lab services. The lab specifically serves in the New York-New Jersey metropolitan area. Management at Fresinius expects the transaction to close by the end of fourth-quarter 2017. Post the deal closure, Quest Diagnostics and Fresenius will jointly work on identifying patients with early-stage chronic kidney disease, with potential to benefit from treatment to slow progression to end-stage renal disease (ESRD), based on the former’s laboratory data analytics.
Firms identified the following factors for evaluating the investment merits of FMS:
Key Positive Arguments / Key Negative Arguments- Fresenius has a diversified business model, solid core volume trends and widespread international presence which will drive growth going forward.
- `With about 75% of revenues generated from dialysis services, FMS is exposed to government reimbursements.
- Fresenius continues to dominate the single-use dialyzer market in the U.S.
- Fresenius generates majority of its revenues from the U.S. and Europe. Fluctuations in foreign exchange rates continue to adversely impact revenues.
- Fresenius benefits from economies of scale across all parts of the business: purchasing, distribution, RD, sales and marketing.
- Fresenius payor/patient mix is likely to deteriorate as commercial insurance patients potentially shift to government payors.
NOTEFresenius’ fiscal year coincides with the calendar year.
Sep 11, 2017
Long-Term Growth [Note: Earnings update in progress; final report to follow]
Over the next five years, the expected EPS growth is 9.4%. Fresenius is poised for attractive long-term growth in the core dialysis business led by favorable demographic and disease trends. Patient count is expected to rise annually, owing to an increase in elderly population and the growing prevalence of diabetes. Firms also view that the company’s widespread international presence, solid core volume trends, attractive overarching industry drivers, a diversified business model, and strong free cash generation is likely to aid strong revenue growth in the coming years.
Fresenius has set up a strong long-term objective called the ‘Growth Strategy 2020’, to chalk out a few strategic initiatives for attaining solid market traction. Per the postulates of the ‘Growth Strategy 2020’, Fresenius aims to boost revenues to $28 billion by 2020, corresponding to an average annual growth rate of around 10%. In this regard, for full-year 2016, revenues increased 7% on a year-over-year basis and reached $17.9 billion driven by strong performance in Health Care Services. Furthermore, management forecasts an increase in revenues in tune with organic growth and acquisitions. At the same time, the company expects high single-digit annual growth in net income by 2020.In addition to the stock’s strong performance in its core dialysis business, Fresenius intends to achieve the 2020 targets by expanding its Care Coordination (non-dialysis segment) as well.
Fresenius Medical expects dynamic growth of the renal market to continue. The company is enjoying the benefits of heavy investments in de novo clinics, especially in international markets. The company also has a growing interest in renal drugs and expects sales in Europe (besides the Middle East and Africa) to grow at a faster rate. The increasing number of patients, regional expansion, as well as a higher penetration of markets will drive growth going forward.
The firms believe that Fresenius is in a position to leverage its role as a vertically integrated therapy provider to improve profitability over the long term. The company has the potential to benefit meaningfully from a range of new products aimed at the peritoneal dialysis market, and in the longer term, from expansion of disease state management in the U.S. Medicare population.
Despite the near-term uncertainties, firms remain upbeat about the potential longer-term opportunities in integrated care. They expect the growth trajectory to accelerate as reimbursement headwinds dissipate and legal costs taper.
11, 2017
Target Price/Valuation[Note: Earnings update in progress; final report to follow]
Rating DistributionPositive / 66.7%↑
Neutral / 33.3%↓
Negative / 0.0%
Avg. Target Price ($) / $56.50↑
Maximum Target($) / $57.00↑
Minimum Target($) / $56.00↑
Upside from Current / 15.5%
No. of Analysts giving Target price/ Total / 2/3
Risks to the target price include reimbursement changes, government investigations and inquiries, commercial pricing risks, leveraged balance sheet and single modality risks,labor cost growth, medicare rates, EPO utilization, increased competition, healthcare reform and potential problems when integrating acquisitions.
Recent Events[Note: Earnings update in progress; final report to follow]
On Nov2, 2017,Fresenius Medical released 3Q17results. Highlights are as follows:
- Revenues increased 10.8%y/yto $5,093Million.
- Adjusted earnings per ADS increased 9.3%on a y/y basis to 59 cents.
On Sep 28, 2017, Fresenius Medical announced the divestiture of its Shiel Medical unit to Quest Diagnostics. Notably, Shiel is a clinical laboratory provider primarily focusing on non-renal lab services. The lab specifically serves in the New York-New Jersey metropolitan area. Management at Fresinius expects the transaction to close by the end of the 4Q17.
Post the deal closure, Quest Diagnostics and Fresenius will jointly work on identifying patients with early-stage chronic kidney disease, with potential to benefit from treatment to slow progression to end-stage renal disease (ESRD), based on the former’s laboratory data analytics.
Revenues [Note: Earnings update in progress; final report to follow]
According to 3Q17 press release revenues increased 10.8% (y/y) basis to $5,093 million.
The company primarily operates in two revenue segments:
The Healthcare services segment: This segment consists of the company’s Dialysis Services and the Care-Coordination (non-dialysis laboratory services).
Dialysis Products: This segment comprises of the company’s Dialysis machines, dialyzers, dialysis solutions, hemodialysis concentrates, bloodline systems, water treatment systems, dialysis drugs and other medical products.
Health Care Services and Health Care Products revenues increased 8% at constant currency (cc) y/y. The Health Care Services segment gained from increased organic revenues from Care Coordination, growth in dialysis services and contributions from acquisitions. Higher sales of dialyzers, machines, peritoneal dialysis products, renal pharmaceuticals, bloodlines and products for acute care drove Health Care Products revenues in 3Q17.
Through its network of over 3,600 dialysis clinics across the world, the company offers dialysis services and products in more than 120 countries and employs over 109,000 staffs in more than 50 countries. Fresenius Medical Care manufactures a variety of durable medical devices used in the treatment of End Stage Renal Disease (ESRD). Devices like Hemodialysis Machines, Peritoneal Dialysis Machines, Granuflo Concentrate Mixing Tanks and monitoring devices like the Crit-line platform are included in the company’s product pipeline.
Revenue Details
North America Revenues (72% of net revenues): By geography, North America revenues rose 2%. Health Care Services in the region grew 8% at cc while Health Care Products revenues increased 6% at cc y/y. 3Q17 organic growth at the segment remained solid at 6% y/y.
This was fueled by higher dialysis treatments and an increase in U.S. revenues per treatment. The Dialysis Care business grew 3% at cc y/y in the region. Meanwhile, the Care Coordination segment saw an improvement of 32% (29% at cc).
EMEA Revenues (15% of net revenues): Revenues in the region increased 6% y/y at cc. Health Care Services revenues from the EMEA segment increased 5% at cc y/y. Health Care Products revenues rose 7% at cc in 3Q17.
The Health Care Services segment was primarily driven by growth in same-market treatments, partially offset by a decline in organic revenue per treatment. Meanwhile, Health Care products primarily gained from a 4% y/y hike in Dialysis product revenues.
Asia-Pacific Revenues (9% of net revenues): Revenues from Asia Pacific grew 14% at cc y/y. Net Health Care Services Unit grew 21% at cc. Meanwhile, Health Care Products Business increased 9% at cc y/y. In Asia-Pacific, the company witnessed 5% organic growth.
The Health Care Services segment in the Asia-Pacific region was supported by the acquisition of Cura Group in Australia. Dialysis treatments in the region increased 7% at cc driving Health Care Products sales in the segment.
Latin America Revenues (4% of net revenues): Revenues in the region increased 11% at cc y/y. We note that Health Care Services segment at the region decreased 1%, while Health Care Products increased 9% y/y.
Despite a lackluster performance in the company’s renal pharmaceutical unit, higher sales of machines and disposables and Dialysis treatments drove revenues in Latin America. Precisely, Dialysis treatments increased 1% y/y in 3Q17 in this region.
Guidance:For 2017, Fresenius Medical estimates revenue growth of 8%–10% at constant currency excluding acquisitions.
Outlook: According to the bullish firms,the Care Coordination division will be a key driver oftop-line growth for the company in the rest of 2017 and beyond.
Margins [Note: Earnings update in progress; final report to follow]
According to the 3Q17 press release, dialysis margin contracted 20 basis points (bps) y/y to 18.1% of net revenues. The company witnessed natural disaster costs, high expenses for supplies and rent in the quarter that resulted in contraction of margins. However, the adverse impact was roughly nullified by lower bad debt expenses and consent agreement on certain pharmaceuticals in 3Q17.
Care Coordination margins also decreased y/y owing to lower profit contribution from vascular services and higher costs in pharmacy services.Operating margin in Asia-Pacific was adversely affected by foreign-currency transaction issues, lower-margin acquisitions and unfavorable product mix.
Outlook:Most of the firms expect lower cost in dialyses services will drive profitability.