Fresenius Medical Care AG (FMS) 2008 Q2 法說會逐字稿

Good day, and welcome to the earnings release for the first half year and second quarter 2008 results conference call with Fresenius Medical Care. At this time, I would like to turn the conference over to Mr. Maier. Please go ahead, sir.

Thank you, John. Good afternoon, and good morning, ladies and gentlemen. I'd like to welcome you and thanks for joining us for Fresenius Medical Care's meeting which will cover our second quarter and the first half of 2008 results and achievements. By now, you should have received a copy and other material of the investor news and that material and the presentation are available on our website under the IR section. Let me also point out that that analyst call is being broadcast via the web. I would like to start with a comment on the Safe Harbor statement, as always. This presentation includes certain forward-looking statements. Actual results could differ materially from those included in the forward-looking statements due to various risk factors and uncertainties. These risks and uncertainties are described in detail in the company's reports filed with the SEC, Securities and Exchange Commission, and the German Exchange Commission, Deutsche Boerse. In compliance with section 401 Sarbanes-Oxley we have provided a reconciliation for any non-US GAAP measure that we utilize. With us today is Ben Lipps, Chief Executive Officer for Fresenius Medical Care, and Larry Rosen, Chief Financial Officer of Fresenius Medical Care, who both will brief you on the results of Q2 and the first half of 2008 and give you a business update. Let me now turn it over to Ben Lipps, our Chief Executive Officer for Fresenius Medical Care. Ben, the floor is yours.

Thank you, Oliver. Ladies and gentlemen, let me extend a warm welcome to you, our Board members, and all our employees and associates around the world and those joining us today on the internet. We're very pleased with the strong second quarter financial results in all of the regions contributed to this operating performance. In terms of the overall agenda, I'll discuss business update and Larry will follow with the financials, and then we will go into a question-and-answer period.

Turing now to Slide 4. This is a brief overview of the quarter. Revenue $2.6 billion, up 11%, a 7% growth in constant currency, and this represents a 220 basis-point improvement to first quarter 2008. Very pleased. Earnings per share up 18%, clearly within our midterm guidance. I would like to say that we are clearly on track to achieve our full-year guidance, probably at the higher end of this guidance or the higher end of this range. However, we do have some challenges, continuing challenges during the second half the year. Our Medicare ASP Plus 6 will be 5% less than last year and our heparin costs in North America are significantly higher for the second half than they were last year and for the first half of 2008. Now, clearly we're focusing on efforts to minimize the use of heparin in dialysis which really has not been a focus for the industry for as long as I know it, but nothing will happen during the second half of this year, in terms of our use of heparin.

So I'd like to just say that we clearly confirm our guidance for the year. We expect it to be in the high end. And, in addition, we're very pleased with all of the activities that we have made and the progress we have made in securing our strategic progress towards our strategic initiatives. Now, why do I say this, I'm very pleased, I have great confidence in our management and our employees and am looking forward to the back half of 2008.

Turning now to the next slide, I'd like to talk about the growth around the world. Clearly, as you look at the revenue by region, North America accounted for 64% of the revenue and about $1.7 billion. The good news is that actually our organic growth rate first quarter to second quarter in North America increased by 100 basis points and we're clearly, basically, I think working through some of the EPO issues that the team and service area have tackled and done an excellent job. I'll talk about it later. I'll show you some of the progress, great progress that we're seeing in the products area. So North America is essentially on target and growing quite nicely this year in spite of the some of the challenges.

If you look at the international, we'd had about $950 million of sales for second quarter, excellent performance, 14% constant currency growth. This is essentially 400 basis points up over first quarter 2008, and on actual currency it's a 28% growth and, again, 14% organic growth, again, a 400 basis-point improvement over first quarter 2008. If you look, break that down a little bit, you'll see that Europe accounts for about 70% of the revenue, $660 million, excellent performance out of Europe, 13% constant currency, 29% actual revenue growth, and again we saw a 200 basis-point improvement in the constant currency from quarter one to quarter two.

Asia-Pacific turned in a 15% constant currency growth you'll remember in first quarter, because of the reimbursement increase that was essentially being promulgated during April of 2008. We saw 6% constant currency growth, so we've seen a 900 basis-point improvement in Asia-Pacific for the second quarter, and Latin America continues to grow at the most rapid rate at 17%, again a constant currency, again, a 14% or a 300 basis-point improvement. So by and large, excellent second quarter. Our growth has accelerated from first quarter and we're pretty much at the high end of our growth target and quite pleased, as I'll go through the different sections here of the results in terms of the revenue, and the performance for the year.

Now, let's turn to the next slide and we'll look at the dialysis services on a global basis. If you adjust for the perfusion business which we sold in the second quarter of 2007, we have a constant currency growth rate of around 8% and, again, the leader here is international with a 19% growth in the international service business, 32% actual and, as I mentioned, we see improvement in North America. We're clearly at a 3% growth, but if you look at it organically, that's closer to 4% and, again, we feel the improvement in a number of areas in North America as we go through.

Taking a look at the next slide, this gives a snapshot of the global service business. As you can see, our same market treatment growth was around 4%, 4.2%, again driven by an almost 8% growth in international and a 2.8% growth in North America was at the market and clearly we're quite pleased with the overall of around 4% on a global basis. We also, in that, if you look at the organic revenue per treatment, that comes out to around 5%. So we clearly are in the range that we're targeting for the organic revenue growth in the service area.

Looking now at the revenue per treatment. We had a very strong revenue per treatment growth in the international constant currency up 10%, putting the revenue per treatment in international at $183 a treatment. We also, for the first time in the last three or four quarters, did not see the revenue per treatment decrease overall, including EPO, and very pleased with that. I'll cover that a little bit later. More significantly, our quality programs and our payment per quality are working quite well in the international area. We've had 11 countries out of 32 we've been able to get a reimbursement increase so far in 2008.

Looking at the de novos As you know from our last call, we're investing heavily in de novos in both international and North America. You can see that we, year-to-date, have done about 70 de novos, 14 in this quarter, 14 in international, and 12 in North America. That number really belies the actual progress; we've actually constructed 17 in North America, we're waiting to get them certified. So we're pretty much on track for the 80 to 85 in North America and the 50 to 55 international. That clearly will give us the capacity then to continue to drive our service growth over the next couple three years.

Turning now to slide 8, I'd like to talk a little bit about revenue per treatment in the US EPO utilization. Again, as I mentioned, in the U.S. we saw revenue per treatment at $327 per treatment, that's flat with a year ago, but that clearly is the first time that I've been able to address this particular issue and not have an overall revenue decrease because of the EPO problem. We saw a 1.5% increase, excluding EPO, again that's pretty much on target. There is no Medicare increase in this quarter. That works out to around 4% to 6% that we would expect in terms of the commercial increases. So basically we're pleased that we're essentially, I think, moving through the EPO issue. We left it behind, I believe, in the second quarter and we're still comfortable that by the end of the year, looking at the year-end 2000 and the year-end 2007, I'm sorry, year-end 2007 and year-end 2008, we would still expect to end the year at about a 2% increase in revenue per treatment and be pretty much back on track where we expected to be.

Turning now to the next slide, I'd like to talk about quality outcomes. As we have mentioned many times, we clearly are absolutely committed to quality both in our products and our services, and other than our hemoglobin outcomes here, I'll show you that we're really making very good progress. If you look at the first line, Kt/V, I'm working off Slide number 9, and basically if you look at our Kt/V, what that is is a reflection of what percent of the time we deliver the dialysis therapy that the physician prescribes for his patient. I'm very proud to say that in North America, Europe, Middle East and Africa we are, 95% of the time, providing that therapy and that is a commitment that we make to the physicians that we have done that. As I mentioned, EPO, clearly we've seen a drop in our above 11's and again because of the time lag, we would expect that to recover and, again, that's due to all the discussion, I think, that was in the press last year so I can't show you progress there today.

Now, if you look at phosphorus control, we've increased the number of patients or the percent of patients within the [Doky] standards by almost 300 basis points in both Europe and North America. And, again, that's a focus on our company's -- that's a reflection of a focus of our company on quality and also this is an area that's an unmet need and we think we've got the tools to really actually put this into some very fine results. And, again, that works with our PhosLo and all our activities and our binders and we're taking a very total therapy approach to this. Again, we think that's what we need to do.

Now, I'd like to also point out that we saw improvement in North America in our hospitalization days. And, again, just to, I'm sure there are providers in Medicare who joined us today. I want to just emphasize again that the efforts that we're spending on quality, you're also the beneficiaries of it because for every day that we decrease hospitalization within FMC, within our patient base, we save the payers about $170 million of hospitalization costs. We're glad to do that, we're pleased to do that, but we want to indicate that everybody wins, including the patients; they don't have to be in the hospital so we're really proud of that trend.

Now, the last thing I'll mention is on a yearly basis. We look at our mortality. There's no common metric around the world so we look at it in terms of measuring it to ourselves. And we've seen an improvement, about 120 basis points over the last year. So we're very pleased with our activities. In fact, in the U.S., as we're operating less than 16% overall mortality even with 50% diabetics and in the international area we're down in the 12% to 14%.

Turning now to my next slide 10, I think this will probably be the last time I show this slide, I wanted to at least show you what's happened in terms of EPO dose per administration. We clearly did bottom at the end of 2007 and into 2008 -- first quarter, month of 2008. And since then essentially we've seen a response, again, as I mentioned, over the years it's never a straight line, it stays there, it's always cyclical, because of a time lag, you always undershoot, overshoot, go back and forth. I believe we ended June at about 97% of where we started in Q1 '07. We said that we thought we'd be somewhere in that range because of the cycling. So I think we're pretty well coming close to the target that we expected, in terms of basically EPO dose per administration and, again, this does validate where we've been on the service side. For a number of years we thought we were doing it correctly, and I believe we are. So at this point in time, we're getting pretty much back to where we were on the dosing.

Now, turning to Slide 11, this is a lag effect. We clearly are not back in with 80% of our patients above 11. I'm not sure exactly where this will finally work out. We believe it will be near that, but we would expect, as we mentioned in the past, we would expect the lag effect to essentially carry through all of 2008. So we'll keep you posted on that. But we think that we're clearly providing the right dose to the patients, at least as the physicians have prescribed it, and we're seeing we're getting back in a more normal range.

Turning to Slide 12, let me talk a little bit about the products area. We continue to see excellent product revenue growth to our external customers. Again, in Q2, we saw a 12% constant currency growth in actual currency it was around 22%. North America had a 13% growth year-over-year in the products business and, again, let me mention that that includes products in PhosLo, because it's sold through the products business, and the products themselves, as we know renal products, grew at 9%, which is again at the high end of the range and clearly way above market. And PhosLo continues to perform very well, we see increasing market share in 2008 and we had an 81% increase in PhosLo revenue in the second quarter 2008 versus second quarter 2007. International continues also to do very, very well. We saw a 11% constant currency growth, again led by machines up 19% and dialyzers up 12%. So again, our franchise we're investing, as Larry will tell you in new capacity, but clearly year not basically missing the mark in terms of sales and we're quite pleased with the performance in the products area around the world.

Now, the last couple slides I'll talk about, kind of old news, I think probably we put out -- you know about this, but let me point out a couple things that are exciting to us. The legislative update, I think everyone knows that the Medicare bill passed on July 14. It was supported by the entire industry. It's clearly a reform that will benefit patients, providers, and payers. I think you all know about the various increases. The thing that's most exciting, I think, to all of us is we're now finally treated on the same level as other diseases where we will get a market basket update on a yearly basis starting in 2012. Again, I think that puts us on a common footing with the other medical diseases.

Now, there's a couple points also that were part of the bill that I just want to emphasize because they, too, are very exciting as you look out into the future. One of them was it extends the authority of the Medicare Advantage special needs plan through 2011. This was extended over what was legally possible and it delays the moratorium on these plans until 2010. Now, this is particularly important, I think, to the industry and to the patients and the payers because both DaVita and ourselves are participating in a demonstration project under the special needs plan umbrella, and I think we're both showing very clearly that if you provide integrated care to these patients, everybody wins. And so with this particular part of the bill, we would expect to be able to take that progress that both groups are making in the demonstration projects and actually roll those forward and basically enroll more and more patients. So we're quite excited about this.

The next slide give us you just a very small snapshot of our experience for the second year of the plan. Remember, this plan started in 2006. So we now have 2007's data. And I want to point out that if you look at the pie chart here showing all of the, on page 14, all of the costs that go into essentially treating a dialysis patient, you'll see that there really are now two potential bundles. The first one is ESRD bundle 2011, which is the dialysis services, Part B drugs, the labs, I think you know that. There's also a comprehensive bundle which is the program that we are, again, along with DaVita with CMS running a demonstration project. And that is also one of the thoughts that CMS has is about extending, and that was in their proposal in February.

Now, the results that we have seen on the second bundle, and again, not touching the dialysis services, not doing anything with the labs or the drugs or anything, we actually were able to save about 11% in costs, which were essentially reduced hospitalizations or visitation to hospitals. Now, that's not all free, we had to spend money also, but it did show that there's an opportunity here to reduce costs and everybody wins. And, of course, we're sharing that with the government as we go through. So that's one of the issues or one of the legislative features that I think might have been missed, is really quite exciting and it goes along with what we're doing in Portugal on the bundle. Remember, Portugal was the first country to go to the bundle. So we're really excited around the world that there's some opportunity for us in bundles and in what we would call comprehensive bundles.

Now, turning to the next slide, Slide 15, I'll talk a little bit about our strategic initiative here in the pharma area. We are very pleased that we were able to put agreements together in the IV Iron for North America and for Europe and Latin America. Again, these are totally separate agreements with different groups but they did happen to come together about the same time. So that's why we announced that agreement. Now, this does fit in nicely with our overall strategy in the renal pharma business.

We wanted to partner with a company or with companies that had proven products and basically had proven and effective products, and clearly we feel in the IV Iron area, Venofer and some of the next-generation products met that criteria, and we want to work to proven and safe products. So the question, what are we going to do? Our role now will be to optimize the utilization of these products in dialysis in such that we end up having essentially the most optimized therapy for anemia management, including that and EPO. And, of course, the issue that we have, we don't see the value of large dose applications in Stage 5 and all of our contracts here and agreements are for Stage 5 only. Stage 3 and 4 are not part of our charter and also other uses of iron are not part of our charter. So it's clearly Stage 5 where we have quite a bit of experience. So we're excited about essentially developing new delivery systems with safe and effective drugs.

Now, in North America we still have to get FTC clearance so that's not been achieved at this point in time. And if you look at, in the international area, which is Slide 16, we hope to start our program there in January of 2009. And, again, I want to mention that in the international area, our partnership is with Galenica, a diversified healthcare group. They operate pharmacies, they manufacture and market pharmaceutical products and we're very pleased to work with them. They also produce the iron API which is used in North America. So we're working with the same product and they're the leader in iron therapy.

In North America, our contract is with American Regent or Luitpold Pharmaceuticals, which is a member of the Daiichi Sankyo group in Japan. So we have some very strong partners here and we're really quite excited that we've been able to put together these relationships.

Now, I believe at this point I would just like to, Slide 17, Oliver's given me a note that I've talked too long so I've got to basically end the conversation. But I think you can see we're really excited, there have been a number of things that we accomplished, our team accomplished, and I'm just so proud of the entirely team around the world, all 63,000 people. It been really a very, very good year to date, tough but good.

Now, the highlights, you've got those in front of you, Slide 17, I won't repeat them all. Again, I think you've seen the North America, we've -- we're managing the anemia, I think doing very well and we'll see that improve. I talked about the iron. In Europe, we continue a very strong double-digit growth, constant currency at 13%. Eastern Europe continues to operate at 17% growth and our same market growth, which I think I showed in the service area is 9%, it clearly is on same. We're also doing some very interesting things in the acute renal business, I'll cover those, at one of the other meetings, we're a leader in a number of areas. Asia-Pacific, I think the thing I'd like to emphasize here is we continue to make impressive growth, revenue growth in China, 42% growth. Outside of Japan, we're operating very close to 35% to 40% growth. In Japan, we had a 15% to 20% reduction in reimbursement; however, we anticipated that. We are introducing a new product in Japan, a dialyzer made in Japan for the Japanese market. It carries a higher reimbursement so we think we can mitigate some of the short falls that happen every two years in the Japanese market as they reduce reimbursement. So I think at this point I've pretty much given the overview of what we're doing strategically and financially, or strategically business-wise, and I'd like to turn it over to Larry. Larry, it's yours.

Thank you, Ben, and good afternoon to everybody. Good morning to those in the states. Let me start with Slide 19, and give you an overview of our earnings development for the quarter. As Ben has shown on his slides, our revenue was $2.67 billion and grew at 11% in actual reported currency and 7% in constant currency. Growth was positively impacted by an organic revenue growth of 7% despite the impact of lower government reimbursement and lower utilization of EPO in the US. The driver in North America was the same market treatment growth of 3%, partially offset by the lower EPO revenue.

In addition, we saw continued growth in our North America product business, which again posted a very strong 14% organic growth rate. In international we benefited from reimbursement increases in important countries such as Argentina, Portugal, Poland, France and a number of other smaller countries. But, as Ben said, we were also affected by the reimbursement cut in Japan. The reimbursement increases, and some mix effects coupled with same-market treatment growth of 8%, resulted in 19% organic revenue growth in our international dialysis services. We saw continued strong demand for our products also in international, especially for machines and dialyzers, which translated into an organic growth of 11%.

Operating income of $429 million, an increase of 10% year-over-year. Strong revenue growth for products, coupled with cost containment measures, enabled us to almost compensate the unfavorable effects of lower EPO reimbursement and utilization so that our gross profit margin decreased by a slight 20 basis points, 34.7%. On the other hand, our SG&A expense relative to revenue decreased by 20 basis points largely due to cost containment measures and economies of scale. Our R&D expenses also increased by 20 basis points in percent of revenue as new product developments are in field testing and due to higher spending on home therapies. So we continued our investments in future growth.

Higher R&D expenses and the start up of 26 de novo clinics during Q2 compared to 16 in the prior year. As a result, our EBIT margin was still a very good 16.1%, but slightly lower than Q2 of 2007. Net interest expense was $82 million and decreased due to lower interest rates generally and to a more favorable financing structure following the repayment of a portion of our trust-preferred securities on February 1. The tax rate was 37%, slightly lower than in the prior year, mainly due to favorable effect of the German tax reform. Net income was $211 million, up 18%, and fully in line with our expectations again despite some of the headwinds, especially from EPO that we've discussed. On this basis we believe our Q2 2008 results represent quite a good performance.

Turning to page 20, we have the half-year P&L. You see a mostly similar trend to what we saw in Q2, revenues increased to $5.2 billion, the growth of 10% reported in 6% in constant currency was almost entirely attributable to organic revenue growth. In North America, same/store treatments contributed 3% for the service revenue growth while especially the reimbursement reduction and lower utilization of EPO had an unfavorable effect. Our product business in North America showed strong growth of 13%. Growth was especially supported by higher sales of PhosLo and PD products in Mexico, as well as generally by all of our other major product categories. In international, revenue grew by 26%, or 12% in constant currency. Again, product revenue grew strongly by 10% in constant currency on the back of higher dialyzer machine and PD sells. Same-store treatment was a very strong 7% in international and, in addition, the reimbursement increases contributed to the increase and also mix contributed to the increase so that our service revenue and international grew by 16% organically for the full first half.

Operating income increased to $818 million, an increase of 8%. Slightly lower earnings growth compared to revenue growth decreased our margin by 20 basis points. Our gross margin improved slightly by 10 basis points to 34.4%, mainly due to cost containment measures, and increased private payer revenue despite the unfavorable effect of EPO reimbursement and utilization. SG&A expense increased by 10 basis points, thus offsetting the improvement in gross margin. This increase mostly reflected higher corporate costs. Further, we spent more on R&D as we discussed related to Q2, increasing the spending and percent of revenue by 20 basis points. Interest expenses decreased to $165 million, primarily due to the mention of favorable financing structure. And, again, the tax rate benefited from German tax reform. As a result of these developments, net income was up 17% to $397 million.

Now turning to Slide 21, you see here the EBIT margin development for our segment. North America achieved an EBIT margin of 16.9% in Q2, representing a slight decrease of 30 basis points versus the same period in 2007, but an increase of 50 basis points versus Q1. The very good EBIT margin was supported by organic revenue growth of 3% in services despite reduced government reimbursement for EPO and lower utilization year-over-year. Second, cost containment measures to balance the EPO effect, including especially further progress on labor hours for treatment; third, continued strong demand for our products, especially machines, concentrates, blood lines and dialyzers and the margin contribution from the phosphate binder, PhosLo.

In the international segment, our EBIT margin remained at a solid 17.5% in Q2 compared to the same period in the prior year. The mix effect of higher growth services which have lower than average margins, unfavorable currency effects, and start-up expenses related to more de novo clinics were offset by economies of scale based on the strong revenue growth of 14% constant currency overall for the segment. With that, we were solidly in our target range for international at 17% to 18%. Turning now to page 22, we take a look at our DSO trend. In international, DSO's remained at 107 days, the same as in Q1, and generally in the range we've seen for a number of quarters, and which we're generally comfortable. In North America we experienced the further increase of 1 day. This increase was due to the implementation of new national patient identification numbers and associated administration problems at Medicare resulting in some payment delays coupled with continuing ramp up for receivables in Mexico due to the winning of a participation in a large tender for PD products, or building up our inventories in anticipation of participating in that tender business. These developments resulted in a one-day increase of our global DSO to 77 days; however, we're confident that specific factors will reverse until year end and that we'll be able to achieve further improvements in DSO potentially coming back to or close to the level that we saw the end of last year.

Now, looking on page 23 at our cash flow development. We achieved cash from operations of $209 million, representing 8% of revenue. This continues the development that we seen in Q1 and is below our cash flow target of 10% of revenue at least. The lower cash from operations is mainly due to the increase in receivables and also due to the replenishment of our inventories after we had exceptionally low levels last year due to our manufacturing capacity constraints and also to prepare for longer more normalized plant holiday this year following last year's shortened period. So, this year we need to build up inventories more than we did last year.

Our net CapEx was $179 million in Q2 net of last year and in line with our planning to invest in the growth of the business by expanding our manufacturing capacities primarily in North America and Germany to meet the continued strong demand for our products as well as investing in the significant increase in the number of de novos. As a result of these developments, the free cash flow was $30 million in Q2 '08. Our acquisition spending net of divestitures was $58 million and reflected the purchase of licenses and clinic acquisitions. This resulted in a net financing requirement of $28 million.

With that, let me come to slide 24 and show how our debt and debt to EBITDA ratio has developed. On the left-hand side you see that our debt level increased by about $300 million to $5.9 billion at the end of Q2 as compared to year-end 2007. The higher debt was largely triggered by the dividend payment and our increased investment spending. The increase in EBITDA to $2.076 billion, mostly mitigated the higher debt level resulting in a very slight increase of debt to EBITDA to 2.86 at the end of Q2. Our mid term target of 2.5 times, however, remains unchanged and for year-end we continue to target a leverage of below 2.8 times.

Now, turning to my final slide on page 25. We here confirm the outlook that we have given earlier in the year. For 2008 we continue to expect revenue to increase to be about $10.4 billion, representing topline growth of more than 7%. Net income we expect to achieve a range between 805 and $825 million, corresponding increases between 12% and 15%. Here we are quite confident to achieve this target and with the range of probabilities more weighted toward the upper end of the band. We continue to focus on further deleveraging with the objective of achieving a leverage ratio below 2.8 at the end of the year and our guidance for CapEx and acquisitions is unchanged and continues to reflect our excellent opportunities to invest in growth. For CapEx, we will spend between 650 and $750 million and close to 60% of that will be geared to expansions such as manufacturing capacity extensions and de novo clinics. For acquisitions, we intend to spend 150 to $250 million, combined approximately 70% of our CapEx and acquisition spending will be for future growth. And I thank you very much and turn it back over to Oliver for question and answer period.

Great. Thank you, Larry. Thank you, Ben, for the presentation and the comments and remarks. So, John, I think we can now open up the lines for questions.

(OPERATOR INSTRUCTIONS) Our first question will come from Ed Ridley-Day with Lehman Brothers. Please go ahead.

Thank you, good afternoon.

Hi, Ed.

Two questions. Firstly, on the deal with Galenica and Daiichi, I'm not sure to what extent you can, but could you give us a little bit more color in terms of the financials behind that deal? It does look like a very strong deal for you. Could I ask, particularly on the royalties that you're paying, are we thinking high royalties for what are fairly strong products compared to a low up-front payment or a slightly higher up-front payment and slightly lower royalty rate, can you give us an idea maybe comparing to similar deals in the past, that will be very useful. Secondly, in terms of your renal drug program, obviously very strong growth there. Could you give us an idea of PhosLo sales in the quarter. Also if you were going to update your guidance to the revenues that you're targeting in the renal drug program given your progress so far?

Ed, this is Ben. We've, like I said, we have a number of hurdles that the FTC hurdles we need to go through. We're still closing the programs here in Europe. So I'd like to defer until the third quarter to give you more details on the financing. Again, I think we're very pleased to have a product with a proven track record and we would tend towards committing to a long-term position rather than a lot of money up front, but that's all I think I can say today. But we will clearly bring that up in November/October and we'll be able to give you the details.

Now, as far as our target for the renal pharma, we had put out a target of $400 million by 2010 or in 2010. That's external sales, and I believe we will do that. We've also said the margins in the pharma, renal pharma area would probably exceed or be at the high end of our current margin, so we're optimistic but I can't give you any numbers at this point and it's not in our guidance for 2008. As far as PhosLo, I guess we're running at the range of about $20 million a quarter. Again, we have not -- we're not going to change our $400 million in 2010 but, quite frankly, we wouldn't mind if we beat it a little bit, which I think we'll find out in 2009 how we're doing. But does that help you?

Yes, it does. That's very helpful. And just a quick follow-up, I presume you are still looking for further bolt-on acquisitions and further drugs for that business. Could we see further activity in that this year?

Well, probably not. Remember, I mentioned that we really were going to resist until 2009 doing something on the next drug, and we -- the discussion was, was it vitamin D or was it iron. But honestly, we're very comfortable with our program now in the phosphate binder and this is one of those opportunities that why wait. We've got very good working relationships with Galenica and American Regent, so we decided to go ahead and try and move it forward this year and have it in place for next year. Beyond that, I think we're -- we'll -- we don't have a need to really acquire anything else at this point in time. So we'll probably execute now through 2009.

Great, thanks very much.

Thank you, Ed.

We will now move onto our next question which comes from [Tom Jones]. Please go ahead.

Good afternoon. I just have a couple of questions. One, excuse me if I missed it, but I wondered if you could share what the dollar impact of increased heparin price was in the quarter. Secondly, what are your expectations for heparin, heparin pricing, the heparin market now that they're down the corridor of taking over APP. And the second question was really on something I noticed in the release, that your average time on dialysis has ticked up, I think, from 3.3 to 3.4 years, year-on-year. I'm sorry, 3.4, to 3.5, that's about a 3% growth rate which is not far short of your overall growth in patients. I was just wondering how much of your growth do you think is coming from incident patients or new patients and how much of it is just coming from the fact that they're just dying a little bit slower than they used to?

That's a good question. I believe what we quote is treatment growth, that could have a component but I don't think. I looked at this a year or so ago. It's very, very small in terms of the actual growth due to mortality. I think you're seeing a rounding year here.

So it may not be a whole 3%.

Yes, I think it is less than that. But what we are seeing, though, is again, we saw 120 basis points improvement in mortality, and I'll recalculate, but that's the not usually not very much in terms of growth. But obviously, for the patient it's quite good. As far as heparin, Tom, no, I didn't comment on that. I think there's probably enough information out there. I've seen analysts look at it from 5 to 7 million a quarter. And I think a lot of people have talked about a couple -- I'm sorry -- heparin -- costs, yes, costs, yes, effect on costs and I think that works out a couple dollars a treatment. And, again, as far as --

A dollar plus.

A dollar plus a treatment, yes, and that will really will hit the second half of the year primarily. I think that's all I can say. Clearly I'm pleased to see Fresenius FE essentially be in acquisition of APP. I would rather have someone who is producing or who has control of a drug like that have some interest in dialysis, which obviously they do. So from that standpoint, I can't comment anymore, but that's an -- and anything we do with [FSE] is arm's length activity. So it's a fairly independent decision.

I just had one follow-up question on anemia, if I may.

Yes.

You said that you sort of kind of expecting that your [EPO] utilization sort of getting back to steady level now having dipped and then recovered. But with your number of patients with hemoglobin of 11 or higher still down at 73%, that translates into about 33,000 patients of yours that are still below 11. I doubt that your nephrologists are going to be particularly happy with that many patients being down there. What's stopping them using more EPO or doing more to improve management outcomes?

Well, I think there's clearly a lot of discussion. Now, remember it goes in cycles. There's a significant lag. So I think until we watch for another six months, I can't tell you that it will settle in at 73. So I think we're dealing with a lag effect today and we'll watch this as we go through the year. But, again, that's the best I can look at at this point in terms of where we'll settle. My guess is somewhere between 75 and 80 or near 80 but we'll see as we go through the year.

Great. Okay.

Our next question comes from Hans Bostrom with Goldman Sachs. Please go ahead.

Good afternoon, gentlemen. I had a couple of questions, please. First, could you remind us what your revenue treatment target is for the US [service] business for the full year? I think it's been mentioned before, but if there is any update to that, that will be helpful. Secondly, you had a very strong development in revenue treatment outside of North America. Could you shed any light on how you expect that to develop over the next 12 to 18 months? Is it reasonable to assume that this rate of improvement continues or is there something you would guide us to expect to slow down? And third question relates to the petroleum related costs, particularly breaking this up into plastics, which clearly is a significant input cost for you and dialyzers, tubing etc., how much that might have changed in the first half in what visibility you have for the second of half of the year and what definitely has changed in costs related to transportation and what the impact has been on that in the first half of the year or the second quarter? Thank you very much.

Hans, I think Larry will take all three of those.

Thank you, Ben. We're projecting basically the same as what we have before, which is for about a 2% end of year to end of year revenue per treatment in the US. So we ended last year at 325 and we're projecting around the 332 level at the end, by the end of 2008. You're right that we've had quite a strong revenue per treatment growth outside of North America in the international segment. We've gotten an unusual number of reimbursement increases recently, 11 out of the 32 main countries that we're working in and I think we probably wouldn't expect that every quarter or every half. However, we would expect a number of those countries to provide reimbursement increases at some point during the year.

We've also had a significant mix effect where we've had stronger growth in some of the countries that provide higher reimbursement and, of course, we are managing our investment so that we try to have growth in countries which have higher more attractive reimbursement levels. So that all is what is contributing. I think probably we couldn't expect to continue at a 19% organic growth rate for the foreseeable future, but we would expect some healthy increases which I would not want to quantify. We haven't given guidance on that in the past and are not really in a position to do that now. In terms of petroleum and energy costs, we do have some cost increases, especially on the distribution side, for our products. Other costs, operating the clinics and the raw material costs for our products have not increased appreciably, even though energy prices generally have increased so much and so are not a significant factor for us.

Would you care to quantify how large your costs related to energy and heat and cooling your clinics is and also transportation costs?

I think at this point we don't really want to quantify that other than to say the increase that we've seen generally from the overall increase in energy costs has been less than let's say 1% of a bottom-line effect.

Hans, to give you some feeling for what we're doing about it. Obviously, heating and cooling, you can't affect that, but that's the not critical in a clinic, what we try to do over the years, where is the big cost in delivering or product? It's in concentrate. You're shipping around water. So we have moved heavily in all areas of the world to dry concentrate. We've tried to essentially find ways technically, again, this was when we were looking at $2 diesel, now it's $4 or $5 diesel, so we're trying to do some of those things. Other than that, shipping dialyzers, machines, things like that, they're not that expensive but it's the home patients, delivering PD and delivering concentrate where you've got a heavy basically a very heavy shipping. That's why we went into the assortment system. There's a lot of things we'll do over the next few years if this is going to stay in this range.

But if you -- I mean, understanding it's a difficult question but if you were to assume that current energy and petroleum prices remain for the next 12 to 18 months, is this an appreciable factor for your margins and, indeed, can you recover some of this pricing to customers or how should we think about that?

No, it's really, Larry, it's really not that significant in terms of our cost structure but yet we are not ignoring it either, we're looking at ways to mitigate it. So I think in terms of the models and so on and so forth, I don't it think basically wiggles the meter at this point in time on a global basis, okay. Does that -- so I don't think at this point we'll manage it and, as Larry said, less than 1%.

Okay. Thank you.

Our next question comes from Holger Blum with Deutsche Bank.

Hi there. Holger Blum, Deutsche Bank. Three questions. Coming back to Ben's statements before. Firstly, you mentioned the ASP plus 6 is lower by 5%, I think that was just an H1 phenomenon, and it is analyzing in Q3, so the comp in second half should get easier? And I wasn't sure whether you indicated that as one of the reasons why you were not more upbeat with regard to your guidance. Secondly, overcoming back to your introductory statement about heparin, you mentioned that one risk factor that you try to -- would use the volumes there in the future and you attempt, what can you do and what magnitude we are talking about? How much percent of total cost is it and to what extent can you bring volumes down. And the third question, coming back to the comprehensive bundle, you mentioned 11% cost savings and higher costs on your end. So what would be the equivalent revenue per treatment in a comprehensive bundle, and how would you share these cost savings with government? Thank you.

Holger, this is Ben. My 5% was Q1 I believe H1 over H1. The only reason that we've seen the Q3 ASP and clearly it's about the same as Q2 but, again, we haven't seen Q4 and even though we expect, is it really going to (inaudible) or is it going to continue to drop? That was the reason I put that in there in terms of absolute EBIT for the last half of the year.

Holger, you're right. The main difference is in the first half, and in particular, Q2, we're reporting Q2 today. There were some smaller additional reimbursement cuts in Q3 and Q4, but the big one came on July 1 of about 5%. And so the big negative comparison was in the first half of this year.

Okay.

Good catch, and thanks, Larry. As far as heparin usage, I think this is not been something that the industry has optimized for a number of years. In fact, I tried to do that back in the 60s by developing an artificial kidney in circuit that didn't require heparin and it never went anywhere, at least in dialysis, because essentially there wasn't much enthusiasm. Then of course when you go into re use, you basically are trading off less reuses if you have more clotting. So that whole area has not been looked at. And that's really what's underway right now is how do we optimize heparin usage in dialysis and it's never been done in the last 40 years but clearly there's an economic incentive to do it now. Does that -- that probably is -- since the program is just underway, I don't have any, basically anymore comments on that.

As far as the comprehensive bundle, we're working that on the demo project, we agree with a, basically a loss ratio, a medical loss ratio which sort of puts the target, then we share the benefit and they're preparing it to 100% Medicare costs. So you always have a baseline which is fee for service Medicare. And then above a quarter we share 50% with CMS and we keep 50%. How that will eventually go beyond the demo project with CMS, that all has to be worked out over the next couple three years but that's the basically the idea. Now as far as directing for treatment, you take 80,000, it's about three times what it is today for Medicare, it would be $600 or $700 a treatment.

That would be if it was really all inclusive.

Totally inclusive.

Okay, thank you.

Thank you, Holger.

Our next question will now come from Alex Surla with Merrill Lynch.

Hi, thank you. A couple of follow-up questions. Firstly, on the Galenica deal, you mentioned in the press release there are so-called license fees. How many years would those extra license fees to the previous marketing partners, how long would the license fees last? Secondly, in terms of the bundle that was proposed with the 2% price cut, it also includes use of utilization data on drugs on the basis of the lowest of 2007, '08 and '09. If we take the 2007 number, being the lowest one, EPO by itself would have caused that price to be about 2% to 3% lower for the total revenue per treatment. So effectively, if you're 2011 bundle uses 2007 EPO utilization data, that could be effectively another 2% cut on top of the headline cut that they already talked about. Can you comment on that at all? And the third one would be on online HD, and how fast can you bring that to the United States? And the fourth one, anything from Gambro at all, any impact?

Okay. Galenica, you're asking questions about the financing, I probably ought to essentially not divulge that at this point in time because we're still in the process of we have not disclosed that. We will in third quarter. Now, as far as the length of the term, both contracts, one of them is basically 20 years, one of them is 10 plus two five-year options that we have that we can essentially make happen. So I think we're looking at a 20-year type of, long-term type of partnership here for dialysis Stage 5 and, again, we'll give you more information on that as we, in October. As far as the bundle, yes, it the lowest of 2007, '08 or '09, in terms of utilization. And again, I think I really can't comment on that at this point because really CMS is not -- they'll be working with the industry as we will, and the only thing that I want to mention is that clearly we will try to provide the best therapy with essentially with the optimum use of drugs and all the other components. So it's a little early to have us comment on that, but we'll be involved with them as it is set.

As far as Gambro. Again, I believe they're in the market, they're a very good competitor. We saw their new machine at the EDTA. So, again, we're -- we find that they're a real responsible competitor in the field and we're glad that they're back. As far as online HDF, we clearly have seen some excellent results in our European theater. Again, this is something that we're looking at in the US. We've got some pilots going in the US. Since we've gotten some issues in terms of regulatory issues, we would probably finish our pilots and then you'll probably see that enter the US some time in the next couple years. Ideally, it would enter when we go into the bundle because at that point in time clearly it is a superior therapy and that's a decision we would make, we would have to worry about reimbursement and things like this. So that's kind of our target, then, would be at the time that we go with bundle.

And with the new Gambro machine, do you feel that they my finally pick up some of the lost market share in the second half of this year?

I believe they're still in the process of evaluating it during the second half of this year and, again, I think they're responsible, they know you bring a new product out, you have to work the bugs out, so on and so forth. I think this is a 2009 type of issue, definitely not this year.

Thank you.

Thank you.

We'll now take a question from Gary Lieberman with Stanford Group. Please go ahead.

Good afternoon. It sounds from your comments that you're not going to phase into the bundling over the next few years, but sort of cut over in 2011. Can you just verify that?

Well, you're talking about Medicare? Yes, Medicare will not start until 2011 so there's no way to do that. However, between now and 2009, we'll continue the comprehensive demonstration project with Medicare and look very seriously whether that will be offered, which we believe it will through the special needs plan, so we'll be very active with them, as well as DaVita, in the special needs plans over the next three years, and then we'll work with them in terms of the dialysis bundle in 2011.

Would you anticipate changing over your commercial contracts that aren't bundled today to a bundle rate by 2011?

Well, I think we don't normally comment too much on that, but obviously with all the discussion on the bundle, the commercial payers are interested in the bundle, too, and where they are, we accommodate them. So I think you'll see a movement to a bundle in the commercial area quicker than Medicare.

Then can you just comment on some of the clinical data that you gave? You noted that the hospital days have come down fairly significantly. Can you just reconcile that in terms or in light of the lower hemoglobin levels? It would just seem somewhat counterintuitive that hospital days would be going down as rapidly as they are in light of the lower hemoglobin levels.

Yes, I think you got -- that's an interesting question. I think what we have is essentially you've got a longer lifetime in terms of the hospital. I don't think we've seen the impact of hospital days. Now, you could also, on the reverse side of that, look at our European experience where essentially it actually creeped up a little bit and we've seen basically hemoglobins go down. We know there's a relationship, we've studied it, but whether it will show up in a quarter-by-quarter, I'm pretty sure it won't. We published that there is a relationship, but we looked at it over a longer period of time.

Okay, thanks a lot.

I think there's a study that just came out that shows that the for-profit group having a higher hemoglobin, actually had a lower mortality. So there's all kinds of data out there if you want to believe it, showing that there's a relationship between hemoglobin and mortality in hospital days. It just hasn't shown up in our system.

Ok, thanks.

Thank you, Gary.

Thanks, Gary.

Our next question comes from Jack Scannell with Sanford Bernstein. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. The question I really, just talk through in slightly more concrete terms the kind of steps that it would take to offer the special needs comprehensive bundle as a commercial product. So what's actually going to take you to get that, and roughly how long might it take, assuming it does happen?

Well, the special needs program exists today and they've been extended. And, of course, from a business standpoint, we have the demonstrate project which is basically being carried forward as a special needs program today. For us to enroll or essentially contract for more than a couple thousand patients or 4,000 or 5,000 patients, which is in this program, we would need to make sure that the co-pays and all this with the commercial guys is worked out. So there's a number of steps but they're probably all doable if it really turns out to be the right business model and we should know that by the end of 2009. But the good part about it is at least we have the option to make that decision because these funds have been -- these programs and plans have been extended. They were actually set to die at the end of 2009.

Thanks.

We'll keep you informed over the next couple years you won't see, 2008, '09, you won't see much impact. By the end of 2009 we'll be basically making some decisions here.

Okay, thanks very much.

Thank you, Jack.

Our next question comes from Ilan Chaitowitz with Redburn Partners. Please go ahead, sir.

Good afternoon. This is Ilan Chaitowitz from Redburn in London. A few questions. First, I have to ask if you guys have seen any dynamics in the last three to six months that would in any way impact your ability to generate price increases from a commercial side or change the mix of your patients more towards public pays versus private pays. That's the first question. Secondly, it's not transparent to me how there would be a move from just a (inaudible) of a bundle to a more comprehensive disease state management program. Can you just outline how that could happen and maybe the timing on that could be as soon as 2011 for the more broad DSM program? And the third question is on the heparin side. How soon do you think you could find an alternative provider for heparin?

Okay, thanks Ilan. As far as the shifting from medical to Medicare, we have not seen any additional pressure or activity in that area, essentially if a patient has commercial insurance, they clearly like to keep it. There's a number of -- there's the American Kidney Foundation who will assist them. So it's a matter of from that standpoint if they have it, there are ways that they can keep the commercial insurance. We try to be supportive of that and essentially do our part. Now, as far as the pressure on the commercial area, I can't comment that there's essentially more or less than we've had in the last couple three years, but remember our strategy is to try to work with the payers. We can save them a lot of money, I think they know that. So I think we're finding in the industry that there may well be more and more interest for the providers to work with the payers because the amount of money they can save is not in dialysis. I think they're finally understanding that. So I think we're crossing a cross roads here where they actually may become partners after a while.

As far as the bundle, CMS has proposed two bundles. The expanded bundle which is he is essentially the snips program, the demo project, and the bundle called the ESRD bundle. They probably will want to look at both and they are looking at the expanded bundle today with DaVita and ourselves, so I think the way this will go, by in to 2009, we will have to make a decision with CMS, do we essentially expand that demonstration project and we'll need their legislative help to clear some things out of the way, but it always is much easier if CMS is supporting it. So I think that one will be business decision along with CMS in terms of they have an independent third party evaluating how successful has that program been. As far as heparin, we have no visibility on when a second supplier could come in the market. Again, just don't have any ability to look at that. So what we're doing, I think, as an industry is optimize the amount of heparin we use which basically is about the only activity we have at this time.

Great, thank you very much.

We'll now take a question from Darren Lehrich with Deutsche Bank.

Thanks for taking my questions, good afternoon, Ben.

Hi, Darren.

Two questions. First, the Medicare physician fee schedule included some discussion around the composite add-on and my understanding is it was introduced without an update for 2009. I guess I just wanted to get your thoughts on how you view that and how that would impact your outlook. The second question is, if you could just go a little bit further into detail about what you think your offsets are related to absorbing heparin increases. I think I heard you say that you're looking at optimizing the drug, but I just want to understand better if there are any other levers in the cost structure that you would expect to offset that and whether you think you can offset it in the third quarter. Thanks.

Okay. As far as the physician schedule, basically that's why we didn't expect to see any change, up or down, on the drug add-on, it's been pretty stable. So that's the reason that we felt the bill passed by Congress should have an increased reimbursement in 2009, and that's the 1% that's in the bill that has been passed. So we'll get a 1% increase of reimbursement in 2009 from Medicare. I think that's basically all we can expect, it's been pretty much determined.

In terms of absorbing the heparin increases, I think it's fair to say that we can mitigate a large part of the increases, but it really has increased quite dramatically. So, we're doing everything that we can in terms of cost containment and efficiency programs in particular, looking at trying to optimize even further the labor hours per treatment. And I think we'll be able to maintain but perhaps not all of those increases.

For this year?

For this year. Yes, and I think anything we do as far as utilization will have no impact this year. And, again, it may end up that reimbursement increase next year is used for heparin as it was for EPO a few years ago. We'd like to not have that happen, but that's kind of where it is today.

Right, okay. Thanks very much.

Thank you, Darren.

Our final question today comes from Martin Wales with UBS. Please go ahead.

Good afternoon. Most of my questions have been answered, but just coming back to earlier questions on the (inaudible) relation with Venofer.

You're fading in and out.

Is that any better?

Yes, that's much better, thank you.

Can you give us a little bit more color on what you were doing with Venofer when you talked about your delivery, (inaudible) FTC first, and, secondly, any alternatives on the iron product side that what made you decide to go with Venofer rather than Ferinject in Europe rather than anything else?

I don't think we caught your questions. I'm sorry, maybe Oliver, Larry, between the three of us --

What will we actually be doing with Venofer.

Okay. As far as administration. It's a little early to divulge that, but I can say this, that as you look at what is the optimum application of iron during dialysis. Right now, we -- the thought pattern is larger boluses of iron less often and quite frankly we're not really sure that that's the right thing at Stage 5. At Stage 3 or 4, that's clearly probably the way to do it because you see them monthly. So we're working on some ideas of how we can administer more frequently smaller doses and that's really tied into some of our thought pattern. Now, that's part of it, and we've got some other ideas that will show up over time. But we're combining our knowledge with a proven API which is really about as good as we can get in the pharma tech area.

To what extent is the fact it is a proven API what is the attraction of doing a deal with Venofer rather than anything else?

Yes, although Ferinject is on the market in Europe and really doing very well. It's a different, slightly different compound but, again, at this time it doesn't have the history Venofer does, and in the US, it basically needs to be evaluated more in a dialysis setting rather than some of the settle that were in the first analysis. So we have not only the first generation but the second generation here to work with over the next 10 years.

Okay. Thank you very much.

John, I think there are no further questions actually.

No, there are no further questions in the queue, that would conclude today's question-and-answer session. Mr. Maier, I would now like to turn the call back over to you for any additional or closing remarks.

Thank you very much, John. I would like to thank everybody. Thank you, Larry. Thank you, Ben, for the presentation, thanks for everybody joining us today on the call and we are looking forward for seeing you for the Q3 disclosure back in November, October/November. Thank you very much.

Thank you so much for joining us.

That concludes today's conference call, ladies and gentlemen. Thank you for your participation, and have a nice day.