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Risk and Opportunities Report

Risk and Opportunities Report

As a company with global operations, Fresenius Medical Care is naturally exposed to risks associated with its business activities. Ultimately, we can only leverage opportunities for our business if we are willing to take certain risks. Many years of expertise and our extensive knowledge of the markets enable us to uncover and assess risks and opportunities for our business as early and reliably as possible.

Risk management

We see risk management as the ongoing task of determining, analyzing and evaluating the spectrum of potential and actual risks in the Company and our environment, and, where possible, taking corrective measures. Our risk management system, which is described in more detail below, provides us with a basis for doing so. It enables management to identify at an early stage risks that could jeopardize the growth or continued existence of Fresenius Medical Care, and to take steps to minimize any negative impact. As such, it is an important component of Fresenius Medical Care’s management and governance.

Opportunities management

We identify opportunities based on comprehensive quantitative and qualitative analyses. This includes evaluating market data and closely examining research projects, while also taking general societal health trends into consideration. In the process, we monitor general economic, industry-specific, regional and local developments to an equal extent. Our goal is to anticipate trends at an early stage and adjust our business model accordingly. The close cooperation between our strategy departments, planning departments and other departments shall allow us to recognize global opportunities as early as possible. An overview of the most important opportunities we intend to capture for our Company can be found in the “Outlook” chapter.

Risk management system

Risk management is part of Fresenius Medical Care’s integrated management system. The two pillars of our risk management are the corporate controlling function and the internal risk monitoring system. In the monitoring system, regional risk managers are responsible for identifying, assessing and managing potential as well as existing industry and market-related risks in their region and reporting them to the regional CFO’s. Twice a year, the regional chief financial officers send their aggregated risk management reports to the central risk management coordinator who consolidates the reports and presents them to the Management Board. The risk management reports contain further information on potential risks. The Management Board is informed directly and immediately of any newly identified significant risks (for risk reporting see chart 2.10.1). The effectiveness of the risk management system is monitored by the Audit and Corporate Governance Committee of the Supervisory Board. More information is available in the “Report of the Supervisory Board”.

Risk reporting

In addition to risk reporting, traditional reporting to management is an important tool for managing and controlling risks, as well as for taking preventive measures in a timely manner. Therefore, the Management Board of Fresenius Medical Care is informed on a monthly basis about the industry situation, our operating and non-operating business, and the outcome of analyses of our earnings and financial position, as well as of the assets position on a quarterly basis.

Part of our risk management system is the Global Internal Audit department. This department audits a selected number of Company departments and subsidiaries worldwide each year. The department works according to the internationally accepted standards of the Institute of Internal Auditors (IIA). At the beginning of 2012, a quality assessment of our internal audit in form of a peer review confirmed the compliance with the standards of the IIA. The scope of internal auditing is widespread and involves, among others, the effectiveness of controls over business processes, the reliability of financial reporting and the compliance with accounting regulations and internal policies. The Company locations and units to be audited are determined annually on the basis of a selection model taking various risks into consideration. This annual audit plan is reviewed by the Management Board and finally approved by the Audit and Corporate Governance Committee of the Supervisory Board. It comprises financial audits of individual units, as well as full audits of all business processes of subsidiaries or business units. All audit reports are presented to the Management Board. The Global Internal Audit department is also responsible for monitoring the implementation of measures documented in the reports. The Management Board is informed about the implementation status on a quarterly basis. The Audit and Corporate Governance Committee of the Supervisory Board is also informed of the audit results. In 2012, a total of 40 audits were carried out. These included full-scope audits – reviews of all business processes – at our sites in Thailand and Portugal, among others.

It is nevertheless important to note that even a functioning and adequate risk management system such as that installed in our Company cannot guarantee that all risks are fully identified and controlled.

Internal control and risk management system for the group’s accounting process

Fresenius Medical Care’s internal control system over financial reporting ensures compliance with applicable accounting standards. The goal is to provide reasonable assurance that the Group financial statements are issued in accordance with the accounting principles. The Company’s internal reporting process is generally carried out at four levels and ensures that financial data and key figures are reliably recorded, processed and controlled. At each of these four reporting levels – the local entity, the region, the segment and the entire Group – the figures and data are compared regularly on a monthly and quarterly basis with the previous year’s values, budget targets, and the latest projections. In addition, the Management Board and the departments responsible for preparing the annual and consolidated Group financial statements discuss indepth all parameters, assumptions and estimates that substantially affect the Group and segment results reported externally. The Audit and Corporate Governance Committee of the Supervisory Board also deals with current quarterly results and compares them with budgets and projections.

Control mechanisms and compliance

The internal control system contains guidelines and instructions that guarantee, for example, that all Fresenius Medical Care transactions are presented accurately, or that significant earnings and expenses are only recorded after management approval (dual control principle).

Further control mechanisms to ensure reliable financial reporting and correct recording of transactions include systematic and manual reconciliations, as well as the separation of certain personnel functions to prevent potential conflicts of interest. The fact that all process owners assess the risks of their respective processes in terms of their implications for accounting also ensures that risks with a direct impact on financial reporting are identified and that controls are in place to minimize these risks. Changes to accounting standards are discussed on an ongoing basis and considered in the financial statements. Employees responsible for financial reporting are given regular and extensive training to deal with this.

Furthermore, Fresenius Medical Care has implemented comprehensive quality management systems and a compliance program, which is monitored continuously, in all of its regions with the intention to ensure at any time and permanently that its business activities are in line with recognized standards as well as local laws and regulations. To monitor compliance is basically a management task at all the Company’s decision-making levels. An important element of the compliance program is the code of conduct that is effective in all regions and considers the locally different legal and ethical standards. It encourages our employees worldwide to conduct themselves in a professional and responsible manner at all times. More information on this can be found in the “Compliance” section.

Special control and transparency requirements in the U.S.

As Fresenius Medical Care is also listed on the New York Stock Exchange, it is required to adhere to the requirements of the U.S. Sarbanes-Oxley Act. Section 404 of this federal law stipulates that the management boards of companies listed in the U.S. must take responsibility for implementing and adhering to an appropriate internal control system to guarantee reliable financial reporting. Based on this requirement, we review the design and operating effectiveness of our internal control system over financial reporting on a regular basis. These criteria are also included in the review by our external auditors.

To assess the effectiveness of our internal control system over financial reporting, we apply the criteria of the COSO model see chart 2.10.2. This was developed by the Committee of Sponsoring Organizations of the Treadway Commission and is recognized as a standard by the Securities and Exchange Commission (SEC). In accordance with the COSO model, Fresenius Medical Care’s internal control system over financial reporting is divided into the five levels control environment, risk assessment, control activities, information and communication, as well as the monitoring of the internal control system. Each of these five levels is regularly documented, tested and assessed.

Our review of the internal control system over financial reporting complies with a specific SEC guideline (Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting). For our review, we use a special software which takes into account the definitions and requirements of this guideline. In a first step, regional project teams coordinate the assessment of the internal control system in each region, after which the results are consolidated for the whole Group. Based on this, management then evaluates the effectiveness of the internal control system for the current fiscal year. External advisers are consulted as needed. A corporate steering committee meets several times a year to review changes and new requirements of the Sarbanes- Oxley Act, to discuss possible control deficiencies, and derive further measures. In addition, in its meetings, the Audit and Corporate Governance Committee of the Supervisory Board is informed regularly of the results of management’s assessment.

As of December 31, 2012, management assessed Fresenius Medical Care’s internal control system over financial reporting and deemed it effective.

Internal control systems over financial reporting are subject to inherent limitations, no matter how carefully they are designed. As a result, there is no absolute assurance that financial reporting objectives can be met, nor that misstatements will always be prevented or detected.

COSO-Framework

Risk areas

The following risks could have an impact on our business activities:

Risks related to the economy as a whole

The international business activities of Fresenius Medical Care are subject to a number of political, legal and financial risks, which we carefully monitor and assess in addition to the general development of the global economy. We also conduct continuous, intensive analyses of country-specific risks with our international markets in mind.

The dialysis market is a growth market that is generally unaffected by macroeconomic influences. 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.

More information on this can be found in the “Overall economic environment” section and the “Outlook” chapter.

Industry risks

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 carry out research and development activities to 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. We work closely with the medical and scientific communities to allow us to quickly identify and further develop important technological and pharmaceutical innovations. These alliances also guarantee that Fresenius Medical Care has extensive knowledge of recent advances in alternative treatment methods and enable us to evaluate and, if necessary, adjust our corporate strategy. Based on this, we analyze and evaluate trends and review the progress of research and development projects on an ongoing basis.

Additionally, we closely monitor the market, especially the products of our competitors and newly launched dialysis-related products. This includes pharmaceutical generics and patented drugs for kidney patients, as they can affect the business with drugs distributed by Fresenius Medical Care. The Company maintains internal strategic departments that monitor the markets, whose 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. This helps us to quickly react on new market conditions.

Last but not least, our many years of experience and our leading position in the dialysis industry give us a competitive edge, as do the synergies resulting from the teamwork between the various technical, medical and academic institutions within our vertically integrated Group.

Legal conditions in the healthcare sector

In the highly regulated environment in which we operate, changes in the law, such as those relating to reimbursement, can have a major impact on Fresenius Medical Care’s business success and strategy. 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 “Healthcare and reimbursement systems” section.

Risks associated with operating activities

We counter potential risks in our business with products and services with preventive and quality-enhancing measures.

Quality risks in production, for products and processes

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 adherence 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 in Europe by Technischer Überwachungsverein (TÜV) and by the Food and Drug Administration (FDA) in the U.S.

We also apply the methods of lean management and Six Sigma see Glossary in our plants. These management tools are used to analyze and improve 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 international business unit Global Manufacturing Operations (GMO) with the aim of identifying and managing quality risks even better. For further information on GMO, see the “Procurement and production” chapter.

Like all blood cleansing procedures that are performed outside of the human body, dialysis is associated with certain risks for the patient whose occurance could potentially damage Fresenius Medical Care’s reputation. National as well as international standards and laws 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 research and development work 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.

Quality risks for our services

The very nature of the medical services we provide to patients at our dialysis clinics presents inherent risks. These include operational risks, 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 healthcare services quality management system, certified according to ISO 9001, is part of our integrated management system. In the U.S., our quality improvement program successfully complies with the standards outlined in the Kidney Disease Outcomes Quality Initiative (KDOGI) 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 improve our processes and treatment results for the long-term. Our clinic quality management system is also audited each year by external certification institutes such as the German TÜV or 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” chapter.

Risks in research and development

The risk of goals not being achieved or being 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. All products, packages, applications and technologies are continuously and systematically monitored, tested and improved. The development cycle for products made by Fresenius Medical Care is generally substantially shorter than for pharmaceutical products. It normally takes between two and three years from concept to market launch. 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. For further information see the “Research and development” chapter.

Patent risks

One of the typical patent risks faced by Fresenius Medical Care is inadequate protection in the form of patents for technologies and products developed by the Company. This means that competitors could copy our products without incurring comparable development costs. To mitigate this risk, we have installed a comprehensive patent management program with defined processes, responsibilities and reporting lines.

In addition, Fresenius Medical Care could infringe the patent of a competitor and thus be liable for damages; this could result in a ban on the Company further selling the affected product. We minimize this risk by systematically monitoring and reviewing patent applications by competitors as well as issued patents to ensure that our products do not infringe the rights of third parties. However, as the claim of a patent, i. e. its scope, cannot be determined until a product has been launched, this risk can never be fully eliminated.

Procurement risks

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 developing partnerships with strategic suppliers through long-term contracts and building relationships with new high-performing partners. At the same time we ensure that we have at least two sources for all supply and price-critical primary products (dual sourcing, multiple sourcing). This strategy in combination with ongoing monitoring of market developments enables us to minimize the risk of bottleneck situations considerably, even at times of limited availability of materials. All relevant suppliers are subject to regular Company-wide performance and risk monitoring. 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 continuously conducting 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. The intense cooperation between our procurement teams in different regions means that we are able to benefit from international pricing advantages and manage risks related to currency fluctuations or dependencies on individual suppliers. More information on this can be found in the “Strategic purchasing and materials management” section.

Personnel risks

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 retain sufficient qualified personnel with extensive personnel marketing and recruitment measures as well as personnel development programs for specific target groups. More information can be found in our magazine.

Our continued growth in the area of dialysis services in particular depends on our ability to 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. Our UltraCare Clinical Advancement Program (UCAP) in the U.S. is one example of such an initiative; more information can be found in the “Employees” chapter.

Our personnel management department addresses the overall risk of not being able to attract or retain highly qualified personnel. Its job is to find and cultivate 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 personnel management can be found in the “Employees” chapter.

Risks due to non-compliance with laws and standards

Fresenius Medical Care has developed a code of conduct that applies to employees in all regions, specifying their conduct within the Company as well as towards our patients, external partners and the public, and encouraging them to comply with applicable laws and Company standards at all times. Together with our overall compliance program, this code is intended to help us meet our own expectations and those of our partners, and to successfully align our business activities to recognized standards as well as applicable laws and regulations. Further details on our compliance program can be found here.

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 2012. Therefore we consider the risk arising from relationships with major private-sector 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 Council, 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 in the "Operations and Strategy" chapter.

Financial risks

The main financial risks that affect our Company are currency and interest rate risks. We use derivative financial instruments to protect us against these risks, but not for trading or speculation purposes. All transactions are conducted with highly rated banks (the majority have at least an “a” rating) that have been approved by the Management Board.

We use interest rate hedging instruments to avert the risk of rising interest rates from our floating rate long-term debt. A sensitivity analysis revealed that if the relevant reference interest rates for the Company like Libor increased by 50 basis points, based on the current high level of hedging, the effect on the net income (attributable to shareholders of Fresenius Medical Care AG & Co.KGaA) would be around 1%. The interest derivatives expire in 2016.

Our foreign exchange exposures primarily result from transactions such as sales and purchases 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 estimation and quantification of transaction risks from foreign currencies is determined according to the statistical model Cash-Flow-at-Risk (CFaR). CFaR indicates the amount of a potential loss of the forecasted foreign exchange cash flows of the next twelve months that occurs with a probability of 95%. As of December 31, 2012, Fresenius Medical Care’s CFaR amounted to
$39.7 M.

Please see the “Quantitative and qualitative disclosures about market risk” chapter of the “Financial report” for further details.

Debtor risks

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 existing ones. We monitor outstanding receivables of existing customers while assessing the possibility of default. For further details on outstanding receivables please see the “Financial report”.

Legal risks

Risks associated with litigation are continuously identified, assessed and reported within our Company. Fresenius Medical Care is involved in various legal proceedings resulting from our business operations among others. For details on ongoing proceedings and further information on material legal risks to which Fresenius Medical Care is exposed, please refer to note 19 of the “Financial report”.

Tax risks

Fresenius Medical Care is subject to tax audits, which can lead to secondary changes in tax assessments and assessments of withdrawal restrictions. Risks resulting from this are continually identified and evaluated. Further details on ongoing legal proceedings and more information on major tax risks of the “Financial report” can be found.

IT risks

As Fresenius Medical Care continues to grow in size and become more international, the processes within the Company are increasingly complex. Accordingly, we are dependent to an ever greater extent on information and communication technologies to structure our processes and harmonize them between different regions. Fresenius Medical Care uses constantly updated and newly developed hardware and software to prevent potential security risks in the area of information technology (IT). With the help of 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 tested and improved on an ongoing basis. 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. To minimize organizational risks such as manipulation and unauthorized access, access is protected by passwords that must be changed regularly. With our strategy of operating three separate data centers (at major geographic regions) we further reduce the risk of complete, worldwide system outages. 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 please refer to the “Control mechanisms and compliance”. 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 continuously monitor whether they are achieved. Further preventive risk management measures limit the effect of environmental factors on dialysis services: Many of our proprietary 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 (disaster response team) steps in all-season 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.

Opportunities

As a vertically integrated dialysis company, Fresenius Medical Care can offer almost all of the products and services that a patient with chronic kidney failure requires for treatment. Our international network of 3,160 dialysis clinics in more than 40 countries is the largest and most international network in the world. As a result, we possess valuable dialysis expertise that is unique in the industry. Thanks to this wealth of experience, we understand that high quality is not only the key to a better quality of life for patients, but that it can also make a significant contribution to reducing the costs of healthcare. Based on this knowledge and our business model, we see several opportunities for further growth, which are explained in greater detail in the following section.

Industry-specific opportunities

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 more than 2.4 M in 2013. By 2020 the number of dialysis patients could reach around 3.8 M. 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 tap 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 2012, the Company was involved in 14 medical care centers (2011: ten). As an experienced partner, we want to continue to support our customers when it comes to setting up new structures in the German healthcare 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 assume 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 PPP initiatives, for example in Italy, Bosnia, Portugal, South Africa, UAE, Australia, the Philippines, India and Indonesia. 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 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), or the patient’s travelto and from the dialysis center in addition to 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 bundle”, 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 on a high level of quality for chronically ill kidney patients 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.

Opportunities related to our business operations

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 page 36 and the general trend towards integrated healthcare (see above), they offer the Company further opportunities for growth.

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 Operations and Strategy and in the Glossary). 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. We use sorbents to make simple tap water suitable for use in dialysis and to recycle dialysis solution. These are major prerequisites for providing dialysis outside of medical healthcare facilities. We will continue to expand our range of innovative products and technologies in the future to react to growth opportunities – increasingly also with the aim of best meeting the demand for integrated care.

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 Management 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 the chapter “Procurement and production”.

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. Further information on our acquisitions in the year under review can be found in the section “Acquisitions and divestitures” and in the section “Financial situation”.

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 failure 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.

Management assessment of overall risks and opportunities

The Management Board bases its assessment of overall risk on the risk management system used by Fresenius Medical Care, which is regularly checked by third parties and by the Management Board. The effectiveness of this risk management system is monitored and, if necessary, improved as part of the Company-wide review of the integrated management system. The Management Board will continue to expand our risk management and its review of the associated management system to be able to identify, investigate and assess potential risks even more quickly and implement appropriate countermeasures. Based on the general principles for estimating risk factors described at the beginnig of this chapter, we currently assume that none of the risks mentioned will significantly impair the earnings, financial and assets position of Fresenius Medical Care in the long term. Furthermore, no material changes to risks were identified compared to 2011. From an organizational point of view, we believe that we have created all necessary conditions in order to identify emerging risk situations early and to be able to react properly if necessary.

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