New Blood Invigorates Dialysis Company

Fresenius, the low-profile German health-care outfit, is tightening management and boosting profits under its young, Harvard-educated CEO

Employees of German health-care provider Fresenius were surprised when, in 2003, longtime Chief Executive Gerd Krick chose Ulf Schneider as his successor—none more so than Schneider himself. Just 37 at the time, Schneider was unusually young to be the CEO of a German blue-chip company, and he had been at Fresenius for less than two years, serving as chief financial officer for the core dialysis business. Schneider says he hadn't been expecting the promotion.

But the choice seems to have paid off for Fresenius and its shareholders. Sales are up 50%, to $14.5 billion, since Schneider took over; operating profit has risen 85%, to $1.9 billion; and the price of Fresenius preferred shares, the most widely traded, has more than quadrupled. "If you look at the share price and profit growth over the last three years, Schneider's performance speaks for itself," says Christian Cohrs, an analyst at UniCredit Markets & Investment Banking in Munich.

American-style Leadership

Schneider attributes Fresenius' growth to disciplined financial and operational oversight. By more quickly identifying problems in the company's far-flung businesses and responding, Fresenius management has been able to deliver more consistent profitability than was the case in the past. The approach "comes out of the difficult years of 2001 and 2002 when we missed a couple of earnings forecasts. We vowed this would not happen again," Schneider says.

Attention to shareholder interests has not always been a hallmark of German companies. But Schneider, now 41, belongs to a generation of managers with significant experience abroad and a keen understanding of the demands of capital markets. He earned an MBA from Harvard University and is in fact a naturalized U.S. citizen who often goes by his American nickname, Mark. (In what must be the ultimate long-distance marriage, Schneider's American wife, Jessica Hopfield, is a principal at consultant McKinsey & Co., based in Chicago. They have no children.)

Schneider agrees that his Harvard experience, as well as time spent working for Fresenius in the U.S. and for pharmaceutical wholesaler Gehe in Britain, strongly influenced his outlook. "The most advanced companies play according to similar rules because they need to attract capital on a global basis," he says.

Dialysis Treatment on the Rise

Despite its stellar financial performance, Fresenius, with headquarters in the sedate Frankfurt suburb of Bad Homburg, is one of the lower-profile German blue chips. That may be partly because dialysis—providing blood-cleansing equipment and services to victims of kidney failure—doesn't at first glance seem like a very sexy business.

But in fact demand is rising because of aging populations in developed countries and the prevalence of diabetes, a major cause of kidney failure. Fresenius Medical Care (FMS), the separately listed dialysis unit, is the No. 1 provider of dialysis services both in the U.S. and worldwide, thanks to an acquisition spree that began in the mid-1990s and culminated in the $4.2 billion purchase last year of Nashville-based Renal Care Group.

Fresenius also stands to benefit from rising living standards in emerging markets, as people in countries such as China increasingly become able to afford life-saving dialysis treatments. "We spend a lot of time going there and trying to understand the market. We want to put a firm stake in the ground as early possible," Schneider says.

Dialysis is Fresenius' core business but not its only one. The company is also growing in its home market by acquiring and operating German hospitals. And it's big in the business of providing intravenous nutrition and equipment for blood transfusion.

Fresenius' somewhat convoluted corporate structure might account for its relatively low name recognition.Fresenius Medical Care is separately traded though majority-owned by Fresenius. In fact, shares of Fresenius Medical Care belong to the benchmark DAX Index, while preferred shares of the parent company belong to the less prestigious MDAX mid-cap index. Ben Lipps, 66, Fresenius' chief executive in charge of medical care, is also a powerful figure in the Fresenius universe. Schneider says he and Lipps speak daily, including at least an hour every Sunday to plan strategy for the week ahead.

Exploring Biotech Markets

Fresenius is now poised to enter the market for cancer drugs, a lucrative but crowded field. The company hopes to win approval from regulators to begin next year marketing its first product, a treatment for people suffering from a form of stomach cancer. Schneider acknowledges that analysts and investors were skeptical about Fresenius' plunge into the market for cancer drugs. "A lot of people saw [Fresenius cancer research] as coming out of left field. Now people see we're on to something," he maintains.

Analyst Cohrs of UniCredit remains cautious on Fresenius' foray into biotech. But the relatively modest investment, no more than $270 million since the late 1990s according to Fresenius, means the risk is low. "The big question mark is biotech. That's a black box," Cohrs says. But since profit from cancer drugs isn't really priced into the shares, "There should not be really a downside."

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