The following risks could have an impact on our business activities:
Risks due to economic conditions
In addition to observing and evaluating the general development of the global economy, we pay special attention to monitoring and assessing the political, legal and financial conditions of our business. As Fresenius Medical Care predominately operates in international markets, we also conduct continuous, intensive analyses of country-specific risks.
Risk related to the economy as a whole
The dialysis market is a growth market that is unaffected by general economic influences to a large extent. This can be partly explained by the fact that an aging population requires increasingly comprehensive medical care. Due to the stable demand for dialysis products and services, Fresenius Medical Care is only subject to economic fluctuations to a relatively small extent. In the countries most strongly hit by the global financial crisis, we expect days sales outstanding to increase slightly, similar to the previous year. As we receive the majority of our reimbursements from government healthcare organizations and private insurance companies, we assume that most of our receivables are recoverable. More information on this can be found in the “Economic environment” section and the “Outlook” chapter.
Risks related to changes in the healthcare market are of major importance to Fresenius Medical Care. Key factors here are new products and therapies developed by competitors as well as regulatory changes in the healthcare sector.
Company strategy and competition
We counter the risk of a competitor impairing our sales opportunities with its products and processes or of our strategy falling short of the trends in the market with our research and development activities. We work closely with the medical and scientific communities to allow us to quickly identify and further develop important technological innovations. These alliances also guarantee that Fresenius Medical Care has extensive knowledge of advances in alternative treatment methods and enable us to evaluate and, if necessary, adjust our corporate strategy. We therefore continuously analyze and evaluate trends and review the progress of research and development projects.
Additionally, we closely monitor the market, especially the products of our competitors and the introduction of new dialysis-related products. To this end, Fresenius Medical Care has internal strategic departments that help us to anticipate changes 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.
Finally, to keep ahead of the competition, we benefit from our many years of experience and our leading position in the dialysis industry, as well as from synergies resulting from the interplay of the various technical, medical and academic institutions within our vertically integrated Group.
Legal conditions in the healthcare sector
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. For this reason, we not only carefully monitor regulatory activities and planning, but also work intensively with government healthcare agencies. Details on the changes in the reimbursement system in the U.S., our most important market, can be found in the “Health and reimbursement systems” section.
Risks associated with operating activities
We counter potential risks in production, products and services with preventive and quality-enhancing measures.
Quality risks in production
We ensure that we comply with legal and Company product and production regulations first and foremost by means of extensive quality management systems in our regions. In implementing these regulations, our employees have access to documented 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 related to quality, from management and administration to development, production and customer satisfaction. Furthermore, the production processes in our plants are inspected by external bodies, for example by TÜV in Europe and by the Food and Drug Administration (FDA) in the U.S.
We also apply the methods of lean management and Six Sigma in our plants. These management tools are used to analyze and better coordinate all production processes to permanently reduce the error rate. Our goal here is to achieve more consistent production results and to continuously improve the quality of our products and related production processes. Since 2010, our quality management has been centrally coordinated by our new business unit Global Manufacturing Operations (GMO) with the aim of managing quality risks even better in future. For further information, see the “Our product business” section.
Quality risks for 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 by gearing our working methods to patients’ needs. In Europe, for instance, our clinical quality management system, certified according to ISO 9001, is part of our integrated management system. The ISO 9001 certificate also attests to our “Good Dialysis Practice”. In the U.S., our internal quality enhancement program successfully complies with the standards outlined in the Kidney Disease Outcomes Quality Initiative (KDOQI) and the Center for Medicare and Medicaid Services (CMS). We assess both our treatment data and our methods in annual internal audits to enable us to continuously improve our processes and treatment results. Our clinic quality management system is also audited each year by external certification institutes such as the German TÜV or Medicare and CMS 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.
Our quality management also includes environmental management, as environmental resources are used for manufacturing dialysis products and the operation of dialysis centers produces clinical waste. More information on this can be found in the “Responsibility” section.
Safety risks for products and processes
Like all blood cleansing procedures that are performed outside of the human body, dialysis is associated with certain risks for the patient that in the worst case can lead to death. National as well as international standards and laws therefore stipulate binding safety standards for dialysis products. In addition, we have created our own quality guidelines for research and development that in part exceed the legal requirements. We also document our work in the area of research and development in comprehensive scientific studies and publications. We produce detailed product information packs and instructions for users of our products, and conduct risk and error analyses according to the most stringent criteria. In addition, Fresenius Medical Care focuses on developing procedures and devices within the scope of a continuous product improvement process, to minimize as far as possible the risk of a patient being harmed due to a technical fault or human error.
Risks in research and development
The risk that goals may not be achieved or be achieved much later than anticipated is inherent in the development of new products and therapies. Most new products have to undergo comprehensive, cost-intensive preclinical and clinical tests before they receive regulatory approval and are 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 projects. Furthermore, we ensure that the legal regulations governing clinical and chemical-pharmaceutical research and development are strictly adhered to. Our research team for dialysis products develops new products and technologies in close cooperation with representatives from the medical and scientific communities. Trade relations are established early on in the development phase. For further information see the “Research and development” section.
We impose comprehensive quality standards on suppliers to counter the risk of low quality in sourced raw materials, semi-finished goods and other components. For example, we demand that our suppliers provide certification from external institutes and undergo regular audits; in addition, Fresenius Medical Care carries out extensive evaluations of sample products and regular quality control checks. We source only high-quality products that are verifiably safe and suitable from certified suppliers that meet Fresenius Medical Care’s specifications and requirements and have a proven track record in manufacturing these materials. These suppliers are constantly evaluated as part of our exacting supplier management system.
Our purchasing strategy is aimed at building and developing partnerships with strategic suppliers through long-term contracts, while at the same time ensuring that we have at least two sources for all supply and price-critical primary products (dual sourcing, multiple sourcing). Thanks to this strategy, we do not consider bottleneck situations to be probable, even if market demand should rise again. We only accept market-related dependencies on suppliers of strategically relevant materials in exceptional cases and subject to defined conditions. When we launched the new business unit Global Manufacturing Operations (GMO) in 2010, we introduced a new, company-wide risk management system for our most important suppliers. More information on this can be found in the “Strategic purchasing and materials management” section.
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. By intensifying cross-regional cooperation between our procurement teams in the new GMO business unit, we will be able in future to benefit even more from international pricing advantages and manage risks related to currency fluctuations or dependencies on individual suppliers even better. More information on this can be found in the “Strategic purchasing and materials management” section.
Our Company’s success depends to a large extent on the dedication, motivation and abilities of our employees. We counter the risk of not being able to win and ensure the loyalty of sufficient qualified personnel with extensive personnel marketing and recruitment measures as well as personnel development programs for specific target groups.
Our continued growth in dialysis services in particular depends on the extent to which we can recruit and retain qualified care personnel. Especially in the U.S., where we operate most of our dialysis clinics, competition for such employees is intense. As a result, we are currently extending various measures and initiatives aimed at further increasing the satisfaction of our clinic personnel, maintaining their high level of motivation and further lowering the fluctuation rate in our clinics. We base these efforts on the results of extensive clinical employee satisfaction analyses. The training program UltraCare Clinical Advancement Program (UCAP) in the U.S. is one example of such an initiative; more about this. In the Fresenius Medical Care Institute of Dialysis Nursing (F.I.D.N.) in the Philippines, we are training dialysis nurses to provide our clinics with qualified and motivated technical staff, and thus ensure the high standard of our treatment quality.
Our personnel management deals with the overall risk of not being able to attract or retain highly-qualified personnel. The department’s job is to discover and promote new talent with targeted measures. Fresenius Medical Care offers employees a challenging work environment and long-term perspectives for their professional development. Furthermore, our employees enjoy performance-based bonus payments and attractive social benefits. Detailed information relating to our personnel management can be found in the ”Employees” section.
Risks due to non-compliance with laws and standards
Fresenius Medical Care has developed a code of conduct, which applies to employees in all regions, specifying their conduct within the Company as well as toward our patients, external partners and the public, and encouraging them to comply with local laws and Company standards at all times. Together with our Compliance program, this code should help us meet our own expectations and those of our partners, and to successfully align our business activities to recognized standards as well as local laws and regulations. Further details on our compliance program can be found here. Additionally, employees who are entrusted with confidential or “insider” information must sign a confidentiality agreement placing them under obligation to comply with relevant guidelines and handle the information responsibly.
Risk of dependency on major customers
In addition to a number of state-owned and public health insurance funds, Fresenius Medical Care’s customers include private health insurers and companies. Our biggest private-sector customer, U.S. dialysis clinics operator DaVita, is also the second largest provider of dialysis services in the world.
However, DaVita only accounted for about 1% of Fresenius Medical Care’s total revenue in 2010. Therefore we consider the risk arising from relationships with major customers to be relatively small.
Acquisitions and investments
Fresenius Medical Care assesses potential financial risks arising from acquisitions and capital expenditures early on with the help of internal and, if necessary, external specialists. Potential acquisitions and investments are analyzed by an internal committee (Acquisition Investment Committee, AIC) based on minimum requirements relating to a number of parameters, with the objective of ensuring that the decision to buy or invest is profitable. The profitability of acquisitions and investments is also monitored after the event on the basis of these key indicators. More information on corporate management and control can be found here.
The main financial risks that affect our Company are currency and interest rate risks.
We actively manage the risks from foreign exchange rate and interest rate fluctuations that result from our business operations. Risk management is based on strategies defined and, if necessary, adapted in close cooperation with the Management Board. These include guidelines that govern all phases and levels of the risk management process: responsibility for determining risks, the careful use of financial instruments for hedging purposes, and accurate financial reporting. We use derivative financial instruments to manage the risks from foreign exchange rate and interest rate fluctuations, but only in connection with underlying transactions, and not for trading or speculation purposes. All transactions are conducted with highly rated banks (the majority have a rating of at least “A”) that have been approved by the Management Board.
We use interest rate hedging instruments to avert the risk of interest rate increases from our floatingrate long-term loans. The aggregate nominal value of the corresponding hedges was $2.15 BN as at December 31, 2010. This meant that, as at December 31, 2010, about 64% of the Group’s financial liabilities were protected against increases in interest rates either by fixed-rate borrowings or by interest rate hedges. Only around 36% of the liabilities were therefore exposed to the risk of rising interest rates. A sensitivity analysis revealed that if the relevant reference interest rates for the Company increased by 50 basis points, based on the current high level of hedging, the effect on the net income (attributable to Fresenius Medical Care AG & Co. KGaA) would be less than 1%. The interest derivatives expire at different dates between 2011 and 2012. In addition, the Group uses hedges with a view to including future liabilities. The aggregate nominal value of the corresponding hedges was $1.025 BN as at December 31, 2010. The interest derivates will become effective in January 2011 and June 2012 respectively.
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 forward contracts. The aggregate nominal value of all exchange rate hedges, mainly for hedging the euro against the U.S. dollar and against other foreign currencies, amounted to $2.6 BN in the Group as at December 31, 2010. Based on a sensitivity analysis, Fresenius Medical Care estimates the effect on operating earnings at about $13 M. For this analysis 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 the “Liquidity and capital resources” section of the financial report for further details.
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 receivables of existing customers while assessing the possibility of default. Please see here for further details on outstanding receivables.
Risks associated with litigation are continuously identified, assessed and reported within our organization. Fresenius Medical Care is involved in various legal proceedings resulting in part from our business operations. For details on ongoing proceedings and further information on material legal risks to which Fresenius Medical Care is exposed, please refer to note 18.
As Fresenius Medical Care continues to grow in size and become more and more international, the processes within the Company are increasingly complex. Accordingly, we are more and more dependent on information and communication technologies to structure our processes and harmonize them between different regions. Fresenius Medical Care uses continuously updated and newly developed hardware and software to prevent potential security risks in the area of information technology (IT). Using our Information Security Management System (ISMS), which is based on the internationally recognized security standard ISO 27002, we continuously enhance IT security guidelines and processes within Fresenius Medical Care. Business data is backed up regularly. The frequency of these backups depends on how important the respective IT system is for our business. Potential IT risks are covered by a detailed disaster recovery plan, which is constantly tested and improved. Fresenius Medical Care operates three data centers at geographically separate locations, each with an associated disaster recovery plan, to maximize the availability and data security of our IT systems. We use a mirrored infrastructure that creates a copy of critical systems, including clinical systems as well as the communication infrastructure and servers. In order to minimize organizational risks, manipulation and unauthorized access, access is protected by passwords that must be changed regularly every 45 to 90 days. Moreover, Company guidelines relating to data protection, which also regulate the assignment of access rights, must be observed. Compliance is monitored with controls including those relating to Section 404 of the Sarbanes-Oxley Act. Operational and security audits are carried out every year both internally and by external auditors.
Other operating risks
Potential risks 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 units, we use internal milestones and monitor continuously whether they are being adhered to. Further preventive risk management measures limit the effect of environmental factors on dialysis services: Many of our own dialysis clinics have emergency generators to ensure that life-saving dialysis treatments can be continued even in the event 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. More information on this can be found in the “Dialysis services in emergency situations” section.