• 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

02.6

Outlook

After achieving and partially exceeding our goals last year, we expect our sustainable growth to continue in the 2009 business year, resulting in new records in terms of revenue and earnings. Despite the unfavorable economic conditions worldwide, we consider ourselves to be prepared for achieving our goals for the year 2010.

BUSINESS POLICY

Fresenius Medical Care is the world’s leading dialysis company. We intend to strengthen this position in the years to come by expanding our activities in business areas such as dialysis drugs. We will maintain our vertically integrated business model; at present, the Company does not plan any major changes to its business policy.

GENERAL ECONOMIC DEVELOPMENT

The economic climate deteriorated considerably in the course of 2008 due to the international financial crisis. Over the last few months, all the world’s major economic research institutes have adjusted their forecasts for economic development in 2009 downwards significantly. The outlook for worldwide economic growth continues to be characterized by great uncertainty and so the risk of further downward adjustment remains very high. For the current year, worldwide gross domestic product growth is forecast to be under 1 %, in comparison to a growth rate of approx. 3.6 % last year. Unlike earlier phases of economic downturn, this steep economic decline is occurring simultaneously in all regions. As a result, individual negative effects are reinforced overall. If the programs introduced to stabilize the financial sector and mobilize the demand for credit are successful, then the global economy could return to a growth path in 2010.

U.S. After the decline in investment activity and industrial production in the U.S. this year, a steeper and longer-lasting decline in private consumption is expected because of the flagging labor market. As a result, the gross domestic product is expected to decrease significantly in 2009 by 1.5 % (2008: +1.3 %).

EUROPE. A similar development can be identified in the euro zone. As in the U.S., declining investment and weak private consumption are having an adverse effect on the gross domestic product, which is forecast to drop by 2.7 % in 2009. The inflation rate is anticipated to fall to below 1 %, assuming that oil prices and the current exchange rate between the U.S. dollar and the euro stabilize.

The German economy has been in a recession since the end of 2008. Almost all economic indicators have deteriorated significantly in the last few months. The weakening of the world economy has had a particularly negative effect on exports, and corporate investments are expected to decrease considerably. This cannot be offset by comparably stable domestic demand or by Germany’s expansive financial policy. The gross domestic product is expected to shrink by 2.7 %.

Economic growth in Great Britain has been negative since the third quarter of 2008. With private consumption further declining and investment activity remaining weak, the gross domestic product is also expected to decrease significantly, by about 2.3 %.

ASIA. The export economy of China in particular, but also that of Japan, have slowed down quite substantially due to decreasing demand worldwide and especially exchange rate developments. Nevertheless, China’s gross domestic product is forecast to increase by 5.8 % in 2009 (+9.6 % in 2008); the country is thus expected to remain the world’s most important growth driver. Japan’s gross domestic product, however, is expected to decrease by 1.5 %.

LATIN AMERICA. Economic growth in Latin America is expected to decline significantly in 2009. Countries that export raw materials are being adversely affected by the low prices for those materials. Overall, the gross domestic product is expected to stagnate in 2009.

MARKETS

We already offer our range of dialysis products and services in over 115 countries. Differences between the regions and between their regulatory frameworks mean that in some countries we only offer dialysis products and are not allowed to operate our own dialysis clinics. If the regulations in these countries, which include Japan, were to change, this would open up new dialysis service markets for us. More information can be found in the „Risk and Opportunities Management” section.

From today’s perspective, significant changes in the dialysis industry are not expected in 2009 and 2010. Market consolidation and the trend towards privatization of several years in the healthcare sector, particularly in highly industrialized countries, should continue in the future. In some markets, such as the U.S. dialysis services sector, where the two major providers Fresenius Medical Care and DaVita hold about 63 % of the market, this process is more advanced. Market consolidation outside North America, however, is at an early stage. Therefore, in these regions, we expect acquisitions to play a more important role for Fresenius Medical Care in the development of new markets.

SECTOR-SPECIFIC CONDITIONS – DIALYSIS MARKET

Fresenius Medical Care expects the number of dialysis patients worldwide to grow by about 6 % in 2009. Significant regional differences will remain unchanged; we expect a slightly lower than average increase in patient numbers in the U.S., Japan, and Western and Central Europe. In these regions, the prevalence of terminal kidney failure is already relatively high and patients generally have secured access to treatment, normally dialysis. In economically weaker regions, the growth rates are much higher, with values of up to 10 %, and in some countries even higher than that.

We are convinced that patient numbers will continue to increase in the coming years and expect annual growth rates of approximately 6 %. It is anticipated that the growing number of people suffering from high blood pressure and diabetes worldwide will contribute to sustained growth in the number of dialysis patients.

The annual growth rates and the differences between economically strong regions and developing nations indicate that the regional distribution of patients will change. In the future, a higher proportion of patients will undergo dialysis treatment in Asia, Latin America, Eastern Europe, the Middle East and Africa. This opens up huge potential for the entire spectrum of dialysis services and products, as more than 80 % of the world’s population lives in these regions.

We do not expect significant changes in the distribution of dialysis treatment modalities in 2009 and 2010. Hemodialysis will remain the treatment of choice, accounting for about 90 % of all dialysis therapies. Peritoneal dialysis is expected to be the preferred treatment for about 10 % of all dialysis patients.

We expect that the volume of the worldwide dialysis market, which according to estimates amounted to about $65 billion last year, will increase by about 5 % annually. As a result, the total market could amount to more than $70 billion by 2010, almost doubling its volume over a period of just ten years.

We intend to maintain our market leadership in the major product groups such as dialyzers and dialysis machines, which is already at a very high level in some segments, and to improve it where possible.

BUSINESS PERFORMANCE OF FRESENIUS MEDICAL CARE IN 2009 AND 2010

EXCHANGE RATE RELATIONS

Fresenius Medical Care’s outlook for 2009 is based on an anticipated exchange rate of $1.36 to the euro. This exchange rate, in turn, is based on the year end rate of 2008 of $1.39 to the euro. As mentioned in section „Economic Environment” the relation between the U.S. dollar and the euro is more important to Fresenius Medical Care than any other currency relation. In its forecasts, the Company also takes other exchange rates that are relevant for the performance of its subsidiaries into account, such as yen to U.S. dollar and yen to euro.

The current very volatile exchange rates have a major impact not only on our outlook for the local results of our subsidiaries, but also on the conversion of these results to U.S. dollars. This is giving rise to greater uncertainty and higher fluctuation margins.

REVENUE

We intend to further increase our revenue in 2009 to more than $11.1 billion (+8 % at constant currency). As a result, we will be able to almost reach our “GOAL 10” target of more than $11.5 billion already in 2009. We intend to continue this positive development in 2010, achieving currency-adjusted growth of between 6 % and 9 %.

NET INCOME

In 2009, we aim to generate a net income between $850 million and $890 million. The targets of our goal 10 growth strategy (see here) are based on an annual net income growth of more than 10 % for 2009 and 2010, based on stable exchange rates. At the time when this annual report went to press, no one-time effects were expected to have a significant impact on net income in 2009.

EARNINGS PER SHARE

For 2009, we expect the earnings per share to grow in parallel with net income. We also expect the earnings per share in 2010 to develop in line with the expected improvement in net income.

DIVIDENDS

We will continue to pursue our long-term profit-oriented dividend policy. Information on the proposed dividend increase can be found in the chapter „To Our Shareholders”. We intend to continue this dividend development in 2009 and 2010. Over these two years, the dividend payout ratio should remain at the 2008 level of nearly one-third of net income.

CAPITAL EXPENDITURES AND ACQUISITIONS

In 2009, we intend to spend about 7 % to 9 % – or $750 million to $950 million – of our revenue on capital expenditures and acquisitions. While our planning foresees investments of about $550 million to $650 million, the budget for acquisitions is $200 million to $300 million. We aim to maintain this level of capital expenditures and acquisitions in 2010.

As in previous years, the Group plans to invest the majority of this amount in North America and Europe, our largest business regions. In addition to the ongoing modernization of our dialysis clinics and production facilities, capital expenditures will be allocated for new dialysis clinics, the expansion of worldwide production capacities, and for dialysis machines within the framework of long-term supply contracts. Additionally, investments will be used to further rationalize production processes and to improve patient data management and billing.

TAXES

For 2009, we expect the effective tax rate to be between 36 % and 37 %; a higher rate in 2010 is not anticipated.

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CASH FLOW

In 2009 and 2010, the operating cash flow is expected to account for more than 10 % of revenue. This takes into account potentially higher DSO (days sales outstanding) in some countries due to the difficult economic situation. Reaching the cash flow targets will be guaranteed by a focused management of current assets. A revenue of more than $11.1 billion is forecast for 2009; operating cash flow for that year would thus be more than $1.1 billion.

DEBT / EBITDA RATIO

Fresenius Medical Care takes the debt / EBITDA ratio as its guideline for long-term financial planning. This ratio was 2.69 at the end of 2008 and we aim to keep it below 2.7 in 2009 and 2010.

FINANCING

Although Fresenius Medical Care is not fully immune to the sustained worldwide financial crisis, we intend to continue to expand our business and meet our financial obligations by the maturity date. The syndicated credit facilities of the Company are spread over 60 lenders; none of these provide more than 4 % of the credit agreement of 2006.

We have a sufficient financial cushion – consisting of only partly utilized bilateral and syndicated credit facilities and the accounts receivable facility – which we intend to preserve in the coming years. We aim to keep committed and unutilized credit facilities to a minimum of 10 % to 15 % of our debt portfolio.

We will focus our financing activities in the coming years on reducing subordinated debt. Therefore, the subordinated trust-preferred securities Fresenius Medical Care Capital Trust II and III, which matured in February 2008, were not refinanced by issuing new subordinated debt, but instead by our existing senior credit facilities.

Our mid-term target is to create a financing portfolio containing only senior and unsecured debt instruments.

Refinancing needs for the years 2009 and 2010 will be limited to Euro Notes credit, amounting to $200 million in July 2009, as well as the annual extension of the accounts receivable facility amounting to $550 million (approx. €395 million). We aim to cover this refinancing requirement, the dividend distribution of approximately €173 million in May 2009 and the expected dividend payment in 2010 through our cash flow and by using existing credit facilities. The contractual obligations from debt instruments offer sufficient flexibility to cover our financing requirements. All in all, we expect to have sufficient financing to achieve our future goals and to continue promoting company growth.

Further information can be found in the „Financial Situation” chapter as well as in the „Risk and Opportunities Management” section.

THERAPIES, PRODUCTS AND SERVICES

The research and development of new treatment methods and products is a long-term process. The activities discussed in detail in the „Research and Development” section, will remain the focus of our work. Our ongoing goal is continuous improvement of treatment quality and thus the quality of our patients’ lives. The use of platform technology – as in the work on the 5008S dialysis machine – will play a major role in improving products or extending their functions. At the same time, projects resulting from corporate decisions and current R&D activities are also of great interest as is following important trends on the market and in medicine in general so that we can adapt our products and projects to the dynamic changes occurring in this environment.

We are ideally equipped to meet future challenges, as we possess core competences in an increasing number of technologies that will be indispensable in the treatment of chronic kidney patients in the years to come. We are constantly growing these competences, in keeping with current market trends and requirements. Our competitive position is extremely solid, due to the acquisition of Renal Solutions, Inc. in November 2007. Finally, we benefit from the synergies resulting from the interaction between the various technological, medical, and academic institutes of our group. In order to ensure that we remain aware of our business environment and also our own accomplishments, we regularly evaluate our performance, benchmarking it against that of direct competitors and leading companies in other industries.

We plan to spend around $95 million on research and development in 2009. Following the integration of RSI, the number of employees in R&D (415 full-time equivalents) is expected to remain fairly stable. In 2010, we expect research and development expenditure to amount to about $105 million.

EMPLOYEES

As a result of further expanding its business, Fresenius Medical Care expects the number of employees to further grow, especially in its dialysis clinics and production sites. We anticipate that, by the end of 2009, we will have more than 67,000 employees (full-time equivalents). This reflects an increase of 4 % year-on-year. We also expect our workforce to continue to grow in 2010, to over 70,000.

In keeping with our growth strategy, we see particularly promising opportunities in Asia-Pacific. Employee numbers in this region will therefore increase significantly. Nevertheless, we do not anticipate any major changes in the worldwide distribution of our employees – most of them will continue to work in North America.

We will remain highly committed to training young people in Germany. In the years to come, we will continue to train beyond our own needs and thus fulfil our responsibility to society.

LEGAL STRUCTURE AND ORGANIZATION

Fresenius Medical Care has been a partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA) since 2006. Changes to the legal form are not planned in the foreseeable future. As described in the „Group Structure and Business” section, Fresenius Medical Care’s activities are organized into three operating segments: “North America”, “International”, and “Asia-Pacific”: the last two are aggregated into the “International” segment for reporting purposes. We intend to retain this organizational structure in 2009 and 2010. Our decentralized organizational structure enables us to react to market requirements with the greatest possible flexibility. This principle of “company within the company” with clearly defined responsibilities has a proven track record of many years now and will therefore be maintained.

PRODUCTION

Expanding our production capacities is again a top priority this year. At the beginning of 2010, we will put a sixth production line into operation in our plant in Ogden, Utah. This will boost our production capacity there to over 45 million dialyzers a year. Two further production lines for fiber bundles will start operating in Ogden in 2010 and 2011. In addition to the expansion of our capacities, we will also better coordinate processes between the production sites and the supply chain.

One of our goals for 2009 is to achieve Six Sigma quality standards and correspondingly high efficiency in all of our Asian plants. We will double our capacities to 7.5 million dialyzers a year; in five years we plan to manufacture almost 20 million dialyzers annually in Asia.

The Chinese and other Asian-Pacific markets will continue to grow strongly in the next few years. Consequently, we intend to introduce more products there and manufacture products locally. At our plant in Jiangsu, we will manufacture concentrates for hemodialysis and peritoneal dialysis solutions for the Chinese market. We will also expand our capacities in Japan. The Indian market is becoming increasingly interesting for us. According to estimates, in 15 years India will have a population on a par with that of China. As a result, our motto for the Asia-Pacific region in the years to come will continue to be: “prepare for growth”. We want to be ready to meet the growing demand in the region at all times.

Furthermore, we will continue to implement our technical management system TAM (see here) in 2009. In addition to the nine countries where we apply tam today, we also intend to extend its use to other European countries as well as large areas of South America over the next year. This will lead to a new level of quality and efficiency in customer service in these regions.

PROCUREMENT AND LOGISTICS

In 2009, in our International segment, we intend to implement measures that were developed in our projects, for example, in supplier management, and in the “Purchasing Excellence” initiative (see here). This will result in further cost savings in procurement and logistics. Another item on our agenda is the introduction of a uniform sap-based information system for purchasing. It will comprise a bid management tool and an advanced purchasing controlling module for harmonized supplier and contract management.

Overall, supply chain management (see here) will gain increasing strategic importance in the Fresenius Medical Care Group, as it is the optimal lever for improving quality, costs, and service. This is one reason why we plan to centralize supply chain management for the Europe / Middle East / Africa region in the future.

In 2009, material costs will remain a challenge for us. As a consequence, we will step up our worldwide search for new, qualified suppliers. It remains to be seen whether overall demand for raw materials and other materials will decrease and prices will drop in the face of the generally unfavorable economic climate. The growing markets in the Asia-Pacific region will continue to put pressure on supplier capacities in individual material groups. As a result, apart from cutting costs, safeguarding the required production capacities is on our agenda in 2009. The potential in North America and Asia-Pacific will play an increasingly prominent role; initiatives to this end have already been launched.

In 2009, our logistics activities will focus on integrating our Darmstadt warehouse into the new distribution center in Biebesheim (both near Frankfurt / Main, Germany). More information on our distribution center can be found in the „Procurement and Logistics” section. Furthermore, we plan to harmonize our warehousing in Central Europe and the Asia-Pacific region.

In North America, we will bring together our third-party transport services under one brand name and thus generate additional revenue. We also intend to step up cross-border cooperation of the logistics departments in the U.S., Canada, and Mexico. Building extensions and moving to new sites will gear our distribution network to better suit customer needs. A major challenge will be the integration of new products into the supply chain and the development of logistics solutions for increasing warehouse and transport volumes.

QUALITY AND ENVIRONMENTAL MANAGEMENT

We intend to further enhance the effectiveness and efficiency of our quality management system in 2009. To this end, we will offer more audits, training sessions, and coaching to our subsidiaries, focusing on the topics of legal regulations, improvements to the management system, and risk management. Moreover, through effective measures and systems, we intend to bring about improvements in all of our business processes.

An important aspect of quality management is quality risk, which will be viewed in closer relation to financial risk in future. The background for this change is the fact that all company activities have a financial impact. As a consequence, financial and quality management are to be consolidated into the Company’s risk management.

This year, we will expand our environmental management system on the basis of ISO 14001 and certify further dialysis centers (see here); Spain and Romania will be the focus in 2009. We aim to certify our first dialysis clinic in Sweden according to ISO 9001. Our goal is for more than 75 % of our clinics to be certified with ISO 9001 by the end of the year and for half of our clinics to have ISO 14001 certification. This means a total of 45 new certifications according to ISO 9001, and 65 according to ISO 14001. Another focus in 2009 will be ensuring that employees are qualified to carry out audits, particularly in Eastern Europe. In addition, we are aiming for certification of our production sites for dialysis concentrate in Ober-Erlenbach, Germany, and our Serbian plant, where dialyzers, tubes and concentrate are made.

In 2009, we will also implement our efficiency initiative “Energy squeeze” at our most important European plants. The goal is to save 5 % of energy consumed at these factories so far, which would cut costs by nearly €1 million this year alone. This will further contribute to achieving the goals of our environmental program (see here).

Last year, using our clinical database EuCliD5, we developed the “e–con 5” integrated software solution for eco–controlling in our clinics. It records environmentally relevant data – for example, on energy consumption or waste disposal – more efficiently, stores these data in high quality, and provides convenient methods for analyzing the data. The pilot application in Slovenia, where the clinics have been working with the software since January 2008, was successful. The software will be rolled out to other countries this year. As a result, our vision of a comprehensive data management system in Europe is gradually becoming reality.

OPPORTUNITIES

As mentioned in the „Group  Business and Structure” section, certain demographic factors have a decisive impact on Fresenius Medical Care’s growth opportunities. These include the aging population and the increasing incidence of diabetes and hypertension, two illnesses that frequently precede the onset of end-stage renal disease (ESRD). Due to these developments, there is a growing need for dialysis products and services. We intend to make a significant contribution to covering this need by supplying renal patients with high-quality products and services. At the same time, we will persevere to achieve our goal of operating at profit.

Fresenius Medical Care can benefit as further markets open up, particularly in Eastern Europe and Asia. Although we already sell dialysis products in most of these markets via distributors or our own sales organizations, we only provide dialysis services in our own clinics in some of them. This is partly due to legal restrictions and to the fact that the prerequisite economic conditions often do not exist – for instance, appropriate reimbursement structures or functioning health systems.

In Japan, new opportunities for Fresenius Medical Care could arise from changes in the legal framework. If the regulations for operating dialysis clinics in this country are changed, enabling private companies such as Fresenius Medical Care to run their own clinics, this would open up significant new growth potential. Japan is the biggest market in Asia with about 290,000 dialysis patients, representing more than half of all dialysis patients in Asia. In addition, populous countries such as China and India will provide further growth opportunities over the long term. Therefore, we intend to strengthen our presence in India’s eight largest cities by offering dialysis services there.

Germany is the fourth-largest market worldwide in terms of the number of dialysis patients treated. We have an excellent market position there, thanks to the quality of our products. Whereas previously only doctors in private practice, hospitals, and nonprofit organizations were allowed to operate dialysis clinics, Fresenius Medical Care can now run dialysis clinics in medical care centers. Medical care centers are facilities managed by doctors with different areas of expertise: these are either salaried physicians or physicians under contract to the statutory healthcare insurance provider. We see ourselves as the partners of our customers with regard to establishing new structures in the German healthcare system, and we will take advantage of any opportunities available to strengthen our business longterm through this commitment. At the end of 2008, we had a share in two medical care centers.

Further opportunities arise from the research and development of new treatments for renal patients. A wearable artificial kidney could be developed in the future. However, research is still in its infancy, and it is unlikely that significant numbers of patients will be treated in the short and medium term. Fresenius Medical Care made the first step with the acquisition of Renal Solutions, Inc. in 2007. Should such systems be developed, their use would open up considerable potential for Fresenius Medical Care in terms of dialysis products and services connected with home dialysis.

Renal drugs are another business area offering excellent long-term growth opportunities. The integration of the phosphate binder PhosLo into the product portfolio in fall 2006 as well as its expansion through intravenous iron compounds in the previous business year are key steps forward in this area. Other renal drugs are vitamin d, iron compounds and calcimimetics. The Company estimates the size of the market for renal drugs of these four product groups to total more than $2.5 billion with respect to 2008.

Furthermore, Fresenius Medical Care could benefit from a number of opportunities arising from its operating business. These include a continually optimized procurement process and cost-efficient production.

GENERAL STATEMENT ON EXPECTED DEVELOPMENTS

We view Fresenius Medical Care’s prospects for the years to come as very positive. At present, all regions are expected to contribute to revenue and earnings growth on a constant currency basis.

In 2008, we aspire to strengthen our market position in all segments and to pursue our growth plans resolutely. This includes building new clinics and the targeted acquisition of dialysis clinics in all regions, as well as the expansion of our production capacities.

This outlook takes into account all factors known at the time of preparing the financial statements that could affect our business in 2009 and beyond. Major risks are discussed in the risk report. Fresenius Medical care will do everything in its power to attain or – if possible – exceed its goals.