• 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

02.4

Risk Report

RISK AND OPPORTUNITIES MANAGEMENT

As a result of its worldwide activities, Fresenius Medical Care is naturally exposed to a variety of risks which are directly related to the Company’s business. Only by assuming risks we can seize the opportunities they offer. As a provider of life-saving products and therapies, we are only marginally subject to economic cycles, a key difference between us and, for example, a manufacturer of consumer goods. At the same time, our technical experience and our broad market knowledge provide a sound basis for detecting risks as early and as reliably as possible.

Fresenius Medical Care sees risk management as the ongoing task of determining, analyzing and evaluating the spectrum of potential and actual developments, and, if possible, taking corrective measures. Our extensive risk management system, the principles of which are set by internal guidelines, is therefore an important component of corporate control. IT enables management to identify and reduce risks that could threaten the Company’s existence or growth at an early stage, and thus minimize their impact as far as possible.

Risk management is part of our integrated management information system and is based on group-wide controlling as well as an internal monitoring system. Regional monitoring systems form the backbone of our risk management system and watch over all inherent industry and market-specific risks. The responsible risk managers present status reports to the Management Board twice a year. These provide qualitative and quantitative appraisals of the likelihood of risks arising that have been identified as potentially harmful to the Company, as well as the potential extent of damage. In addition, the Board is immediately and directly informed of any newly identified risks. Efficient reporting is essential for controlling and monitoring risks as well as for taking precautionary measures. Therefore, the management of Fresenius Medical Care receives information on a monthly and quarterly basis about the state of the healthcare industry, our operative and non-operative business, as well as analyses of our asset, financial and earnings position.

In 2007, our internal audit department was reorganized and strengthened as a part of the global company risk management system. The department works independently from the regions, and the head of department reports directly to the CFO. The annual audit assignments are selected based on a risk assessment model. The audit plan is reviewed by the Management Board and finally approved by the Audit Committee. The plan consists of financial audits and full-scope audits performed throughout the company. Audit reports are distributed to the Management Board and to our external auditors. The audit committee is informed about the audit results. In 2008, a total of 27 audits were conducted.

Fresenius Medical Care’s opportunities management is a result of our efforts to closely observe individual markets and recognize trends early on. We identify opportunities based on comprehensive quantitative and qualitative analyses of market data, research plans and general health trends. The close cooperation between our strategy and planning departments and those responsible for M&A activities allows us to recognize opportunities worldwide as early as possible. Our ability to anticipate general economic, market-specific, regional and local trends at an early stage enables us to adjust our business model accordingly. As discussed in the „Dialysis Market” section, health systems and reimbursement criteria differ from country to country. Fresenius Medical Care’s position as a technologically leading provider in the dialysis market with innovative products and therapies creates opportunities for future growth. We aim to take advantage of these with our long-term growth strategy goal 10 released in 2005. Our Company objectives are discussed in detail in the „Outlook” section.

We are listed on the New York Stock Exchange and are therefore required to adhere to the specifications of the Sarbanes-Oxley Act. Section 404 expects the Management Board of companies listed in the U.S. to take responsibility for implementing and adhering to an appropriate internal control system to guarantee reliable financial reporting. As a non-U.S. company or “foreign private issuer”, we were obliged to comply with the Sarbanes- Oxley Act by December 31, 2006. Fresenius Medical Care met the requirements one year earlier, on December 31, 2005.

Our internal control system ensures that our financial reporting complies with applicable accounting standards. This is guaranteed by mechanisms such as automated and manual controls on the one hand, and by the separation of functions and adherence to guidelines and operational mandates on the other. Furthermore, the assessments carried out by management ensure that risks with a direct impact on financial reporting are identified and that controls are in place to minimize these risks. In addition, we stay abreast of changes in accounting standards and continuously instruct those responsible for preparing financial information with comprehensive training courses.

The criteria laid down in the “Internal Control – Integrated Framework (COSO framework)” set up by the Committee of Sponsoring Organizations of the Treadway Commission form the basis for evaluating the effectiveness of our internal control system for financial reporting. Following the COSO framework, our internal financial reporting control system is divided into five levels and evaluated accordingly. Not only the control environment, but also risk evaluation, control activities, information and communication paths, as well as the monitoring of the internal control system are documented, tested and assessed.

In 2008 we implemented a Sarbanes-Oxley Act 404 compliance software. The documentation, testing and assessment of the internal control system are carried out with this software. However, IT supports a risk-based approach, enhances the efficiency of the management of internal controls, improves the quality of the data, and supports management in monitoring and assessing the internal control system.

Our review of the internal control system for financial reporting complies with the guidelines published on May 23, 2007 by the Securities and Exchange Commission (SEC) for the evaluation of the internal control system for financial reporting by management. The definitions as well as the requirements set out in the guidelines have been incorporated in the Sarbanes-Oxley Act 404 compliance software.

Regional project teams coordinate the evaluation of the internal control system. The Management assesses the effectiveness of the internal control system for each fiscal year and publishes its findings in the Annual Report. External advisers are consulted as needed. A steering committee led by our Chief Financial Officer meets regularly to find out about changes and new requirements of the Sarbanes-Oxley Act as well as to discuss potential weak points in our system, and to derive further measures. In addition, the Audit Committee of the Supervisory Board reviews the results of the Management’s assessment on a regular basis.

The Management assessed the effectiveness of the Company’s internal control system for financial reporting as of December 31, 2008. Based on this assessment, management determined that the Company’s internal control system for financial reporting was effective as of December 31, 2008. The effectiveness of the internal control system for financial reporting was audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, an independent registered public accounting firm, and confirmed in all material aspects as part of its review of our financial statements as of December 31, 2008. For further details, see here.

RISK AREAS

The main risk areas with an impact on the business activities of the Fresenius Medical Care Group are as follows:

RISKS DUE TO ECONOMIC CONDITIONS

In addition to observing and evaluating the development of the global economy, we pay special attention to monitoring and assessing the political, legal and financial conditions. The predominately international markets of the Fresenius Medical Care Group also make IT essential for us to conduct continuous, intensive analyses of country-specific risks.

RISKS RELATED TO THE GENERAL ECONOMIC ENVIRONMENT

Fresenius Medical Care is affected by general economic fluctuations to a lesser degree than companies in other industries. The demand for dialysis products and services is largely independent of economic cycles and is also relatively stable. At present, the development of the global economy presents no substantial danger to Fresenius Medical Care. For 2009, however, all the leading economic institutes forecast a sharp downturn in the global economy, which could have a slightly adverse effect on the growth of Fresenius Medical Care. Further information can be found in the „Outlook” section.

RISKS IN THE HEALTHCARE INDUSTRY

Risks related to changes in the healthcare market are of major importance to Fresenius Medical Care. The main risks include the development of new products and therapies by competitors, the financing of healthcare systems, and reimbursement in the healthcare sector.

We actively minimize risks by closely monitoring the market, especially the products of our competitors and the introduction of new dialysis-related products. As part of our active risk management, Fresenius Medical Care has internal strategic departments that help us to anticipate and quickly react to new market conditions. Their main tasks are to identify and analyze all activities that could affect the dialysis market and the Group’s business, and communicate these within the Company on a regular basis. In addition, close ties with the medical and scientific communities allow us to quickly identify and capitalize on technological innovation. These alliances also keep us up-to-date on alternative treatment methods and enable us to evaluate and, if necessary, adjust our corporate strategy. As a result, we continuously analyze and evaluate trends and review the progress of research and development projects. The development of new and innovative products will remain a decisive factor for success in the dialysis market in the foreseeable future.

As we operate in a highly regulated environment, changes in the law, such as those relating to reimbursement, can have a major economic and strategic impact on Fresenius Medical Care’s business success. This is especially true in the United States, where we generate about 89 % of our sales with dialysis services, the majority of which are financed by public health insurance programs. Regulatory changes outside our most important market could also have a significant impact on the Company. For this reason, we not only carefully monitor regulatory planning and changes, but also intensively work with government healthcare agencies. Details on the changes in the reimbursement system in the U.S. can be found in the „New Reimbursement Models” section.

RISKS ASSOCIATED WITH OPERATING ACTIVITIES

We counter potential risks in production, products and services using preventive and quality assurance measures.

RESEARCH AND DEVELOPMENT. The risk that goals may not be achieved or be achieved later than anticipated is inherent in the development of new products and therapies. A new product has to undergo comprehensive, cost-intensive preclinical and clinical studies before IT can receive regulatory approval and is launched on the market. Fresenius Medical Care counteracts risks in research and development projects by regularly analyzing and assessing development trends and reviewing the progress of the projects. Furthermore, we ensure that the legal regulations governing clinical and chemical-pharmaceutical research and development are strictly adhered to. Our dialysis products research team develops new products and technologies in close cooperation with representatives from the medical and scientific community. Trade relations are established early on in the development phase. Further information can be found in the „Research and Development” section.

PROCUREMENT. We impose substantial quality standards on suppliers to control the risk of low-quality sourced raw materials, semi-finished goods and other components. This includes demanding external certification, performing our own inspections of suppliers and sample products, as well as regular quality control checks. Fresenius Medical Care only accepts high-quality and safe products that are proven to be appropriate from certified suppliers that meet the Group’s specifications and requirements and have a proven track record. These suppliers are constantly evaluated using our exacting supplier assessment system.

Fresenius Medical Care accepts market-related dependencies of suppliers of strategically relevant materials in exceptional cases only and subject to defined conditions. In this regard, our purchasing strategy is aimed at supporting and developing our partners and strategic suppliers through long-term contracts while at the same time ensuring that we have at least two sources for all products and raw materials (dual sourcing, multiple sourcing) to ensure a steady supply at favorable prices.

Fresenius Medical Care is also exposed to market-driven price fluctuations for raw materials. By conducting continuous market analyses, shaping supplier relations and contracts in accordance with our needs and reviewing the use of financial instruments on a case-by-case basis, we are able to counteract these fluctuations to a certain extent. Further information on procurement processes can be found here.

PRODUCTION. Compliance with internal and legal product and manufacturing regulations is ensured by our Integrated Management System in accordance with ISO 9001, ISO 13485 and Good Manufacturing Practice (GMP) requirements, and implemented according to written process and work instructions. Regular audits are carried out by authorized quality management staff at each of our production sites to ensure that these adhere to the guidelines. The audits cover all areas and aspects affecting quality, from management and administration to development, production and customer satisfaction. In 2006, our production site for dialyzers in St. Wendel successfully passed an FDA (Food and Drug Administration) GMP Audit conducted by TÜV Süd Product Service Munich under the mutual recognition agreement between the European Union and the U.S. We have also introduced Lean Six Sigma in some of our plants. This is a management system used to analyze and better coordinate all production processes to permanently reduce the error rate. We intend to achieve even better production results and to further improve the quality of our products and related production processes. Further information can be found in the „Production” section.

PERSONNEL RISKS. Fresenius Medical Care has developed guidelines and codes of conduct for its employees worldwide to establish authoritative standards for our internal and external communication. With these guidelines and our compliance program, we aim to fulfil our own expectations and those of our partners, while aligning our business activities with recognized standards as well as local laws and regulations. Further details on our compliance program can be found here.

Employees who are entrusted with confidential or insider information are under obligation to comply with relevant guidelines, such as the German Investor Protection Improvement Act, and handle the information responsibly.

Our success depends to a large extent on the dedication, motivation and abilities of our employees. We counteract the risk of a shortage of qualified personnel through pre-emptive measures, such as employee development programs and comprehensive recruiting. Furthermore, we offer our employees performance-related bonus payments and attractive social benefits. Further details on our employee bonus scheme can be found here.

In addition, we have launched several initiatives to further increase job satisfaction among clinical staff, to improve motivation and retain qualified staff in our clinics. These initiatives involve implementing improvement measures where they are needed, based on a thorough satisfaction analysis. To deal with the general shortage of trained clinical personnel, we use targeted marketing programs to locate qualified and motivated personnel for our clinics and thus ensure a high standard of treatment quality. Comprehensive training programs such as the F.I.D.N., which is discussed here, also counteract a possible shortage of clinic personnel. Risks in the area of personnel marketing are considered insignificant as a result of our risk management strategies.

SERVICES. The very nature of the medical services we provide to patients at our dialysis clinics presents inherent risks. In this context, operational risks can arise, for example in the area of hygiene. We counteract these with strict organizational and operational procedures, ongoing personnel training and patient-oriented working methods. Our ISO 9001 certified clinic quality management system is part of our Integrated Management System (IMS) as detailed here. The ISO 9001 certificate also attests to “Good Dialysis Practice”. In the U.S., we have successfully implemented the standards outlined in the Kidney Disease Outcome Quality Initiative (KDOQI) and the Center for Medicare and Medicaid Services (CMS) clinical performance measures using our internal quality enhancement program. In addition to internal assessments of treatment data, annual internal audits of our processes provide a solid foundation for continuous improvement. Our clinic quality management system is also audited each year by external certification institutes such as the German TÜV or Medicare and CMS Networks in the U.S. As a consequence, we are able to quickly identify quality flaws and risks and to remedy them in a timely manner.

The IMS also covers environmental management, as manufacturing dialysis products requires the use of environmental resources and running dialysis centers produces clinical waste. An environmental management system, certified according to the ISO 14001 environmental standard, has therefore been implemented in some of our production sites and dialysis clinics to further protect the environment and resources while identifying potential savings for raw materials. Please refer to the „Quality and Environmental Management” section for further details.

MAJOR CUSTOMERS. In addition to a number of state-owned and public health insurance carriers, private health insurers and companies are among Fresenius Medical Care’s customers. The largest private company is DaVita, which is also the world’s second-largest provider in the dialysis services sector.

Fresenius Medical Care achieved about 1 % of its total revenue with DaVita in 2008. Therefore we assess the risks arising from relationships with major customers to be relatively small.

ACQUISITIONS AND INVESTMENTS. Fresenius Medical Care identifies potential financial risks arising from acquisitions and capital expenditures early on by performing careful, in-depth reviews with the help of internal and, if necessary, external professionals. Potential acquisitions and investments are analyzed at regular intervals by an internal committee (Acquisition Investment Committee, AIC) using internal guidelines and minimum requirements for a number of parameters. The efficiency of acquisitions and investments is also monitored subsequently on the basis of these key figures. Further information on corporate performance measures can be found here.

FINANCIAL RISKS. The main financial risks that affect our Company are currency and interest rate risks. All other risks in this category are of secondary importance for Fresenius Medical Care.

We actively manage foreign currency and interest rate exposures that result from our business activities. Risk management is based on strategies defined in close cooperation with the Management Board. These include, for example, guidelines covering all steps and levels of the risk management process. They define responsibilities for determining risks, the careful use of financial instruments for hedging purposes, and for accurate financial reporting. We also use derivative financial instruments to manage the risks from foreign exchange rate and interest rate fluctuations. These, however, are restricted to hedging exposures in relation to underlying transactions. Transactions for the purpose of trading or speculation are not allowed. All transactions are conducted with highly rated financial institutions that are approved by the Management Board.

We use interest rate hedging instruments to reduce the impact of interest rate increases from our floating-rate financial liabilities. The aggregate nominal value of the respective hedge contracts, which all expire between 2009 and 2010, was $285 billion as of December 31, 2008. As of December 31, 2008, 75 % of the Group’s financial debt was protected against increases in interest rates either by fixed-rate borrowings or by interest rate hedges. Thus, only 25 % was exposed to the risk of increasing interest rates. We are therefore hedged to a large extend. Based on the current headging, a sensitivity analysis results that the effect on the net income of Fresenius Medical Care would be less than 1 % if the relevant reference interest rates for Fresenius Medical Care would change by 50 basis points.

Our foreign exchange exposures primarily result from transactions such as sales and purchases in foreign currencies between group companies located in different regions and currency areas. Most of our transaction exposures arise from sales of products from group companies in the euro zone to other international business units. The foreign exchange risks are therefore related to changes in the euro against various other currencies. To hedge against these risks, we generally use foreign exchange contracts. The aggregate nominal value of foreign exchange derivatives as of December 31, 2008 was $830 million. Based on a sensitivity analysis, Fresenius Medical Care estimates the effect on operating earnings to about $11 million. Although, IT is assumed that the exchange rates of all non-hedged transactions in foreign currency change by 10 % to the disadvantage of Fresenius Medical Care. Please see page 20 of the financial report („Liquidity and Capital Resources”) for further details.

DEBTORS. To reduce the risk of delayed or non-payment by customers, we evaluate the credit standing of new customers and review the credit limits of our existing ones. We monitor outstanding payments while assessing the possibility of default. Please see page 7 of the financial report for further details on outstanding debts.

LEGAL RISKS. Risks associated with litigation are continuously identified, assessed and communicated within our organization. Fresenius Medical Care is involved in various legal proceedings resulting from our business operations. For details on ongoing proceedings and further information on the legal risks that Fresenius Medical Care is exposed to, please refer to Note 18 from the financial report.

IT RISKS. Fresenius Medical Care uses the latest hardware and software to reduce potential risks from information technology (IT). Our IT infrastructure is highly reliable and stable. Potential IT risks are covered by a detailed disaster recovery plan, which is tested and improved on a regular basis. Fresenius Medical Care operates three data centers at different locations, each with an associated disaster recovery plan, thus further reducing the potential impact of a disaster at any one site. We use a mirrored infrastructure that creates a copy of critical systems, including clinical systems and the communication infrastructure and server. To minimize organizational risks such as manipulation or unauthorized access to sensitive data and programs, we use access protection by means of passwords. In addition, internal procedures must be observed that govern authorization assignment. These are monitored to ensure that they comply with Section 404 of the Sarbanes-Oxley Act. Operational and security audits take place annually.

OTHER OPERATIVE RISKS. Potential risks, such as those arising from the construction of new production sites or the introduction of new technologies, are considered early on in the planning stage and reviewed on an ongoing basis. When building new production sites, we use internal milestones which we monitor constantly. Further risk management measures limit the effect of environmental factors on dialysis services. Many of our own dialysis clinics have emergency generators that ensure that life-saving dialysis treatments can be continued even in the case of a complete power failure. Furthermore, in the U.S., for example, a Fresenius Medical Care emergency team steps in during natural disasters such as hurricanes to professionally coordinate relief efforts and provide dialysis treatment for patients in the affected regions.

OVERALL RISK

The Management Board’s evaluation of general risk is based on Fresenius Medical Care’s risk management system, which is subject to regular external reviews and scrutiny from management. The effectiveness of the risk management system is monitored and improved if necessary as part of the group-wide review of the Integrated Management System. The Management Board will continue to develop the risk management system as well as its review of the related management system to be able to identify, examine and evaluate potential risks even more quickly and ensure a timely and appropriate response.

Based on the general principles for estimating risk factors described here, we currently assume that none of the mentioned risks will significantly impair the asset, financial and earnings position of Fresenius Medical Care in the long term. Furthermore, no material changes in risks were identified compared to 2007. We have established a structure that will allow us to quickly identify emerging risk situations.