A Healthy Player in Kidney Care
Call it the price of prosperity. Kidney failure tends to disproportionately affect the populations of rich countries, so it follows that treating this grave condition can be a lucrative business. Underscoring this point, the American depositary shares of German dialysis giant Fresenius Medical Care (FMS) brushed $37.99 on Mar. 3, a 52-week peak. The stock has climbed 46.9% from its May 4 trough of $25.85.
Vertically integrated, Fresenius owns and operates dialysis clinics and manufactures materials necessary for the procedure. As the world's largest dialysis company, its growth could continue as diabetes and obesity rates climb in the U.S. and in developing markets such as India and China.
Dialysis patients receive treatments several times a week. Lasting three or more hours each, the treatments take on the kidneys' role in flushing impurities from the body. Due to high rates of diseases like hypertension and diabetes, the number of U.S. dialysis patients has escalated in recent years. The National Kidney Foundation estimates there are 275,000, and Fresenius says it increases about 3% annually.
SCARCITY OF TRANSPLANTS.
Dialysis patients are the ultimate repeat customers. What separates dialysis from most other costly medical procedures is that patients must endure it for the rest of their lives. Without the treatment they usually die within weeks. The result for companies that provide the service is a strong, constant revenue stream.
Patients who receive kidney transplants can escape dialysis dependency, but the number of transplants is not at all likely to be enough to keep pace with the growing need for treatment. According to the United Network for Organ Sharing, more than 64,000 people are waiting for kidneys in the U.S., up from about 16,000 in December 1989 -- "and it will only keep growing" spokeswoman Annie Moore says. With transplants still relatively scarce, the vast majority of patients with severe kidney malfunctions likely will still have to turn to dialysis.
And large numbers of patients turn to Fresenius. For 2005, the company earned $455 million in net income on $6.77 billion in revenue. At the end of 2005, it operated about 1,155 clinics in North America administering a combined 13.47 million treatments. In the fourth quarter, Fresenius averaged revenue of $302 per North American treatment, up 4% from the fourth quarter in 2004.
Outside North America, Fresenius operates an additional 525 clinics, which pulled in $208 million in the fourth quarter. (Per-treatment revenues for international treatments amount to less than half of revenues for those in North America.)
Fresenius is also the world's leading provider of dialysis supplies, a business that accounted for $516 million in 2005 fourth-quarter revenue, 29% of the group's total. These products, which include filters and fluids, are "really where the money is," according to Mansi Kothari, research manager for the medical-devices group at consultant Frost & Sullivan. Especially profitable, she continues, are Fresenius's single-use dialyzers, the actual artificial kidneys used in the process, though she says "medically, it's a toss-up" whether they are better than the reusable variety.
The company is still growing. By the end of March, Fresenius expects to complete its approximately $3.5 billion acquisition of dialysis provider Renal Care Group (RCI), making it handily the largest dialysis provider in North America. Following the deal, Fresenius will run about 1,500 clinics on the continent serving about 115,000 patients. This doesn't include the approximately 100 clinics that the companies are divesting following a Federal Trade Commission review of the deal.
ON THEIR HEELS.
Fresenius is also looking to Asia, where emerging wealth is linked to higher rates of obesity and diabetes. In an e-mail, company spokesman Thorsten Ramm wrote that outside Japan Fresenius has about a 40% market share in the Asia Pacific region.
Frost & Sullivan's Kothari says that as the "undisputed leader," Fresenius benefits from its scope and reach but it's not the only dialysis company that's booming. The company's main U.S. rival is El Segundo (Calif.)-based Davita (DVA). That company's stock has enjoyed a similar run since last spring, even though it does not have an equipment business like Fresenius. Davita share prices climbed 53.1% from Apr. 28 to hit $59.94 on Feb 15. In the midst of the ascent, Davita closed its acquisition of Swedish outfit Gambro's U.S. dialysis-clinics division for about $3 billion.
For companies like Fresenius and Davita, a unique aspect of the dialysis market is that many patients with kidney failure, or end-stage renal disease (ESRD), are elderly, disabled, or come from lower-income brackets. As a result, government programs, primarily Medicare, pay for a huge portion of dialysis treatment in the U.S., though Kothari says Fresenius earns more per procedure when patients are covered by private insurers.
Michael Fleischman, a principal at health-care consulting group Gates, Moore & Co., suggests that uninsured people who need dialysis can qualify for disability and therefore receive the treatment. By contrast, if they needed some other urgent medical care, such as for various types of cancer, "there's a possibility that they would not be treated for the disease." He suggests that the flip side of this situation for dialysis providers is that potential changes to Medicare could reduce per-treatment revenue in coming years.
There are other potential clouds on the horizon, but they appear relatively minor. It's now possible to take dialysis through a home machine (see BW Online, Med Tech's Rising Stars?). But Kothari doesn't expect that procedure to become routine for at least another decade. In the meantime, Fresenius is carving out a niche in home dialysis products.
Even as Fresenius and Davita straddle North America, startups continue to crowd in. Companies like National Renal Alliance and U.S. Renal Care took in major investments in equity and venture-capital funding in the last year as they look to jump-start growth. Still, Fresenius' dominant market position -- and favorable demographic trends -- suggest a promising future.
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