Chapter 2.1

Operations
and Business Environment

Dialysis Market

The dialysis market is growing worldwide. As a vertically integrated provider with decades of experience, Fresenius Medical Care can supply patients with both high-quality dialysis products and services from a single source. Our Company is therefore ideally placed to expand its business in the future and thus consolidate its excellent position as market leader.

We estimate the value of the global dialysis market at around $75 BN for 2011 corresponding to an increase in constant currency terms of around 4% compared to the previous year. We assume this market volume can be broken down as follows: dialysis products with a revenue of around $13 BN and dialysis services (including dialysis drugs) with a revenue of approximately $62 BN. Detailed information on how this data is compiled can be found in the section “Collection and analysis of market data”.

Dialysis products

The main dialysis products include dialyzers, hemodialysis machines, concentrates and dialysis solutions, along with peritoneal dialysis products. The three largest manufacturers of dialysis products together accounted for approximately 65% of the worldwide market in 2011 in terms of revenue. With a market share of approximately 33%, Fresenius Medical Care was the market leader in this segment, followed by Baxter and Gambro. The remaining, mainly Japanese, dialysis product providers all held market shares in the single-digit percentage range.

MARKET POSITION IN MAJOR PRODUCT GROUPS 2011


       
       
 
Rank 1
Rank 2
Rank 3
Source: Company data and estimates
Dialyzers Fresenius Medical Care Gambro Nipro
Dialysis machines Fresenius Medical Care Nikkiso Gambro
Concentrates for hemodialysis Fresenius Medical Care Fuso Gambro
Bloodline systems Fresenius Medical Care Gambro Kawasumi
Products for peritoneal dialysis Baxter Fresenius Medical Care Terumo

Dialyzers are the largest product group in the dialysis market with a worldwide sales volume of around 211 M units in 2011. Around 93 M, or almost half, were made by Fresenius Medical Care, so that we comfortably held the largest market share in that segment. Dialyzers can generally be categorized as cellulose-based or synthetic-based (plastic-based), depending on the material used for the production of the dialysis membrane. More than 90% of dialyzers used around the world have a synthetic membrane. Fresenius Medical Care developed the high-performance Polysulfone fiber, pioneering the development and production of dialyzers while setting new standards in the field of dialysis.

Dialysis machines constitute another key segment of Fresenius Medical Care’s product business. Here, too, we are the clear market leader. Of the roughly 73,000 dialysis machines sold in 2011 worldwide, some 55% were produced by Fresenius Medical Care.

In the U.S., which is our largest business region, our market share in these two product groups, dialyzers and dialysis machines, exceeded 80% of the socalled independent market in 2011. We define the independent market as all dialysis clinics that do not belong to the major dialysis service providers Fresenius Medical Care or DaVita. In 2011, more than 85% of all dialysis machines installed in dialysis clinics and centers in the United States and more than 90% of all new machines purchased there were manufactured by Fresenius Medical Care. Our 2008K machine is the leading dialysis system. More than 100,000 units are currently in use in the United States. In the reporting year, we introduced the new 2008K@home dialysis machine, which is specially designed to meet the requirements of home hemodialysis. In addition, we launched the new 2008T dialysis machine in November 2010. It incorporates the “Fresenius Clinical Date Exchange (CDX)” system, a new software developed for capturing and sharing clinical data. In November 2011, the touch screen navigation of the 2008T dialysis machine was further improved. Further information on the 2008T and 2008K@home dialysis machines can be found in the “Research and development” chapter. Dialyzer sales also developed very positively last year: We achieved record figures in the U.S., selling more than 35 M units.

In the year under review, China was our second-largest sales market for newly sold hemodialysis machines after the U.S.; in 2011, we supplied more than 6,000 units here. Almost half (over 49%) of all hemodialysis machines currently used in China are produced by Fresenius Medical Care. With the product business growing by more than 40% at present, China continues to gain importance as a sales market for Fresenius Medical Care. The country’s government is making efforts to develop a modern healthcare system with corresponding reimbursement structures – an important prerequisite for opening the market for dialysis services to international providers. We are currently building our first dialysis clinic in this region in the Eastern Chinese province of Jiangsu, which will initially care for around 40 patients. We will start offering dialysis services in this country for the first time from mid 2012 as part of a pilot project. This makes Fresenius Medical Care one of the first foreign companies to open a dialysis clinic in this highly restrictive market. However, we will continue to drive our future growth in the Chinese dialysis services market primarily through cooperation with local clinics and management contracts. So far this applies to 52 clinics, which we provide with dialysis machines and disposable products.

Dialysis products 2011 Hemodialysis products 2011 Peritoneal dialysis products 2011

In the area of peritoneal dialysis, we account for 19% of the global market in terms of revenue, see also chart 2.1.12. Our market share in the U.S. was 41%. The current market leader in peritoneal dialysis is the U.S. company Baxter. At the end of December 2010, Fresenius Medical Care finalized the acquisition of Gambro's worldwide peritoneal dialysis business with the aim of expanding its activities in the field of home dialysis, particularly in Europe and the Asia-Pacific region. Further information on our position in the home dialysis market, which comprises home hemodialysis and peritoneal dialysis, can be found in the “Home dialysis” section.

Dialysis services

Renal patients generally receive a dialysis treatment in clinics or dialysis centers, which they visit three times a week for several hours. They are treated either during the day or overnight while they sleep. Further treatment options include home dialysis, which patients generally carry out themselves at home under expert guidance and with the necessary accessories, or dialysis on vacation, for example on a cruise ship or at a resort; Fresenius Medical Care also offers services for these cases. The vast majority of dialysis services, however, involves classical treatment in clinics or centers.

Last year, most dialysis patients were cared for in one of around 31,700 dialysis centers worldwide, resulting in an average of some 70 patients per center. The organization of these centers varies significantly depending on whether the health systems in the individual countries are state-run or private: The United States have around 5,800 and the European Union (EU) have around 5,400 dialysis centers; whereas in the U.S. only around 1% of patients are treated in publicly operated clinics, in the EU this number is about 60%. In Japan, private nephrologists (doctors specializing in renal treatments) play a key role. About 80% of dialysis patients are treated in their facilities.

Dialysis services worldwide; number of patients treated 2011

Fresenius Medical Care can operate its own therapy centers in countries where the healthcare system allows private sector companies to provide medical services and an appropriate reimbursement system is in place. For some years now, healthcare systems in a large number of countries have been under pressure to improve the quality of treatment while at the same time keeping healthcare costs as low as possible. Many of them have therefore started to contemplare, whether and how specialized private companies can help them in this. Other countries are currently developing their healthcare systems and are looking to interact with healthcare companies with a good reputation for high quality in their business activities with the aim of developing modern treatment standards. In both cases, Fresenius Medical Care, as an experienced vertically integrated provider, is the right partner: With our high-quality and innovative products and services, we have the ideal prerequisites to continue expanding our position on the dialysis market.

In the U.S., Fresenius Medical Care and the second largest provider, DaVita, together serve about 66% of all dialysis patients; this is a relatively high concentration of dialysis clinics. In the year under review, Fresenius Medical Care upheld its position as market leader and treated about 138,400 patients, approximately 33% of all dialysis patients in the U.S. This number will increase significantly in 2012, partly due to the acquisition of Liberty Dialysis Holdings Inc., currently the third largest operator of dialysis clinics in the U.S. Further information on this can be found in the chapter “Growth strategy” and in the chapter “Subsequent events”.

Outside the U.S., the dialysis service segment is considerably more fragmented: With 1,081 dialysis clinics and almost 95,000 patients in 40 countries, Fresenius Medical Care operates the largest and most international network of clinics by far. In particular the acquisition of International Dialysis Centers (IDC), the dialysis services business of Euromedics, which closure was completed inmid 2011, enabled us to expand our market position in important Eastern European countries.

Overall, Fresenius Medical Care further consolidated its clear position as market leader in the dialysis services business in the reporting period and treated 233,156 patients (2010: 214,648) in 2,898 clinics (2010: 2,744).

Operators of dialysis clinics in 2011 Top 5 dialysis providers worldwide 2011

Sector-specific conditions

Collection and analysis of market data

Reliable information on the development of the dialysis market and its general conditions both globally as well as on a national and regional level is an important prerequisite for the success of our business. This includes current and future patient numbers, social and medical trends, as well as the position of our competitors. To obtain and manage representative market information, Fresenius Medical Care has developed its own tool, the Market & Competitor Survey (MCS). The American journal “Nature Reviews Nephrology” recognized the MCS as the industry standard in 2010. The MCS is used to collect and analyze relevant dialysis market and competitor data, distribute it globally throughout the Company and utilize it. For this purpose, we compile data in the individual countries on the number of dialysis patients, the chosen treatment method, the products used, where treatment took place and the structure of service providers. The data is then compared with official figures from national associations and with results of previous surveys to draw conclusions on patient numbers and market values, globally as well as regionally. We use this information together with publicly available data on our competitors as a basis for strategic decisions by our management, research and development and marketing on the one hand, and for our external reporting, such as the annual report, on the other. Unless otherwise stated, the data in this chapter is based on internal estimates provided by the MCS. Through regular updates, we account for new trends such as changes in the use of certain treatments as well as in the structure of our competitive environment, e.g. caused by the entry of new providers.

Fresenius Medical Care uses its own system to collect market data with good reason: Although recognized organizations in many countries publish information on chronic kidney failure (also called end-stage renal disease or ESRD), demographic patient structures and relevant trends, there is either a time lapse between collection and availability or the data is not reliable or detailed enough to give a complete and up-to-date picture of patient numbers worldwide. Furthermore, unlike the MCS, these generally do not track the number of renal products used for dialysis, such as dialyzers or solutions for peritoneal dialysis.

The results of the MCS are also part of a model that enables us to analyze developments in the global dialysis market. The overall market is represented via the reimbursement structures of the individual countries. We take into account which products and services are included in the reimbursement rates. Services that are reimbursed separately are added. In addition to information on the product market, this model allows us to collect and analyze data for dialysis services and the pharmaceutical market.

Patients

Chronic kidney failure is a global problem: At the end of 2011, approximately 2.776 M patients were being treated. Around 2.158 M of these in more than 145 countries received renal replacement therapy in the form of dialysis. Some 618,000 renal patients live with a transplanted kidney. Of the 2.158 M patients worldwide who underwent regular dialysis treatment at the end of 2011, approximately 20% were treated in the U.S., 15% in the EU, and 14% in Japan. The remaining 51% of all dialysis patients are spread across 120 countries in various regions around the world. In 2011, the number of dialysis patients rose by approximately 6%, although significant regional variations remained.

Fresenius Medical Care: Patients treated 2011

The patient numbers in individual countries can be compared based on prevalence, which expresses the relative number of people in treatment for chronic kidney failure. Prevalence varies widely from country to country, from well under 100 to over 2,000 patients per million population (p.m.p). Prevalence is highest in Taiwan with around 2,850 p.m.p., followed by Japan with around 2,520 p.m.p. and the U.S. with around 1,950 p.m.p. It averages at about 1,050 p.m.p. in the 27 countries that make up the EU. In the past 10 years, prevalence increased steadily. The average prevalence worldwide is around 400 p.m.p, much lower than in the countries mentioned above. There are several reasons for this:

  • The countries differ demographically, because age structures in the population vary worldwide.
  • The incidence of risk factors for kidney disease such as diabetes and high blood pressure also diverges.
  • The genetic predisposition for kidney disease differs across the world.
  • Cultural factors such as nutrition also play a role.
  • Access to dialysis is limited in many countries so that many kidney failure sufferers are not treated and thus do not appear in prevalence statistics.

A comparison of the economic strength of countries – based on their gross domestic product (GDP) – and their prevalence values suggests that economic factors affect not only demographic development, but also treatment options for renal patients. Particularly in countries with an annual GDP per capita of less than $10,000, not all sufferers have access to treatment. In countries with a higher GDP, there is no noticeable correlation between economic strength and prevalence. However, rising global prevalence indicates that, based on the total population, more and more people are receiving renal replacement therapy over the years.

DIALYSIS PATIENTS: REGIONAL DEVELOPMENT


   
   
 
2011
Change
Source: Company data and estimates
North America 518,000 ~ 5%
U.S. 419,000 ~ 4%
Europe/Middle East/Africa 595,000 ~ 4%
EU 329,000 ~ 2%
Asia-Pacific 820,000 ~ 10%
Japan 304,000 ~ 2%
Latin America 225,000 ~ 5%

WORLDWIDE

2,158,000 ~ 6%

In the U.S., Japan and Western and Central Europe, we recorded a below-average growth in the number of patients in 2011. In these regions, prevalence is already relatively high and patients generally have reliable access to treatment, normally dialysis. In economically weaker regions, growth was above average and in some cases reached double-digit figures – an indication that access to dialysis treatment in these countries is still limited but is gradually improving. In addition to easier access to dialysis resulting in better recording of patient numbers, however, other factors contribute to a rise in global prevalence, for example the spreading incidence of illnesses that cause renal damage such as diabetes and high blood pressure, as well as the general aging of the population due to medical advances.

Treatment methods

There are basically two types of dialysis treatment: hemodialysis (HD) and peritoneal dialysis (PD). In the case of HD, a hemodialysis machine controls the flow of blood from the patient through synthetic bloodlines into a special filter, the dialyzer, where it is cleansed and returned to the patient’s body. With PD, the patient’s peritoneum is used as a dialyzing membrane. Not every patient is equally suited to these two methods. As PD is usually carried out by patients themselves, it requires a high degree of personal responsibility. In addition, the human peritoneum can only be used as a dialyzer for a limited period of time, ideally if the kidneys are still functioning to some extent.

PATIENTS WITH END-STAGE RENAL DISEASE


in M
   
   
Source: Company data and estimates
Patients with end-stage renal disease (ESRD) 2.776
of which dialysis 2.158
hemodialysis (HD) 1.921
peritoneal dialysis (PD) 0.237
of which patients with transplants 0.618

Of the 2.158 M patients who underwent dialysis treatment at the end of 2011, 1.921 M – about 89% – were treated with HD and around 237,000 with PD. In a global comparison of treatment methods, HD is clearly the most commonly used. Within the group of the 15 countries which account approximately for more than three quarters of the world dialysis population, HD is the predominant treatment method in all countries, except Mexico.

A third alternative method for treating patients with end-stage renal disease is kidney transplantation. Approximately 618,000 patients were living with a transplanted kidney at the end of 2011. However, for many years now, the number of donated organs worldwide has been significantly lower than the number of patients on transplant waiting lists. Consequently, less than one quarter of patients with chronic kidney failure lives with a donor organ. Despite ongoing and extensive efforts by regional initiatives to increase awareness of kidney donation and willingness to donate, the share of patients receiving kidney transplantation compared to other treatment modes has remained relatively unchanged over the past ten years.

Customers

Fresenius Medical Care’s most important customers are state-owned or public health insurers, private health insurers, and companies. The largest private customer, which is also the world’s second-largest provider in the dialysis services sector after Fresenius Medical Care, is the U.S. company DaVita.

Health and reimbursement systems

As renal replacement therapy is a life-saving medical service, patients do not usually have to pay for it themselves, but the costs are carried by the responsible healthcare system. The reimbursement systems for dialysis treatment – in other words the scheme used by a healthcare system to pay for dialysis services – differ from country to country and often vary even within countries. The factors determining reimbursement include regional conditions, the kind of treatment provided, regulatory issues and the type of care provider (public or private). As a provider of dialysis services, Fresenius Medical Care offers dialysis in more than 40 countries with different healthcare systems and reimbursement schemes. Our international experience puts us in a position to support national healthcare systems in their endeavors to customize structures, adapt our business to local needs and regulations and at the same time act profitably.

The healthcare debate in some countries is currently focused on establishing reimbursement structures based on treatment quality. The goal of a reimbursement system of this kind is to improve the quality of treatment for a dialysis patient at a lower overall cost. This requires maintaining high medical standards besides the efficiency in treatments.

The example of the U.S. shows the opportunities that a reimbursement system aimed at maintaining the highest possible quality offers Fresenius Medical Care as a vertically integrated company. In January 2011, the United States, our largest sales market, also introduced a new bundled reimbursement system for the dialysis treatment of public healthcare patients (Medicare patients). All products and services that used to be reimbursed according to the composite rate are now reimbursed in a flat fee. This includes services such as the administration of certain drugs and diagnostic laboratory tests that were reimbursed separately in the old system. The bundled reimbursement rate is adapted to patients’ characteristics such as age and weight considering adjustments for patients who require exceptional medical care leading to higher costs. In addition to automated annual inflationary adjustments starting in 2012, other special features of this new reimbursement system include adherence to certain quality parameters. These comprise, among other things, patient satisfaction, regulation of the hemoglobin content of the blood (anemia management) and the mineral metabolism in the bones. The initial new bundled reimbursement rate for 2011 was introduced with a 2% cut as compared to the estimated costs under the prior reimbursement system. In addition, the authority of the state health care program (Centers for Medicare and Medicaid CMS) initially implemented a further 3.1% reduction.However, this was subsequently eliminated effective April 1, 2011 after successful negotiations with the authority. Beginning in 2012, the payment amount will be subject to an annual inflation adjustment. For 2012, the rate increase will be 2.1%. The inflation rate should be at a comparable level in forthcoming years according to earlier draft bills.

The new bundled reimbursement system in the U.S. will be phased in over a period of four years. Accordingly the implementation of the new payment system will be completed in January, 2014 for all dialysis centers. Fresenius Medical Care decided at an early stage to convert nearly all of the clinics to the new reimbursement system already on January 1, 2011.

End-stage renal disease is one of the few chronic illnesses whose treatment cost is covered by public health insurance in the U.S. The care of the main part of all U.S. dialysis patients is mainly financed by Medicare and Medicaid, the two American healthcare programs that manage the medical care of the elderly and people on low incomes who do not have private health insurance. Changes to the reimbursement rates and methods of Medicare and Medicaid therefore have a significant effect on our business in North America. At Fresenius Medical Care, we feel that our vertical business model puts us in a good position to work with the new system and to react on possible adjustments in the future.