• 02.1
  Operations and Business Environment
• 02.2
  Results of Operations, financial Situation, Assets and Liabilities
• 02.3
  Non-financial Performance Indicators
• 02.4
  Risk Report
• 02.5
  Subsequent Events
• 02.6
  Outlook

02.3

Non-financial Performance Indicators

RESEARCH AND DEVELOPMENT

Our Company’s business activities are aimed at achieving objectives on three levels. First, we seek to enhance the safety and quality of life of every single patient, and to improve their chance of survival. Second, we intend to offer our customers high-quality, reliable products – the best treatment at the lowest possible cost. And third, based on these two objectives, on a corporate level we want to maintain and expand our leading market position. What these three goals have in common is quality. The groundwork for Fresenius Medical Care’s high-quality products and services is laid in our research and development (R&D) departments. This is where quality begins. Last year, we once again enhanced the performance and quality of our products and treatments through our ongoing R&D work, thus creating a basis for sustained growth of our Company in the future.

QUALITY IN RESEARCH AND DEVELOPMENT – A DEFINITION

High quality in dialysis treatment is not easy to guarantee, as dialysis is one of the most complex types of therapy. At the same time, it is a highly individual treatment that depends on many factors, which may be weighted differently from patient to patient. For this reason, we define quality in research and development first and foremost via the result. This includes the quality of treatment that can be achieved with our products and services in the different areas of application and takes into account important aspects such as the safety and reliability of our products to ensure patients’ well-being. High-quality treatment means better results and a better quality of life for patients. Therapies that focus on quality from the outset lead to lower follow-up costs, say, for hospital treatments and stays. This ensures that quality remains affordable. Many of the products and treatment methods that stem from our development departments take this as a point of departure. Secondly, quality can also be defined in terms of the path that takes us to this result: the structures and procedures involved in the development process, and the availability of appropriately qualified staff. Company-specific regulations as well as international standards and norms, which we achieve to the full extend possible with our research and development activities, provide a framework for these two quality aspects. In this way, we can guarantee cost-efficient and high-quality product development processes.

QUALITY OF TREATMENT AND A PARADIGM SHIFT IN REIMBURSEMENT

Quality costs money (see the „Quality and Its Costs” section), but quality is also reimbursed. This is particularly true in Portugal and the U.S., where a bundled reimbursement system was introduced last year. Thanks to this, patients will receive better care in the future.

For Fresenius Medical Care, these changed reimbursement structures also promise advantages, opportunities and challenges in research and development. Thanks to our integrated business model, we are not only in a position to offer all the products and services specified in the “therapy bundle” in the required quality; we can also focus even more on further developing our range of products and services. Further information can be found in the section „New Reimbursement Models”.

QUALITY IN THE DEVELOPMENT PROCESS

Our research and development work is rooted in responsibility for our patients on the one hand, and accountability to our Company on the other. Our aim is to do all that is technologically, medically and economically possible to enhance the length and quality of life of dialysis patients, which is still very limited, by shaping the required processes so that they are as quick and effective as possible. To achieve these aims, we regularly reassess our processes and priorities in research and development. In addition, we compare our approach with that of high-tech companies in other fields of technology and cooperate with them. This collaboration benefits all those involved and helps us to continuously review and improve our development processes and benchmark them against those of market leaders in other technologically sophisticated industries.

Every new development at Fresenius Medical Care starts with an idea. This can be sparked either by a specific need on the market (market pull), or through technological advancements (technology push). Every product idea runs through a structured development process with clearly defined phases, so that only those ideas are pursued that actually create value for patients and users as well as for Fresenius Medical Care itself. Therefore, we examine and evaluate the planned product in terms of its market value, development costs, the resources required, and the technologies we need to manufacture the product. If the idea is still interesting “at second glance”, but it has not yet been clarified beyond doubt that it can be implemented and is suitable for the market, a pre-development phase is added in which staff scrutinize the concept for any possible flaws. If the idea passes this test, it goes into the development phase. This involves several milestones: first, a functional model has to be approved, then in a later development phase a test model, and finally the development result, after which the go-ahead for the market launch is given by a special committee. Feedback from customers and users is also essential in the development process, as it allows us to keep their needs in view.

Our goal of guaranteeing high-quality research and development motivated us to put in place detailed guidelines for R&D at Fresenius Medical Care. These place great importance on compliance with safety norms and regulatory requirements, as well as on achieving outstanding development quality at the lowest possible cost.

A special feature of the R&D work carried out in our Company is that we have to consider the circumstances in different regions and countries – for example regulatory conditions, legal, healthcare, and financing systems, and the habits of people who live there. For this reason our work is highly decentralized. In addition, we differentiate our products and services according to the region: a dialysis machine can have a different design or differing functions in the individual countries. Therefore, quality can only be defined the same the world over at the highest level of meaning, as the quality of treatment. The actual details, however, can vary region by region.

Development and production cycles also vary in length, depending on the kind of product. For example, it normally takes at least five years to develop a new generation of dialysis machines. The machine is then on the market for at least seven to eight years. But even during this time, we continually strive to improve it and to integrate new functions. Devices already in use may be retrofitted to accommodate changes in minimum safety requirements, for example, that are specified in national and international norms.

Enhancing the process safety of dialysis machines is a separate field of development. As with all extracorporeal treatment methods (i.e. that take place outside of the body), dialysis involves a number of risks that cannot be fully ruled out, such as blood loss or air infusion. In the worst case, they can lead to the death of the patient. As part of our continuous efforts to improve our products, we therefore work on developing additional methods and devices to reduce the risk of patients being harmed by technological error or human failure.

With every dialysis treatment, not only the patient is subject to a calculated risk; we are too. Both medically and technologically, a degree of uncertainty remains during treatment. We see it as our duty to reduce this uncertainty as much as we can. To this end, we comprehensively document treatments and perform detailed error analyses. For our products to be reliable, moreover, they must function without errors and be easy to operate. Consequently, we define exactly how the machines are to be applied and provide detailed information on the intended use in the form of handbooks.

QUALITY THROUGH QUALIFICATIONS

Innovative products and therapies at the highest level are key to Fresenius Medical Care’s success. The task of our R&D departments is to continually develop and improve our products and treatments. The largest is R&D International with 250 employees, most of whom are employed at our Schweinfurt and Bad Homburg sites. Smaller teams are also located in St. Wendel and in Romania. In addition to R&D International, we have research and development departments in North America and in the Asia- Pacific region, as well as at key production sites. All of these units are closely interlinked and cooperate on many projects.

At the end of last year, a total of 415 employees (full-time equivalents) worked on improving the quality of therapy in our research and development departments, roughly the same number as in the previous year.

The members that make up our team reflect the variety of areas in research and development as it relates to renal replacement therapy. They include people from the medical profession as well as software specialists and economists. However, engineers make up the largest group of specialists in our offices and labs. Almost half of all our research and development employees are graduates from technical universities or universities of applied sciences. Added to these are other members of staff who have completed technical apprenticeships or graduated from universities. Holistic thinking is required in all of our development departments. To design a dialysis machine, employees must first understand the underlying medical processes – regardless of their original professional background.

Fresenius Medical Care’s R&D departments constantly observe medical advancements in the field of renal replacement therapy and even have a direct impact on them. The members of our R&D departments participate actively in public research discourse, attend expert scientific conferences, and cultivate direct and personal contact with customers and leading physicians.

Employees from our R&D departments sit on various committees, such as national or international committees to establish product and treatment standards, in which the legal foundations for our industry are laid. They work side by side with government organizations, medical professional associations and healthcare providers. This provides us with first-hand information on regulatory issues which we can then implement quickly in new product features or functions. Of course, it also attests to the expertise ascribed to our staff outside the company.

QUALITY AND ITS COSTS

Our research and development activities primarily serve to ensure and enhance the value of our products and services from the customer’s perspective. At the same time, the ongoing development of new and improved dialysis therapies and products is an integral part of our growth strategy. Our objective is to offer state-of-the-art products at competitive prices, to stand out significantly from other providers in the market, and ultimately to increase sales. Last year, again, we managed to further boost the efficiency and quality of our products through our continuous research and development work. However, it is impossible to calculate the exact contribution of individual developments or innovations to revenue growth or to relate them to a given business year. As a rule, new products do not replace old ones, but the latter remain on the market. It takes several years to introduce a new product on all markets. At the same time, however, our products have a life-time spanning several years.

In 2008, research and development expenditures amounted to $80 million, corresponding to around 2.8 % of our total dialysis product sales. This means that our investments in the future of our products and services grew significantly for the first time year-on-year ($67 million). The main reason for this increase in expenditure is the acquisition of Renal Solutions, Inc. (RSI).

While our research and development expenditures are rather low compared to other companies in the healthcare sector, they are well within the range typically observed in the dialysis industry. They are also sufficient, since our activities focus on continual improvements for users and patients rather than inventions.

QUALITY THROUGH INNOVATION CULTURE

The Fresenius Medical Care Group is highly innovative and has tremendous creative potential. This is due to the group’s typical innovation culture that has produced our current comprehensive range of technologically leading products.

A successful innovation culture necessitates certain factors: the right location, motivated and highly qualified employees from different areas of expertise (see the “Quality through Qualifications” section above), further training for staff in all relevant areas, as well as high priority being placed on innovation in the Company as a whole and particularly at management level. In addition, Fresenius Medical Care’s global culture is characterized by an open and fair discussion beyond departmental boundaries. This ensures that objectives are invariably the objectives of all. A further feature of our innovation culture is that it strikes a balance between short-term, long-term, and visionary projects, and contains the right mixture of projects with low and high risks. Added to this is excellent communication between all of the Company’s R&D departments, as well as between Fresenius Medical Care and its clinic partners. This enables us to fully exploit potential synergies resulting from the vertical integration of our Company.

Another element of our culture of development and innovation are the annual meetings and conferences we hold in this area, where employees from our worldwide R&D sites meet and exchange experience with one another and with representatives from the various market segments. Here, new ideas are propounded and new technologies discussed. These meetings foster personal contact between R&D staff within our international company and enable us to compare our internal projects with current market trends. This exchange goes beyond defined reporting lines and is in our view indispensable for creative and efficient research and development work.

Our innovativeness is reflected in the number of patents and patent applications to which Fresenius Medical Care has the rights. At the end of 2008, these encompassed 2,402 patents in around 460 patent families. Furthermore, our inventions in the year under review gave rise to additional patent families, which will protect our innovations in important dialysis products and treatment methods in the future.

In the following sections, we discuss selected focus areas for development in the year under review and provide a short overview of current research activities.

DEVELOPMENT FOCUS: ONLINE-HDF AND 5008S HEMODIALYSIS MACHINE

With the development of the 5008 therapy system, we raised the status of online hemodiafiltration (Online-HDF) from an exclusive technology for just a few users to a standard piece of equipment. In Online-HDF, the machine automatically produces the required amounts of sterile and pyrogene-free infusion solution from standard bicarbonate dialysate. Clinical studies show that hemodiafiltration leads to a 30 % to 35 % decrease in the mortality rate of kidney patients. Hardly any other single measure in the field of renal replacement therapy has such a positive impact on the length of patients’ lives. Fresenius Medical Care was one of the first providers of commercially available Online-HDF machines; we see this as a confirmation of the Company’s longterm innovation and product development policy. As Online-HDF becomes increasingly widespread as a standard treatment, our R&D work will center on improving technical aspects of this treatment method.

An important milestone for our research and development activities last year was the European market launch of the 5008S hemodialysis machine at the most important event in the industry, the Congress of the European Renal Association / European Dialysis and Transplant Association in Stockholm in May. The 5008S is an upgrade of our 5008 therapy system. In developing this product, we focused our efforts on improving the interface between the machine and the operator. New features include convenient navigation as well as more automated processes, for example, data collection and documentation. As a result, nurses have more time to tend to individual patients. This and other integrated safety and control measures have raised the quality of treatment considerably compared with the basic 5008 model. The 5008S also uses resources more efficiently in standby mode, the machines use minimum amounts of dialysate and energy. We expect the dialysis system 5008S with intuitive operation to contribute to establishing Online-HDF as a treatment of choice in renal replacement therapy. We will continue to use the 5008 as the main platform for further significant improvements and extensions of our products.

DEVELOPMENT FOCUS: HOME DIALYSIS

The average age of the population in industrialized countries in particular is rising. As a result, the number of people with end-stage renal disease (ESRD) is also growing significantly. The number of dialysis patients could more than double by 2025 to reach approximately 4 million.

With this in mind, we are currently pursuing two strategies that will take the pressure off hospitals’ capacities in the future and improve the quality of treatment for individual patients. First, we intend to make it possible to transfer more treatments to the patient’s home environment. And second, we aim to make it easier for dialysis treatment to be carried out successfully in the patient’s home environment by optimizing our products.

The two current home dialysis therapy forms, peritoneal dialysis (PD) and home hemodialysis (home HD), complement each other. Fresenius Medical Care anticipated this relationship early on by pursuing a balanced product policy.

At present, an important strategy in home dialysis is to continue improving PD. In PD, the patient’s peritoneum is used as the dialyzing membrane. A sterile dialysis solution is introduced and discharged through a catheter that has been surgically implanted into the patient’s abdominal cavity. The solution removes toxins along with excess water. The patient administers the treatments several times a day or during the night supported by a machine, the cycler. Fresenius Medical Care possesses several types of these extremely high-quality and powerful machines for automatic peritoneal dialysis (APD). The development department has recently developed a new cycler with the aim of offering high-quality APD worldwide at an improved cost. The uniform technological platform is an important step in this direction. A cycler developed specifically for the U.S. market was approved by the Food and Drug Administration (FDA) in 2008. Customers’ reactions so far have been extremely positive. We are planning on enhancing this cycler to make it one of our core products in the U.S. and contribute to gaining additional market share.

Recognized advantages of Fresenius Medical Care’s PD solutions, such as balance and bicaVera, are their biocompatibility and pH-neutral properties. In addition, they contain particularly small quantities of the harmful glucose degradation products that arise from the sterilization of PD solutions. This means that the peritoneum is maintained as the dialysis membrane, which again contributes to the patient’s well-being. Moreover, PD is a convenient home therapy for early treatment of kidney failure particularly if there is still residual renal function. In general, the aim in future is to begin treatment at an early stage of the disease.

Using the PatientOnLine software, clinic personnel can monitor the patient’s individual PD treatment, thus contributing significantly to quality assurance. In 2008, a new version of the software, PatientOnLine (5.0), was brought onto the market. It allows physicians to determine the patient’s current state of health even more reliably. Furthermore, it is compatible with Windows Vista and has been further improved with additional functions. In recognition of its high quality standards, version 5.0 of PatientOnLine now bears the “CE” mark of conformity (CE = Conformité Européene) in accordance with the Medical Device Directive of the eu and is thus certified as a medical device. The CE mark of conformity obliges Fresenius Medical Care to ensure that PatientOnline fulfils the legal requirements in the eu in terms of health protection, safety and environmental protection. It helps customers to identify high-quality products in the market.

In 2008, we also stepped up work on therapy options for children with kidney disease under the motto “special solutions for special people”. Last year, home therapy improvements also encompassed better patient information: we issued a brochure entitled “Kidney Options” in 25 countries for patients who had recently contracted kidney disease as well as a special user handbook for home HD patients, which we published for the first time.

DEVELOPMENT FOCUS: BODY COMPOSITION MONITOR (BCM)

The Body Composition Monitor (BCM) was successfully introduced in many countries in 2008. An in-depth account of this highly innovative diagnostic machine can be found in last year’s annual report. The BCM can determine the hydration state (water level) and body composition (body water, fat-free body mass, and fat) of a dialysis patient. Only on the basis of these data, especially the percentage of body water, is it possible to assess the exact condition of dialysis patients. In this way, the treatment can be tailored better to the individual needs of patients and dialysis therapy can be improved considerably.

The hydration state of kidney patients has an immediate influence on the state of their heart and vascular system and thus on their life expectancy – cardiovascular diseases are the most frequent cause of death of dialysis patients. With the BCM, Fresenius Medical Care has developed an easy-to-operate, inexpensive, state-of-the-art measuring device that provides users with a comprehensive clinically validated program for evaluating the data collected.

In 2008, several clinical studies were completed and publications issued. These publications underscore the outstanding diagnostic importance of the BCM.

As the BCM is not yet a standard medical device, Fresenius Medical Care is cooperating closely with different international clinical experts who report on their experience with the BCM at clinics after introducing the device. Some also hold workshops and convey their findings in training programs. The findings will provide essential clues for our customer service’s consulting work. Given the importance of the hydration level and the potential of the BCM method, which we are only beginning to fathom, this project will continue to be a focus of our development work in the future.

DEVELOPMENT FOCUS: SORBENT SYSTEMS

General trends in medical technology can also be observed in the dialysis sector: new methods and materials make it possible to reduce the size, weight and energy consumption of individual components and thus entire devices, as well as integrate fundamentally new functionalities in medical technology. Fresenius Medical Care took a step in this direction with the acquisition of Renal Solutions, Inc. (RSI) in 2007. RSI is an internationally recognized and exclusive specialist in the field of dialysate regeneration using enzyme-based sorbent systems. The main objective of these systems is to reduce the amount of water needed for hemodialysis treatment from about 120 liters (37 gallons) of reverse osmosis water at present to around five to six liters of drinking water – an important contribution towards cutting costs and protecting the environment with the aim of making our treatments ecologically sustainable. Apart from the ecological and financial implications of these improvements, they may lead to a substantial reduction in the size of hemodialysis machines. The ultimate goal is for patients to be able to wear these devices, possibly directly on their bodies. The long-term use of such sorbent systems is of particular interest to the R&D department because they hold the prospect of removing specific toxins from patients’ blood. Advancements in innovative dialysis solutions will be a focus in the years to come and could possibly even culminate in a wearable artificial kidney.

QUALITY THROUGH RESEARCH COOPERATION AND FUNDING

We gauge the success of our innovations primarily on the basis of day-to-day practical experience. For this reason, cooperation between our researchers and Fresenius Medical Care’s clinics and a close relationship with daily users – doctors, nurses and patients – is important to successfully research and develop innovative solutions for treating people with kidney disease. In this way, Fresenius Medical Care benefits from its position as a vertically integrated dialysis company with direct access to users in its own clinics.

Moreover, we maintain close contact with universities and research institutes in our area of expertise. We cooperate particularly intensively with the University of Michigan (on a long-term study of chronic kidney patients), University Krems in Austria (on extracorporeal methods), and the Renal Research Institute (RRI) in the United States. For our collaboration with universities and other scientific institutions in Germany and abroad, we use various financing models, some of which are publicly funded.

The RRI’s network currently comprises 15 institutes in 6 U.S. states. The RRI was founded in 1997 as a joint venture between Fresenius Medical Care North America and the Beth Israel Medical Center, a hospital in New York. The idea was to create a network of clinics in which new technologies could be researched, with the aim of improving patients’ quality of life and gaining a better understanding of the course of chronic kidney failure.

The RRI is widely acknow02.04.2009ledged as the leading institute in the field of clinical treatment of chronic kidney failure. Its research program ranges from studying fundamental scientific aspects of hemodialysis to improving technologies for determining the hydration level of hemodialysis patients. The RRI is widely acknowledged as the leading institute in the field of clinical treatment of chronic kidney failure. Its research program ranges from studying fundamental scientific aspects of hemodialysis to improving technologies for determining the hydration level of hemodialysis patients.

The rri’s work in 2008 focused on dialysis frequency (daily dialysis compared to thrice-weekly treatment), the hydration level of dialysis patients (see the „Development Focus: BCM” section) as well as so-called SORB technology and the wearable kidney (see the „Development Focus: Sorbent Systems” section). Last year, clinical studies on the regulation of patients’ calcium and phosphate levels also played a prominent role in rri’s work with the aim of establishing a more objective scientific basis for the prescription of calcium. To this end, laboratory data are used as well as a computer program that permits an assessment of the intake and levels of calcium and phosphate, as well as the way the two minerals are processed in the dialyzer. Based on this appraisal, recommendations can be made to doctors regarding the right dosage of the phosphate binder PhosLo (see also page 100) and of calcimimetics. Another project currently being carried out by the RRI focuses on the removal of toxins. A substance is introduced into the bloodstream that dissolves the toxins directly before the blood enters the dialyzer. These examples show that the studies conducted by the RRI integrate the whole group’s interests and its requirements for new knowledge.

For many of our studies, we have access to rri’s extensive databases and the data compiled by Fresenius Medical Care North America. Using these, we can trace back patients’ state of health for months, which in turn enables us to optimize instructions for the future treatment of kidney patients. In the evaluation of our databases, we try more stringently to use past-related data to draw conclusions on future improvements. For example, we intend to further reduce the risk of infection in dialysis patients.

The RRI publishes 15 to 25 articles a year in the industry’s specialist magazines. It also takes part in numerous U.S. and international symposia with more than 30 abstracts a year. Last year, for example, the RRI was represented at the annual conference of the American Society of Nephrology (ASN), where different RRI representatives reported on their research findings to an interested audience. Furthermore, the RRI holds its own three-day international conference every year in January, at which researchers from different institutes come together to discuss specialized topics. A lively exchange is also encouraged within the Fresenius Medical Care Group, for instance on experience with the different health systems.

Some of the RRI’s studies are subsidized, including the institute’s research projects with the University of Michigan, the University of North Carolina, the University of Rochester, and the University of Massachusetts together with St. Raphael’s Hospital. The topics of projects that are subsidized include depression and fear among children with chronic kidney disease or the effects of dialysis on other processes in the body, for example in patients with cardiovascular diseases.

In 2009, the RRI will concentrate on evaluating technological and clinical approaches to further improve the quality of treatment and boost its success rate. In clinical projects, for example, the RRI intends to work more intensely on raising water purity standards and improving the compatibility of different drugs. SORB technology will be a predominant topic in research projects. Further research areas include factors that promote cardiovascular problems in dialysis patients, daily dialysis and its effect on the heart and the thyroid function, as well as problems that arise in connection with dialysis.