Fresenius Medical Care AG (FMS) 2008 Q3 法說會逐字稿

Good day and welcome to the Fresenius Medical Care Earnings Release of Third Quarter 2008 Results Conference Call.

At this time, I'd like to turn the conference over to Mr. Maier. Please go ahead, sir.

Thank you, Maryanne. Good afternoon, good morning, everybody, ladies and gentlemen. Thank you for joining us for Fresenius Medical Care's meeting today, which will cover our Q3 and nine month 2008 results and achievements. By now, you should have received all the relevant material and it's also available on the internet.

I would like to comment on the Safe Harbor statement. 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 and other risks and uncertainties are described in detail in the Company's reports filed with the Securities and Exchange Commission and the German Exchange Commission Deutsche Borse. In compliance with Section 401 of 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, our Chief Financial Officer, who will brief you both on the results for Q3 and nine months of 2008 and give you a brief business update.

Let me now turn over this call to Ben Lipps, our CEO 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 of our employees and associates around the world and those who are joining us on the internet. In terms of the overall agenda, I will discuss the business update, Larry will cover the financials, and then we will go into a question-and-answer session.

Let me start by saying I'm very pleased with the performance of our team around the world and the results for Q3 and the year-to-date. I'm also very enthusiastic about our opportunities as we look ahead. There are some reasons that I'd like to share with you why I see these views.

The results we reported today were very strong in revenue growth, expense management, earnings growth, which leads us with confidence to reconfirm our guidance for 2008. Our products and service businesses are performing very well around the world. We are expanding our production capability due to increased demand. Our renal pharma initiatives are expanding and on target. And we are very excited about our pipeline of new products for HD and PD therapies, which will continue to improve patient care.

Turning now to chart four, our revenue for the quarter was around $2.7 billion, 12% actual currency growth, 9% constant currency. Earnings per share grew 14%. We're clearly on track to achieve our full year guidance, despite significant headwinds from our Heparin costs and the volatile currency environment.

Turning now to page five, chart five, this will give us a little better feel for the regions and how the revenue developed in the regions. This was one of our best organic revenue growth quarters, 8%. North America has returned to 7% growth and 5% organic growth. Clearly, the first two quarters where we suffered from EPO effects, we did not achieve these numbers. Very pleased with North America's growth.

International continues to grow double digit, 23% actual currency, 14% constant currency. Europe, which is 70% of international, at a 14% constant currency growth continued very strong. Asia-Pacific, 10% constant currency, Latin America, 22% constant currency. Clearly, for international, we continued at a very strong revenue momentum for the year, 13% organic. So in summary for third quarter, all regions met and exceeded our growth targets and we are very pleased.

Let's turn now to chart six and we'll look at the nine months. Again, the organic growth in North America was about 4% and we talked about that during Q1 and Q2 in terms of the EPO issues. Very pleased to see them move back into the target range of 5% to 6%. International continues to operate in the 25% revenue growth range, actual currency, 13% constant currency, and they also continued with the 13% organic growth rate.

So, as you look at the year and nine months to date, the US has basically returned to the growth that we were targeting and expecting and international has continued to grow at their excellent rate of around 13% to 14% in constant currency. So, we're off to a very strong growth in third quarter and basically for the year in international.

Turning now to chart seven, we'll look at the dialysis services on a global basis. We saw in third quarter a strong 9% constant currency growth, again led by international, 30% actual, 20% constant currency, and the US rebounded to 6%, which is clearly in the target range we were expecting. So, we're very pleased with the growth rate in the dialysis services area for Q3.

Looking now at chart eight, we'll -- this chart shows a good snapshot of our global services business and we've seen improvements in all the metrics. Looking at the organic revenue growth in international, 19% driven by same market growth of almost 10% and a constant currency revenue growth of 8%. So, very, very strong growth continues in the international dialysis services section.

North America returned to an organic growth rate of 5%. Very good, that's the target. And we essentially accomplished that with a 3% same market treatment growth and a 2% increase in revenue per treatment. We've seen revenue increases in the international in 11 of the 32 countries and we continue to see a willingness on the part of payers to pay for quality because we're able to show them, as I'll show you later, what this does in terms of reducing hospital days and costs.

With respect to de novos, we are on track to open about 135 to 140 de novos. This is a 70% increase over 2007. We clearly will have put in place enough de novos then to essentially give us a very strong platform to grow forward in 2009 and '10.

Turning now to chart nine, looking at the revenue per treatment in the US, very pleased with the performance of the dialysis services business in the US. We reached a new record of $333 per treatment. We had expected to achieve that at the end of the year or fourth quarter and so, we're one quarter early. And again, that is almost all, if not all, from contracting, excellent contracting. And again, we're quite pleased with that growth and the return, then, to record territory for revenue per treatment.

I'd like to turn to slide 10 and talk about quality. Clearly, that is the name of the game in our business. We are clear and absolutely committed to quality on both products and services. It served us well for a number of years. In fact, in the US, DaVita and ourselves are basically setting standards, coming to an agreement on standards of quality metrics, and we think this will be very helpful for CMS as they develop the pay for performance. And so, we're quite pleased.

And again, I believe if you step back, on average, DaVita and FMC have some of the most superior quality outcomes in the US. And again, there are a lot of very fine -- very fine clinic operators, but we're proud of the fact that together, we have very strong commitment to quality and I think it's showing through in the numbers.

Now, let's take a look at some of the numbers. Looking at Kt/V, clearly we are very proud of the fact that 95% of the treatments meet or exceed the prescribed therapy and that is in both -- for FMC both North America and for Europe. Again, if you go down and look at nutrition, Albumin, you can see that Europe continues to have superior nutritional status. The US suffers from the regulatory constraints that will probably keep us from achieving those numbers.

However, in our demonstration program with CMS where we're free to provide supplements and basically focus on nutritional standards, we clearly increased that significantly. So, we hope as we move forward in disease management that this is one of the benefits that we can provide our patients.

Turning now to anemia management, quite frankly, it's one of the most critical yet treatable conditions for hemodialysis patients. There is an expectation out there that physicians should target between 10 and 12 g/dl. But because of the biological variability in response to the EPO, many patients will transition higher than the 12 and eventually move back into the range.

Our data does not show any adverse health consequences achieving levels up to 13 g/dl. So, we are introducing a new metric here that basically shows the number of patients that are between 10 and 13 g/dl. And you can see that about 85% of the patients in Q3 in North America and 76% in international. So, this is a new metric that we'll essentially continue to show you and we'll talk about the low end and the high end, those over 13 and under 10. I'll comment about that in a minute.

Now, if you go down and look at our hospitalization days, we're very proud of the fact that we continue to improve hospitalization days in North America. And we're pretty much at a very low level in Europe, so I doubt if there's much improvement that we can actually make from that level in Europe. However, in the US, one further hospitalization day reduction contributes a savings to our payers, the Medicare or our commercial payers, of about $150 million per year just for FMC's patients. So again, everyone wins, patients, basically we're pleased that they stay out of the hospitals, and at the same time the payers win.

Now, when it comes to mortality, we still have not come to a universal metric in terms of mortality. But we're working on that. All I can tell you is our mortality, as we measure it, continues to improve. We're less than 17%, again with 50% diabetics who have about a 500 basis point higher mortality, you can see that we're essentially doing very well.

Moving now to chart 11, this is probably the last time you'll see chart 11, but I figured I'd show it to you one more time. You can see that we've stabilized around 96% of our Q1 2007 EPO utilization and we really expect now that we'll probably cycle around 96% to 97%. And that at this point in time, we believe that EPO is stable and we believe that we are doing the best we can with -- under the conditions that are out there in essentially this becomes something we'll track only on outcomes but not on utilization going forward.

Turning to the next slide, slide 12, and looking at our standard outcomes, you can see that when you look at those patients, the percent of patients above 11, the lag effect is now kicking in and we start to see an increase in that percentage going from 73% in the second quarter back up to 76%.

And interestingly, when you look at our new metric between 10 and 13 in the first quarter of 2007, we basically had 77% of the patients and now we're up to 85% and we're pretty flat in the 85% range, which means that we have about 7% below 10, which we're working on. But we'd certainly like to get that as low as possible. And we have another 7.5% above 13 but remember probably very, very few above 13 for three months because of the new regulations. So, we're really quite focused in -- on our programs and we think these stabilized in EPO and is probably not an issue on a going forward basis.

Turning now to products on slide 13, we continue to see excellent product growth around 11% constant currency both in Europe and in the North America. So, we're again quite pleased with the acceptance. This is pretty similar to what we've seen for the first quarter to second quarter. And again, we're doing quite well, then, on the products area, again driven primarily by hemodialysis products, which is the reasons we're expanding our plants around the world. And that should be completed in early 2009 or mid-2009.

Turning now to North America and renal pharma, very pleased to indicate that we'll have -- in fact as starting in October, we have a revenue run rate of about $200 million a year in terms of external sales. We have two products, PhosLo and Venofer. I'll talk a little bit about PhosLo here. First of all, we had a very strong year-over-year growth of about 62% in terms of revenue growth in PhosLo, with prescriptions increasing at about market of 3%.

Now, of course, most of the focus in the -- October has been on the entrance of the generic. And let me comment a little bit about what our strategy is there and basically we can answer questions later. We basically have determined that we would allow one generic to enter, therefore we would protect our valid PhosLo gel cap patent and we believe with one generic, we will have more flexibility in the market.

Now, what we are planning to do with the market during 2009 is we have initiated and developed a phosphate kinetic modeling program that basically combines PhosLo and gives comprehensive guidelines and algorithms driven by laboratory data, essentially PTH management approaches, dialyzer capability, dialyzer prescription, dialyzate. So, it's a total holistic approach to optimizing bone mineral metabolism.

We're in the -- currently in pilot with this product -- with this algorithm and these studies and it's one of the -- one of the approaches that you can really only do if you're a vertically integrated company where you have all of these capabilities available to you. And again, we believe this is the approach that we need to take, the industry needs to take with respect to bone mineral metabolism because we still only have about 50% of our patients who are meeting the guidelines set by the physician community.

Now, with this, we're calling it PKM, again phosphorous kinetic modeling, and a dispense as written campaign, we believe that we can provide our patients an opportunity to receive the branded product plus the guidance information that will be available to them in terms of their therapy and also to the physician. Now, we'll offer this through our special renal pharmacy and this will add benefit to the physicians and the patients because they will have a very significant tracking program.

Now, at the same time, we have a new formulation coming out in 2009, so I think there's been speculation where will the -- where will -- how much impact will a generic have. Our view is that on a sustained basis, it'll have between 30% and 40% impact, again after the transition. So, that's really what we're planning to do in that area. And again, I'm not worried about the renal pharma. With the addition of Venofer, clearly the renal pharma in the US will continue to grow and do quite well and we've started in -- we've started, I'll show you here, in November of this year.

Now, turning to Venofer, I think we received clearance in September. We closed the transaction in September. We're actually starting sales in November and we're very proud to be associated with this product. It has a proven safety -- superior safety profile and we're very excited working with American Regent and Galenica to develop basically new iron therapy -- new iron therapy regimens, okay.

Now, I'd like to turn -- so that's pretty much where we are on renal pharma. And at this point in time, I'd like to go to chart 15 and talk a little bit about some of the long term investments that we're in the process of making in 2008. And first of all, as I mentioned, we're expanding our production capability primarily for dialyzers in Ogden, Utah, St. Wendel in Germany and Buzen in Japan. We also have been expanding our international dialysis service network. We now treat about 60,000 patients. And as you can see here on the chart, we're focusing on profitable, fast-growing countries.

Now, the reason this is quite exciting to us in the long term as well as today is that this is an excellent base for our products and our pharma products in the future and we basically want to continue to grow this business. We're very excited about the bundle that we've been able to work with in Portugal, so we believe we have a very good program here for the long haul. And we're investing about building de novos at about the rate of 10% of our clinics.

So again, turning to the next investment page 16, we are investing in -- as I mentioned earlier in the year, we have purchased Renal Solutions Inc. and we're investing in some new product concepts for the next -- for the next decade. And they're all based around regenerative renal therapy. And again, I think what this is is we're combining the sorbent technology from Renal Solutions with our membrane technology, our hardware.

And right now, I'll show you what we're doing in the PD area. Basically, what we're doing here and will be going into clinicals with these in 2009, is we've developed a very compact program -- a very compact device to regenerate PD solution. And this took all various technologies that we have. And you see a couple of graphics here of it. And what it is is we've been able to reduce significantly the amount of absorbent that it takes to essentially create the ability to remove a day's worth of toxins.

Indeed, we feel that dialysis -- PD is an excellent home therapy and that one of the difficulties of PD, it does not have sufficient efficiency. So, with this device being used either at night, it will improve the therapy by about 100%, or if the patient would like to wear it during the day, you'll see a little wearable design here. Again, because we've reduced the sorbents, we clearly are able to put this in a size that is not obtrusive.

Turning now to my last slide, 17, and just summary, we're very proud of the increase in revenue per treatment, strong organic growth that we've -- achieving the target in North America. We're in the starting blocks for Venofer, and we clearly, as we look at Europe, we clearly see growth momentum in Europe is continuing, 14% constant currency, and we see a very strong same market growth of 10% in the treatment area. And our acute business, acute renal business is growing quite strongly, 33%. Focused on that in the future, but it's again a very nice adjunct business. Again, Asia-Pacific, strong treatment growth. And in China, we continue see impressive growth of around 26% a year.

So in summary, we've had a very good quarter with respect to each of the region's revenue development and we clearly met the target, the bottom line, and we are quite pleased with the investments that we're making in terms of their success where we're very comfortable that they'll pay off as we look into the future.

So at this point, Larry, I'd liked to turn it over to you if you'll take the financials.

Thanks, Ben, and very good afternoon to everybody. Let me start with slide 19 and provide you with an overview of our earnings development for the quarter. As Ben has shown on his slides, our revenue was $2.7 billion and grew at 12% in actual currency and 9% in constant currency. Growth was carried by a very strong organic growth of 8%.

Our operating income was $422 million, an increase of 6% year-over-year. Our operating margin of 15.6% declined from last year's level and was impacted by the increased cost of Heparin and especially further investments into future growth. These included the continued expansion of our service business, we opened 19 clinics in North America, and then the international service business, we achieved strong growth coupled with the startup of 10 new clinics. [Old] startup costs for the new clinics and mix effects associated with the expansion of the international services affected our margin.

Second, we recorded higher depreciation expenses resulting from the expansion of our manufacturing facilities, the both current and future demand for our products. Third, the increase in capacities allowed us to revert back to a more normalized summer shutdown program combined with a normalized maintenance program at our European facilities as compared to the very shortened program that we had last year. And lastly, we continued to increase R&D expenses for field testing of new products and higher spending on new home therapies, some of which Ben just discussed.

Net interest expense was $87 million and it decreased due to lower interest rates and a more favorable financing structure following the repayment of a portion of our trust preferred securities back early in the year. The tax rate was a rounded 37%, slightly lower than in the private -- in the prior year, mainly due to the favorable effect of the German income tax reform, which was initiated on January 1st. Net income was $206 million, up 14%, and in line with our expectations, despite the various cost increases we discussed. In the aggregate, we're very pleased with the results.

Now on slide 20, you see our progress during the first three quarters of the year. Our revenue was $7.9 billion and grew at 10% in actual currency. The constant currency growth of 7% was almost entirely organic and was achieved despite the impact of lower government reimbursement and lower utilization of EPO in the US.

Our operating income was $1.24 billion, an increase of 8% year-over-year. Strong revenue growth from products coupled with cost containment measures enabled us to almost compensate the unfavorable effects of lower EPO reimbursement and utilization, higher Heparin costs and higher startup costs associated with 99 de novo clinics opened during the first three quarters of the year compared to only 59 in the prior year, so that our gross profit decreased slightly by 30 basis points to 34.1%.

Our SG&A expenses relative to revenue decreased by 10 basis points, largely due to cost containment and economies of scale. Our R&D expenses increased by 20 basis points due to new product developments and development of new home therapies. So again, we continued our investments for the future, startup of de novos, higher R&D expense and expanded manufacturing capacity and thereby sacrificed a little bit of our EBIT margin to capture these growth opportunities. Accordingly, the EBIT margin was 15.7%, 40 basis points lower in the first nine months of 2007.

Net interest expense of $366 million decreased for the same reasons mentioned before, overall slightly lower interest rates and a more favorable financing structure. The tax rate was 37%, beneficially impacted by German tax reform. Again, that came on January 1st of this year. Net income was $603 million, up 16%, and very much in line with our guidance of 12% to 15% EAP growth for the full year.

On slide 21, you see the EBIT margin development for our segments. North America achieved an EBIT margin of 16.7% in Q3, representing a slight decrease of 30 basis points versus the same period in 2007. The EBIT margin was supported by organic revenue growth of 5% in dialysis services and continued strong demand for almost our entire product portfolio, shown by the revenue growth of 11%.

These factors were slightly more than offset by the increased Heparin costs and other cost increases in North America's service business, such as personnel, energy and costs associated with the implementation of our new medical and billing system. In particular, the personnel costs were also impacted by some nonrecurring items, in particular the two hurricanes that we had during the quarter and the additional costs that we incurred to support our operations during that time. We also had higher depreciation expenses, energy and raw material costs in the products business in North America.

In international, our EBIT margin was reduced to 16.1% in Q3 compared to the same period in the prior year. Higher growth in dialysis services based on newly opened clinics resulted in startup expenses and margin mix effects. We saw also a bit of unfavorable currency effects in the Asia-Pacific region related to products we purchased from Europe for Asia-Pacific and denominated in euros.

In addition, the higher deprecation expenses associated with capacity expansions and in particular the normalized summer maintenance program in Europe affected the international EBIT margin. We believe a lot of these factors are, to a large extent, temporary effects, in particular the summer shutdown effect, as the ramp-up of production and patient growth in new clinics will generate benefits for the years to come.

Now, turning over to slide 22, we'd like to give you some further insight regarding our development of DSO, or days sales outstanding. In international, DSOs were at 108 days and thus stayed in the band that we've become used to seeing in the last number of quarters. In North America, we were able to reduce DSO by one day and expect further reductions going forward as the drivers of the increases in DSO that we saw, especially during the first half, become less important.

These factors were in particular the implementation of new national patient identification numbers and associated administration problems at Medicare resulting in payment delays. And second, the ramp-up of receivables in Mexico due to our successful participation in the tender for peritoneal dialysis products.

Combined, our worldwide DSOs remained at 77 days in Q3 compared to Q2, where we saw a one-day reduction in the same period of the prior year. During the first nine months of 2008, DSOs increased by four days compared to a one-day reduction during the same period in the prior year. These developments on DSO affected our cash flow, which I want to discuss next.

On slide 23, we show our cash flow development in Q3. We achieved cash from operations of $315 million, representing 12% of revenue, which was clearly ahead of our target to achieve cash flow in excess of 10% of revenue. Drivers of the strong cash flow from operations were higher earnings, reductions in inventories and other working capital items, while increases in accounts receivable were partially offsetting. Compared to the prior year, cash flow in Q3 was lower primarily due to the previously discussed increase in DSO and some increases in other working capital items.

In line with our investment plans to expand our service business and our manufacturing capacities, net capital expenditures increased to $160 million in Q3. As a result of these developments, free cash flow was $155 million in Q3. Our acquisition spending net of divestitures was $39 million and reflected primarily the purchase of dialysis clinics and licenses. All this resulted in a free cash flow after acquisitions of $116 million.

For the first nine months, on slide 24, we achieved cash from operations of $716 million, representing 9% of revenue. Cash from operations in the first nine months was affected mainly by increases in receivables and the replenishment of our inventories after we had exceptionally low levels due to our manufacturing capacity constraints last year.

Our net CapEx was $493 million in the first nine months, ahead of last year and related especially to investments in future growth opportunities such as manufacturing expansion, primarily in North America and Germany to meet the continued strong demand for our products, as well as generally the expansion of our service business. Accordingly, free cash flow was $223 million in the first three quarters of 2008. Acquisition spending net of divestitures was $130 million and reflected mostly the purchase of clinics and licenses. This resulted in free cash flow after acquisitions of $93 million.

With that, let me come to slide 25 to show how our debt and the debt to EBITDA ratio has developed. On the left-hand side of the chart, you see that our debt level increased by $106 million to $5.748 billion at the end of Q3 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 $2.1 billion more than offset the higher debt so that our debt to EBITDA ratio, our leverage ratio, improved from 2.84 at the end of 2007 to 2.71 at the end of September. With this development, we already reached our guidance for the year end 2008. We believe this is a comfortable leverage level in these more volatile times in world financial markets.

Before wrapping up, let me, on the following slides, discuss how we think about two important issues, foreign currency effects and liquidity management. First, as we are reporting our financial statements in US dollars, the weakness in the euro and some other emerging market currencies against the US dollar present challenges for our reported results. The key issue in this respect is translation, meaning the conversion of local currency earnings into US dollars. Our largest translation exposure relates to the euro. We have also seen weakness in some other currencies.

When currency exchange rates change gradually over time, our exposure is moderated, as we're able to mitigate some of the effects of currency changes through initiatives such as changing product sourcing from one country to another or one region to another or by entering into hedging contracts. Speed and magnitude of the recent changes may temporarily reduce these mitigating effects.

However, as our underlying business is strong and on target, these translation effects do not give us too much concern. In addition, there are some offsetting favorable currency developments and the stronger US dollar should also benefit our valuation due to our large US business.

On chart 27, you can see how far the euro has weakened against the US dollar just in the last few weeks. We, as usual, monitor currency developments very closely and due to our diversified cost base, as well as our diversified revenue base, have natural hedges and can over time take steps to mitigate even very strong currency movements.

Turning over to slide 28, the other very important topic in the current financial environment is our liquidity situation. Here, we feel quite comfortable. Our liquidity is secured through medium and long term financing. We have a very strong bank group, which is able to fund when needed and there's no near term refinancing need following renewal of our AR financing facility in October.

As a result, we currently have almost $900 million in unutilized lines available. Our financing is also not subject to the increased spreads we currently see in the market, as most of our spreads have been locked in before the crisis at much more attractive levels.

On chart 29, we provide you with the details of our unutilized financing facilities as of the end of September. The largest unutilized facility is the revolver, which is a key component of our senior credit facility and has $652 million of availability at the end of September. This source of liquidity is fully committed. Our subsidiaries around the world also have approximately $230 million of lines with local banks available to cover their local financing needs.

Maturity profile of this financing structure is detailed on the next chart. Here on chart 30, you can see that there's no immediate refinancing need. The first moderate refinancing will occur in July of next year with the maturity of EUR200 million of promissory notes, also called Schuldscheindarlehen. We have just renewed in October in the midst of the crisis that we're in our accounts receivable facility. So in summary, we feel that we have sufficient liquidity available to comfortably cover our financing needs for our ongoing business and for our growth plans.

With that, let me move on to our guidance, and that's on slide 31. We discussed the challenges that we see especially related to currency translation. But despite this situation and due to our strong underlying business, we remain confident to be able to achieve our guidance of more than $10.4 billion in revenue and net income in the range of $805 million to $825 million, or 12% to 15% growth for the year. Our leverage ratio guidance is to end the year at below 2.8, a level which we already achieved at the end of Q3.

Capital expenditures are estimated to be between $650 million and $750 million and acquisitions between $150 million and $250 million. Combined, about 70% of our CapEx and acquisition spending will be for future growth. Our results for the first nine months confirm the good performance of our business are very much in line with our guidance for the full year.

This ends my presentation and we're now open to answer your questions.

Thank you very much, Larry, thank you very much, Ben. So, Maryanne, I think we can open up the lines for further questions actually on the call.

Thank you. (Operator Instructions).

We'll now take our first question from Tom Jones from JPMorgan. Please go ahead.

Oh, good afternoon. I actually have three questions. Ben, I was wondering if it might be possible for you to elaborate on the comment you made as regards your PhosLo [anti-generic sization] strategy of allowing one generic to enter. Just wondered if you could give us some more detail of the rationale behind that, why you think that was the best way to go in terms of creating shareholder -- or protecting shareholder value at least.

Secondly, just wondered if you'd care to make some comments on how you envision some key trends in your business, particularly payer mix and the commercial pricing environment, but also bad debt and some cost items in a more difficult recessionary environment maybe referring back to 2001 and the early '90s as an example as to how things panned out in that timeframe.

And then last of all, I just wondered on your thoughts of the possibility of an MSP extension cropping up again -- Kent mentioned on the DaVita call yesterday and given that it looks reasonably certain that the Democrats may have considerable power in Washington next year and they're going to look to be finding savings in Medicare. It seems to be a relatively easy option for them as a place to find some Medicare savings. Wonder what the possibility that you personally think of that cropping up again next year?

Okay, thanks, Tom. Back on the PhosLo, basically most of the information we had is that if you can control one to one generic rather than basically losing your patent structure in a court fight, if it turns out that way, and having multiple generics, we clearly believe that all the information we had is that this would probably keep the loss of business down in the 30% to 40% range. We also knew that we have the new product coming along and we're in this business mainly as a therapy and we feel we're in a good enough position now where we can actually offer -- with the same product we can offer an additional benefit to our pharmacies. So basically, that was the decision, let's go ahead with one generic and only one generic.

Now, the trends back in the early 2000, again, we didn't see any trend in terms of changing commercial mix. We did see basically a little bit of a shift in bad debt collections but we don't collect much of that anyway. And a lot of it is essentially -- basically 70% of it is paid back through the government. So, we have not seen over that particular recession, and that's the one I lived through, we've not seen any negative consequences to us in terms of -- in terms of our operations.

Now, you could certainly project that things might be worse than that and therefore there might be some changes. We monitor very closely our commercial mix. We've got an ultra-care program where we actually talk with the commercial patients on a monthly basis, assist them in getting Cobra if they need it. And so, we think that we are -- and we've seen no indications to date. So, we think that we're doing all the right things to allow these patients to continue to receive the benefits they should get from the plans that they've paid into for many years.

Now, so, I think if those were the first two, I can go on to the Democratic Congress. But so basically, we don't expect much effect, although we're clearly very vigilant and we're watching it very carefully. Now, what's going to happen with the Congress and if it shifts to totally Democratic, which is what the polls say, we believe there's going to be a lot of interest in cutting costs or saving costs to Medicare. We believe the fact that we had a bipartisan bill passed this year, which basically went a long way to reforming ESRD, that we won't be in the spotlight.

But we've got two approaches. One of them is that we're very excited about our demonstration project with the CMS that does show that we can save considerable money for them, costs for them, and yet have good patient care. And clearly, I think Kent is probably right. It's hard to handicap it, but if you're looking for basically revenue and if then clearly the MSP has been out there as a pay for [operator] a number of a -- two or three years now, so my guess is it will come back. But I couldn't handicap it at this point. So, but we've got a couple of approaches to deal with this cost pressure and one of them is the demonstration program and the other one is we've already had a bill passed for this year.

And just following up on the subject of the demo program, sort of looking at it slightly sidewise on the nutritional supplementation issue, do you think there's any prospect in the short term of altering the rather perverse systems where you're actually by law prevented from helping your patients in that regard? Do you think there's any reason that that could change in your favor in the short term or is that just dreaming on our part?

Yes, I don't think it will because it certainly can be abused very easily and I think the OIG's sensitive to that. So, I think it's -- it'll find its way in through basically the comprehensive bundle which CMS has talked about. So, I would guess the comprehensive bundle will come before that, okay.

Great.

Thank you, Tom.

Our next question comes from Gary Lieberman from Stanford Group.

Thanks. Good morning.

Hi, Gary.

Good morning, Gary.

You saw some really good revenue per treatment growth and you said that pretty much all that came from strength on the commercial side. Can you talk about that in a little bit more detail? I mean, are the negotiations more difficult, less difficult than they've been? Is there more pushback with regard to out-of-network contracts, if you could give some color there?

Yes, I'll try. But that's a pretty difficult -- it's pretty subjective on my view, but I'll give you my views, Gary. Appreciate any thoughts you have. Well, what happens is that, again, we have not used out-of-network as a business -- as a business plan. And I think that you're seeing healthcare costs in this inflationary period during the first six months of this year or let's say from the second to the eighth month that healthcare costs are projected to increase 8% to 10% next year.

So, our desire to get a mid single digit increase has not been -- it's not been easy but it's not been rejected. So from that standpoint, I don't think anything's changed in the commercial area and we're trying to provide value. If they want to do disease management or bundling with us, we'll accommodate them. So, we're trying to do whatever they want to do as long as the rates are proper.

Okay. And then, I guess just one follow-up question on the cost side. It sounds -- as clearly costs are a little bit higher in the quarter from a number of different items, some were onetime, sounds like some will be ongoing. Could you sort of quantify what percentage of the higher costs in the quarter from higher personnel or new billing will be ongoing forward and how much of that was sort of just onetime?

Gary, Larry'll take that. Go ahead, Larry.

Gary, I think the key one that was onetime was the hurricane impact. Just looking at the US, it was a relatively small part of the increase. I don't want to quantify the exact amount. Other costs will be remaining for some quarters, but we might expect them to moderate over time given the current environment.

And in there, I would include utility and energy costs, location costs, even personnel costs and potentially Heparin pricing are all cost categories that contributed to the third quarter cost increase that we might expect to moderate over a number of quarters. So, just the hurricane impact was the real onetime effect, but then some others that we could have some optimism about for the next few quarters.

And then, I guess since you brought it up on the Heparin side, what -- is it better utilization that might bring the costs down or some kind of alternative? What are you optimistic about there?

This is Ben. Well, what we have -- are in the process of optimizing our use of Heparin and we're not -- we're not through at this point, so that's clearly the one driver. And of course, there's always rumors that somebody will get back in the market. And again, that might have some benefit to us on the pricing. But it's primarily utilization that we're focusing on optimizing. And we're not there yet.

Okay, great. Thanks a lot.

Thanks, Gary.

Thank you, Gary.

(Operator Instructions)

No more questions?

There is no questions at this time.

Okay.

Well, we thank you very much. And again, we'll see many of you I think during the next few weeks on road shows. So, thank you very much for joining us and looking forward to seeing you in person. Thanks a lot.

Thanks, everyone.

Thank you. Bye-bye.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.