Patient growth and demographic development

According to estimates, the number of people worldwide suffering from chronic kidney failure and requiring dialysis treatment is rising by around 6% annually. This number is expected to reach around 2.15 M in 2011 and almost 4 M by 2020. Several social trends contribute to this growth in patient numbers. In Europe and the U.S., for example, these include the aging population and the increasing incidence of diabetes and hypertension, two illnesses which frequently precede the onset of chronic kidney failure. In developing and emerging countries, the expanding population and an increase in wealth are key factors that boost demand for dialysis products and services. We want to continue to make a significant contribution to meeting this demand in the future.

Changes in legal and political conditions

Whether or not private companies can offer dialysis treatment and in what form depends on the healthcare system of the country in which they operate and its legal framework. For Fresenius Medical Care, opportunities to extend into new markets or to expand its market share arise if a country opens up to private dialysis providers or allows cooperation between public and private providers. These decisions are increasingly influenced by the following factors:

• In many countries, the resources for financing, managing and providing healthcare services are becoming ever scarcer. This situation has worsened as a result of the financial and economic crisis.
• At the same time, healthcare systems face the challenge of providing their population with increasingly comprehensive medical services. This is due to longer life expectancy and the associated increase in concomitant diseases or because fully-functioning healthcare provision is still being established.
• Dialysis is a complex life-sustaining procedure, which places high demands on a healthcare system in terms of expertise and efficiency.

For these reasons, public healthcare providers are increasingly looking to work with private providers to develop high-quality, sustainable healthcare solutions for patients with chronic kidney failure. This constitutes a huge opportunity for Fresenius Medical Care.

One example is Germany, the fifth-largest market worldwide in terms of the number of dialysis patients. We lead the market here with our products. Dialysis centers are predominantly operated by doctors in private practice, hospitals, and non-profit organizations; however, for a number of years, Fresenius Medical Care has also offered dialysis services in medical care centers. These are facilities for outpatient care managed by doctors with different areas of expertise who are employed as salaried physicians. At the end of 2010, the Company was involved in eight medical care centers (2009: four). As an experienced partner, we want to continue to support our customers when it comes to setting up new structures in the German health care system, and take advantage of the opportunity to strengthen our business in the long term. In Japan, where dialysis centers are primarily managed by private nephrologists, new sales opportunities could also open up for private companies such as Fresenius Medical Care in the long term if these are approved as clinic operators in Asia’s largest dialysis market.

Public private partnerships

In some countries, public private partnerships (PPP) promise to be an attractive business model for Fresenius Medical Care. These are contractually defined project alliances between the public sector and private companies in which both partners have a specified share of the financing, tasks, risks, and opportunities. Here, too, our broad expertise in dialysis gives us a competitive edge, as it enables us to prepare suitable offers for various levels of care for hospitals, health insurances, local or national authorities. Depending on the contract, we can set up new dialysis clinics and install the equipment, train medical personnel on quality, hygiene and nutrition or manage the clinics ourselves on the terms agreed. PPP therefore offers an opportunity for both partners: The public sector benefits from private investments in a dialysis infrastructure based on high standards of treatment, from the transfer of knowledge on quality, technology and management issues, and from the operational efficiency of a global dialysis company, helping it to provide patients with better and, at the same time, more cost-effective healthcare. In turn, Fresenius Medical Care can tap new markets, expand its market share, and extend its range of products and services with new forms of healthcare thanks to the PPP model. Partnerships of this type can also be the first step towards complete privatization. We are already part of a PPP initiative in Italy and are planning further projects in Indonesia, Abu Dhabi, Portugal, Brazil, and Turkey. The relevant contracts are tailored to the respective needs of the partners involved as well as to the local legal conditions.

Growing demand for integrated healthcare

Cost pressures on the one hand and the growing number of patients on the other are causing an increase in global demand for a comprehensive – or integrated – healthcare concept (disease managementDisease managementIntegrated concept of patient care that takes into account all medical aspects of an illness.) for patients with chronic kidney failure. This is based on the following principle: All healthcare services and therapies associated with the treatment of a kidney patient – possibly going even one step further to include the treatment of concomitant diseases – are combined to create an integrated program that is tailored to the individual requirements of the patient and the needs of the insurer. Depending on the contract and which elements a healthcare system prescribes as part of basic treatment, this can involve, for example, special medical tests, drugs for kidney patients, the insertion and medical supply of the vascular access connecting a patient to the dialysis equipment (vascular access management – VAM), or the patient’s travel to and from the dialysis center in addition to the dialysis itself. This comprehensive care from a single source improves the way in which the different stages of treatment are coordinated and controlled, minimizes complications and thereby avoids additional stays in hospital, which are a significant burden for patients, as far as possible. As a consequence, the patient’s quality of life and the quality of treatment increase, while the overall costs of the treatment decrease.

Payors increasingly no longer reimburse the components of this type of holistic treatment separately but combined in a “service package”, which is linked to contractually defined, measurable treatment targets on which the dialysis provider must submit regular reports (pay for performance). These quality parameters are generally based on national and international guidelines on good treatment practice for kidney patients and in some cases even exceed them. Failure to meet these criteria results in measures ranging from a reduction in the reimbursement to a full withdrawal of the license.

Integrated healthcare using the pay-for-performance model offers opportunities for all those involved: Dialysis patients can enjoy a sustainably improved quality of life; pooling healthcare provision with a single provider reduces the overall costs of treatment as resources are used more efficiently and makes these costs easier to control and calculate for the public sector and for health insurers; dialysis providers can in turn expand their range of offers by providing the additional services required by the contract.

Fresenius Medical Care is particularly well placed to offer integrated treatment programs for chronically ill kidney patients with a high level of quality for several reasons:

• As a manufacturer of leading dialysis products and an operator of the largest international dialysis clinic network worldwide, we have long-standing experience in providing comprehensive care for dialysis patients.
• Thanks to the high quality and reliability of our products and services, we enjoy a very good reputation in the industry.
• We use sophisticated internal feedback instruments to measure and compare the success of treatment at our clinics and to rapidly identify any potential for improvements.

Our first positive experience of quality-based healthcare models with flat-rate reimbursement was in Portugal, where this type of system was implemented in 2008. We are also reimbursed under the pay-for-performance principle for some of our patients in Argentina. In the year under review, we concluded a cooperation agreement with the health authorities of the Spanish region Murcia to provide around 200 dialysis patients with complete care. This contract, the first of its kind in Spain, is set to take effect in mid-2011 and will run for an initial period of six years. Further information on integrated healthcare and reimbursement, including the new bundled reimbursement system in the U.S., can be found in the “Health and reimbursement systems” section.

Horizontal expansion of our portfolio

Dialysis drugs supplement our range of dialysis services and products, enabling us to expand our portfolio horizontally. In line with our strategy ( see here) and the general trend towards integrated healthcare (see above), they offer the Company further opportunities for growth. Usually, patients undergoing dialysis require medication to counteract anemiaAnemiaReduced oxygen transport capacity of the blood, measured as reduced hemoglobin content in the blood. and control their mineral metabolism – both of which are consequences of chronic kidney failure. Anemia in dialysis patients is generally treated with the hormone compound ErythropoietinErythropoietin (EPO)Hormone that stimulates red blood cell production. (EPO) and with intravenous iron compounds. The market volume of these intravenous iron compounds for kidney patients amounted to around $1.1 BN in 2010. Phosphate bindersPhosphate binderPhosphate binders bind phosphate within the intestines. Excess phosphate consumed with food is normally discharged by healthy kidneys. This filtering process can only partially be replaced through dialysis for patients with chronic kidney failure. Too much phosphate in the blood can have a number of adverse effects, such as bone disease, thyroid problems and vascular calcification. used to control the bone metabolism are required by more than 80% of all dialysis patients and accounted for a market volume of approximately $1.2 BN in 2010.

In previous years, license agreements for intravenous iron compounds and the integration of the phosphate binder PhosLo^® into our product portfolio were instrumental in enabling us to participate in this market. In 2010, Fresenius Medical Care extended its cooperation with Galenica, a pharmaceutical company, and founded Vifor Fresenius Medical Care Renal Pharma, a joint venture specializing in the development and global sale of drugs for kidney patients. The joint venture, in which Fresenius Medical Care holds a 45% stake, is pursuing a dominant market position in both of these areas.

New products and technologies

If patient numbers grow as strongly as anticipated, cost pressure continues to rise, and the capacity of clinics is no longer sufficient to treat all patients, home therapies look set to take on a more crucial role. This development offers Fresenius Medical Care opportunities for growth. As a result, we are expanding our expertise in peritoneal dialysis with high-quality products and treatment programs as well as acquisitions see here. Sorbent technology already provides us with a key method for other forms of home therapy: home hemodialysis and the wearable artificial kidney, which an international team is currently developing in a long-term project see here. We use sorbents to make simple tap water suitable for use in dialysis and to recycle dialysis solution. These are major prerequisites for dialysis outside of medical healthcare facilities. In the future, we will continue to expand our portfolio with innovative products and procedures to exploit opportunities for growth, increasingly with the aim of best servicing the demand for integrated healthcare see here.

Internal organization and procedures

The organization and management of its operational business presents Fresenius Medical Care with a series of opportunities that will help to improve the Company’s success in the long term. For example, we use the Lean and Six Sigma management methods to analyze and better coordinate our production processes worldwide in order to further reduce both our defect rates and manufacturing cycles. We are systematically expanding environmental management at our production sites and clinics to improve our operating efficiency, for example by saving resources; see here.

In the year under review, we reorganized our global production in the Global Manufacturing Operations (GMO) unit and created a corresponding position on the Management Board; further details. We believe that by establishing an integrated production network and harmonizing quality management and supply chain management, we will be able to:

• further increase the efficiency of our processes,
• better manage risks, and therefore costs,
• improve returns on our invested manufacturing-related capital.

Acquisitions

By expanding our global network of clinics through acquisitions as well as procuring know-how and relevant technologies in the area of research and development, we are investing in our future growth. The close collaboration between our strategy and planning departments and the managers responsible for our acquisitions ensures that we are able to identify suitable potential acquisitions worldwide as early as possible. For information on our acquisitions in the year under review see here and here.

Business model of Fresenius Medical Care

Finally, our business model also provides opportunities for the future growth of our Company. As a vertically integrated dialysis company, we not only offer almost all of the products and services that a patient with chronic kidney failureChronic kidney failure (end-stage renal disease, ESRD)Permanent failure of the kidney (terminal kidney failure) resulting from slow and progressive loss of the kidney function over several years. Since the renal function cannot be recovered, the patient has to be treated with renal replacement therapy, i.e. kidney transplantation or dialysis. Chronic kidney failure is accompanied by long-term complications such as renal anemia, hypertension and other cardiovascular problems, as well as bone disease, loss of appetite and malnutrition. requires for treatment, we also use these on a daily basis in our own clinics. Consequently, we benefit from the feedback of patients, physicians and nurses worldwide in developing and manufacturing new products as well as in organizing our clinic management.