Operations and Strategy
Fresenius Medical Care is the world’s leading provider of dialysis products and services. Dialysis is a vital blood cleansing procedure that substitutes the function of the kidney in case of kidney failure.
Leading provider of dialysis products and services
As a vertically integrated company, Fresenius Medical Care offers products and services along the entire dialysis value chain. In the year under review, we further expanded our business with dialysis products and in particular our services business. We now care for approximately 258,000 dialysis patients in around 3,200 proprietary dialysis clinics in approximately 40 countries worldwide. We are continuously developing this network of clinics – the largest and most international in the world – to accommodate the ever growing number of dialysis patients. At the same time, we operate more than 40 production sites on all continents, making us the leading provider of dialysis products including dialysis machines, dialyzers and disposable accessories. The Company’s largest plants in terms of production output are in the U.S. (Ogden, Utah, and Walnut Creek, California), Germany (Schweinfurt and St. Wendel), and Japan (Buzen). We also maintain further manufacturing facilities worldwide which cover local demand for dialysis products as a rule. Therefore they are much smaller than the sites mentioned above. Further information on our production activities can be found in the “Procurement and production” chapter; a list of our major holdings can be found in the “Financial report”.
Fresenius Medical Care is organized regionally and divided into the segments North America, EMEA (Europe, Middle East, Africa), Latin America and Asia-Pacific. For reporting purposes, the EMEA, Latin America and Asia-Pacific regions are grouped into the “International” segment. Fresenius Medical Care’s Company headquarters are in Bad Homburg, Germany. The headquarters of North America, our most important region in terms of revenue, are in Waltham, Massachusetts (U.S.). An overview of Fresenius Medical Care’s main locations can be found in chart 2.1.1.
Management and control
Since February 2006, Fresenius Medical Care has had the legal form of a partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA). The corporate structure of Fresenius Medical Care AG & Co. KGaA as well as the Company’s management and supervisory structure are discussed in the “Corporate governance report”. The Members of the Management Board are presented in the section Management Board; information on the positions of the Management Board and the Supervisory Board can be found in the section Directorships.
Reporting on the basis of U.S. GAAP
Fresenius Medical Care reports on the basis of U.S. GAAP (United States Generally Accepted Accounting Principles) with the U.S. dollar as the reporting currency. This is due to the Company’s high business volume in the U.S. and the fact that it is listed on the New York Stock Exchange. Furthermore, the Company prepares its reports in accordance with International Financial Reporting Standards (IFRS).
Our products, services and business processes
At the end of 2012, about 2.306 M patients regularly underwent dialysis worldwide. Dialysis is a vital blood cleansing procedure that substitutes the function of the kidney in case of kidney failure. It removes toxins and surplus water from the body, which is normally discarded through urination in healthy individuals, as the patient’s kidneys can no longer fulfill this task. We distinguish between 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 a special filter, the dialyzer. With PD, the patient’s peritoneum is used as a dialyzing membrane. Fresenius Medical Care’s business encompasses both therapy methods.
As a globally leading company, Fresenius Medical Care offers dialysis services and products in more than 120 countries around the world with a focus on the following areas:
Hemodialysis in specialized clinics
Most dialysis patients undergo hemodialysis (HD) in specialized clinics. HD is by far the most common type of renal replacement therapy, accounting for more than 89% of all cases worldwide. It requires the use of special products, primarily hemodialysis machines and dialyzers that are connected to the device and act as “artificial kidneys”, filtering toxic substances from the patient’s blood. Fresenius Medical Care is the world’s leading manufacturer of these and other dialysis products for use in both our own and third-party clinics. Further information can be found in the section “Dialysis market” and in the glossary.
Home dialysis is still a niche market
The two types of home dialysis are peritoneal dialysis (PD) see glossary and home hemodialysis. In the year under review, about 11% of all dialysis patients worldwide underwent PD. Home hemodialysis continues to be a niche market: At the end of 2012, only around 0.6% of all patients received this treatment. We provided products to approximately 49,000 PD patients and more than 3,500 home hemodialysis patients by the end of 2012; as a result, around 20% of all PD patients and approximately 28% of all home hemodialysis patients use our dialysis products. More information on home dialysis can be found in the magazine.
Acute dialysis in the case of sudden kidney failure
Generally, dialysis patients suffer from chronic kidney failure – a disorder which in most cases develops gradually over many years. But in acute medical emergencies, patients may also be in need of dialysis because of rapid kidney failure, for instance after a serious accident. Fresenius Medical Care offers products and services for so-called acute dialysis as well.
Dialysis drugs expand our product portfolio
Dialysis drugs enable us to expand our product portfolio horizontally beyond providing dialysis products and services; they therefore fit in perfectly with our strategic focus. Usually, patients undergoing dialysis require medication to counteract anemia and to control their mineral metabolism. This includes agents to stimulate red blood cell production (erythropoietin, EPO), iron compounds, phosphate binders, vitamin D preparations and so-called calcimimetics, see the glossary. We obtain the dialysis drugs EPO and vitamin D from specialized providers, but make phosphate binders ourselves for use in our own clinics as well as for sale to third parties. Iron compounds are produced by Vifor Fresenius Medical Care Renal Pharma Ltd., a joint venture between our Company and the Swiss company Galenica.
Laboratory services complete our service portfolio
Nephrologists rely on extensive laboratory tests to tailor dialysis to each patient. The laboratory results have a significant impact on the quality of patients’ treatment and therefore their quality of life. In 2012, Spectra Laboratories, our subsidiary in the U.S., provided around 60 M laboratory services for some 192,000 patients in our own as well as in external dialysis clinics.
Dialysis also possible on vacation and business trips
Usually, patients requiring regular dialysis are constrained in their mobility. Vacations or business trips to other countries seem impossible. For patients on HD or PD who wish to travel, Fresenius Medical Care offers a complimentary reservation service for dialysis treatment outside their normal environment. We use not only our own global network of clinics for this, but also certified third-party dialysis providers, enabling dialysis patients to receive their vital treatment in many countries of the world.
Major markets and competitive position
Dialysis services in 3,160 proprietary clinics worldwide
Fresenius Medical Care is the world’s leading provider of dialysis services with a market share of about 11% based on the number of treated patients. We not only provide services to most dialysis patients, with 3,160 clinics worldwide we also operate more dialysis clinics than any of our competitors in 2012. We treated 64% of our patients in North America, 19% in Europe, 10% in Latin America and 7% in the Asia-Pacific region.
High market share with dialysis products
Our dialysis products accounted for around 33% of the global market in 2012, which means that we are still the market leader in this area. The market share of our key products – dialyzers and dialysis machines – was even higher at around 45 and 55%, respectively.
Further information on the major markets and the position of Fresenius Medical Care can be found in the ”Dialysis market” section.
Legal and economic conditions
Fresenius Medical Care provides life-saving products and therapies for patients suffering from chronic kidney failure and is therefore exposed to economic cycles to a relatively small extent. This sets us apart from manufacturers of consumer goods, for instance, whose products are subject to a more cyclical demand.
Fresenius Medical Care’s business is impacted more by government reimbursement rates and systems. Reimbursement schemes for dialysis treatments differ from country to country and often even within countries. Fresenius Medical Care provides dialysis services in more than 40 countries with different economic conditions. Our international experience puts us in a position to support national healthcare systems in their endeavors to create suitable reimbursement structures, adapt our business to local needs and regulations, and at the same time act profitably. Further information can be found in the “Dialysis market” section.
As a life-saving treatment, dialysis is subject to the highest safety and quality standards. These requirements are stipulated in numerous national and international legal provisions, standards and norms which are the basis for our corporate activities. For further information see the the section “Quality management systems are regularly reviewed” .
Finally, demographic factors contribute to the continued growth of the dialysis market. These include the aging population and the rising incidence of diabetes and hypertension, two diseases that often precede chronic kidney failure. In recent years, forecasts on the occurrence of these two diseases have continuously been adjusted upwards. In addition, the life expectancy of dialysis patients is increasing primarily due to ongoing improvements in the quality of treatment and higher standards of living, also in developing countries.
Strategy, objectives, and corporate management
Our long-term strategy aims at sustainably increasing shareholder value. We focus our business activities on our patients’ health and hence on the quality of treatment with the objective of improving their quality of life and raising their life expectancy. The Management Board uses a number of different tools and indicators to evaluate the Company’s business performance, develop its strategy, and make investment decisions. Overall, we are still in an excellent position to achieve our growth targets described in this chapter.
Our strategy takes into account concrete, measurable growth targets as well as long-term trends forecast by us in the dialysis market. We not only expect the number of patients to increase but also the quality of services provided and of the products available to become even more important in future. We think, integrated care for kidney patients is another area that will continue to grow in the future. In response to this, we will not only focus our business on individual services or dialysis products, but also on combining the different areas of application related to dialysis.
In September 2010, we presented a mid-term strategy with defined targets in the form of GOAL 13 drawing upon the previous growth strategy GOAL 10. GOAL 13 stands for “Growth Opportunities to Assure Leadership in 2013”. As GOAL 13 comes to a close in 2013, we intend to set new goals in the current financial year that will allow us to maintain our outstanding market position and to be successful in the dialysis market. Basically we will continue along our growth paths in the future:
Path 1: Organic growth
We intend to strengthen our leading market position by the expansion of our clinic network and by introducing our innovative dialysis products. We are planning to expand our clinic network in all important markets and growth regions worldwide to maintain and even improve our leading market position. At the same time, we aim to advance our comprehensive, innovative treatment concepts (see “Our dialysis services business” chapter) and combine them with dialysis drugs, for example. This strategy makes us stand out significantly against our competitors. We expect that most of our future growth will be generated in an organic way.
Path 2: Acquisitions
With our long-term growth objectives and our aim to boost profitability in mind, we regularly screen possible acquisitions to selectively expand our dialysis clinic network. To this end, we focus on particularly attractive regions. In addition we also see potential for growth in the suitable serving of vascular access needs to our patients.
Path 3: Horizontal expansion
Already in the business year 2010, we had expanded our range of dialysis drugs in accordance with our strategy by the formation of a joint venture with the Swiss-based Galenica. The formation of Vifor Fresenius Medical Care Renal Pharma Ltd. in which Fresenius Medical Care has a 45% share had been completed at the end of 2011 after clearance by the antitrust commissions. The joint venture is designed to develop and distribute drugs for kidney patients. The products are used to counteract anemia and to regulate the bone metabolism of dialysis patients as well as patients with chronic kidney failure who do not yet need dialysis treatment.
Path 4: Home dialysis
As in the past, only a relatively small number of dialysis patients, approximately 11%, perform dialysis at home. Most patients receive their treatment in specialized dialysis clinics. In the long term, we want to assume an important role in the home therapies market, which includes peritoneal dialysis as well as home hemodialysis. To achieve this goal, we intend to combine our comprehensive and innovative product portfolio with our expertise in the area of dialysis services.
Additional information about our strategy in the different operation areas and regions are set out in the chapters “Subsequent events” and “Outlook” and in various other sections of this annual report.
Key performance indicators
The Management Board uses various financial indicators when operating the Company. We manage the activities of our segments based on their operational results, defined as EBIT (Earnings before Interest and Taxes). EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is specifically used as an indicator to determine the total debt / EBITDA ratio allowing us to assess the Company’s creditworthiness.
The Management Board evaluates each segment based on target figures that reflect those revenues and expenses that the segments are actually able to control. Therefore, interest expenses for financing, tax expenses, legal costs, expenses of the headquarter including controlling and finance, professional services and certain expenses for research and development are not included in a segment based target figure.
The operating cash flow is used to assess whether a business can itself generate the cash required to maintain the assets reported in its balance sheet and make expansion investments.
To determine the total debt / EBITDA ratio, financial liabilities are compared to EBITDA. The total debt / EBITDA ratio is an indicator of the amount of debt and the length of time needed to service it. It provides more reliable information about the extent to which a company is able to meet its payment obligations than simply taking the absolute amount of financial liability into account. Fresenius Medical Care holds a strong market position in a growing, global and mainly non-cyclical market. Furthermore, most of the Company’s customers have a high credit rating as the industry is characterized by stable and sustained cash flows that can be planned. This means that we can work with a relatively large share of debt capital compared with companies in other industries (see also “Principles and objectives of financial management”).
We also gear our corporate management towards operating indicators based on the following yield calculations:
- ROIC (Return on invested capital) expresses how efficiently a company allocates the capital under its control or how well it employs its capital with regard to a specific investment project. Fresenius Medical Care’s ROIC in 2012 of 8.1% was at a comparable level as in the previous year of 8.7%.
- ROOA (Return on operating assets) expresses how efficiently employed capital is managed throughout the Company by calculating profit in relation to total capital. Fresenius Medical Care’s ROOA in 2012 of 11.4% was at a similarly high level as in the prior year (2011: 12.2%).
- ROE (Return on equity) provides an insight into the Company’s profitability. To calculate it, corporate net income (net income attributable to shareholders of Fresenius Medical Care AG & Co. KGaA) is placed in relation to employed shareholder capital (capital of shareholders of Fresenius Medical Care AG & Co. KGaA). With 12.5% in the fiscal year 2012 ROE (after tax) was at a comparable level to 2011.
- When calculating our cost of capital, we use the WACC (weighted average cost of capital) formula. The WACC is derived using the weighted average of costs incurred for equity and debt. Fresenius Medical Care’s WACC in 2012 was at 6.8%, after 6.7% in the prior year. Comparing the Company’s WACC with its ROIC of 8.1% reveals that in 2012, Fresenius Medical Care not only generated its capital costs, but also increased its shareholder value.
Key performance indicators
|1Based on adjusted numbers; further details can be found in the section “Results of operations”.|
|Debt EBITDA ratio||2.83||2.69|
|Return on invested capital (ROIC)||8.1||8.7|
|Return on operating assets (ROOA)||11.4||12.2|
|Return on equity (ROE)||12.5||13.6|
We manage our investments using a detailed coordination and evaluation process. The Management Board sets the complete investment budget for the group as well as the investment targets. Before concrete investment projects or acquisitions are realized, our internal Acquisition Investment Committee (AIC) examines the individual projects and measures taking into account the return on investment and potential yield. The investment projects are evaluated based on commonly used methods such as the net present value and internal interest rate methods; payback periods are also included in the assessment. In this way, we try to ensure that we only make and implement investments and acquisitions that actually increase shareholder value.
Details on the development of these indicators as well as other financial figures can also be found in the chapter “Results of operations, financial situation, assets and liabilities”, and in the “Financial report”.