Fresenius Medical Care AG (FMS) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I am Brock, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care earnings call on the third quarter 2015. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. (Operator Instructions). I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Thank you very much, Brock. We would like to welcome all of you to the Fresenius Medical Care earnings call for the third quarter and nine months of 2015.

As always, I would like to start out the call by mentioning our cautionary language that is in our Safe Harbor statement, as well as in our presentation and in all the material that we've distributed today. For further details concerning risks and uncertainties, please refer to these filings, including our SEC filings.

With us today, again, is Rice Powell, or CEO and Chairman, and Rice will give you a general business update and go through some of the highlights of the quarter and the nine months. We also have with us Mike Brosnan, our Chief Financial Officer, who will cover the financials. With this, Rice, that's my intro. The floor is yours.

Thank you, Oliver. Welcome, everyone. We're delighted to have you join us today. We appreciate your interest in Fresenius Medical Care and our third quarter results.

I think my storyline today, as I begin my prepared remarks on slide number 5, the storyline is simply great execution. It's been a very strong quarter for us. People worked their plans. They had good plans. And the results are there for you to see in the operational performance.

I think the four key things I would mention for the quarter; North America, outstanding performance. They had a huge contribution to the improvement in their own earnings, as well as the overall global company earnings, and margin improvement is great as well. And we'll talk more about that as we move through the presentation today.

Our international businesses were impacted in the third quarter, as they were in the second quarter, with foreign currency. You know that. We've talked about it before. And, also, we had some one-time items that we had mentioned to you back in July, as Mike and I took you through the second quarter. We'd given you a heads up on those items. But I think we have performed as we expected that we would, given the headwinds with currency.

Care coordination has continued with good growth. We're making progress in the integration activities and we feel good about where we are at that point.

And I would say to you, my last point on slide 5, is simply our outlook for 2015. We are confirming it. And Mike will talk to you about it as well. We're confirming the projections for 2016 and we feel good, at this point in time, about where we are.

Turning to slide 6, looking at our revenue breakdown, I think we see good performance, again, in the quarter; 9% constant currency growth, slightly over $4.2 billion for the global enterprise; organic growth of 6% for both North America and the international segments; 11% revenue growth in North America and 5% constant-currency growth on our international book of business. And you can see on slide 6 the breakdown of the individual international businesses; their constant-currency contributions as well as their organic growth.

I think if we take a moment and look at slide 7 and just take a bit of a look at our infrastructure for the service business nine months through the year, as I generally do, I'll give you the three key figures that are important to us; treatment growth up 5%, patient growth up 3%, and then the clinic base to support those treatments and patients up 2% at just above 3,400 clinics on a global basis. And, again, you can see 33 million treatments delivered around the world through nine months of the year. And you see our patient count at just shy of 300,000.

If we turn to slide 8 and focus on our healthcare revenue, I think two things are worthy of noting here; at $3.4 billion in the quarter, constant-currency growth at 10%, organic growth at 6%, and same-market growth at 5%. Obviously, you know that the 5% same-market growth is a nice improvement for North America. Traditionally, they've been running around the 4% mark and now they've moved up, more similar to what we've seen internationally, at 5%.

And I would highlight for you when you break down the constant-currency growth, 6% is very good in international given these headwinds that we're facing. 12% is outstanding for North America. And then focusing on care coordination; $480 million in revenue in the quarter, 56% constant-currency growth and organic growth of 17%.

Now, turning to slide 9 and taking a moment to look at the external book of business with our products portfolio at $829 million in revenue in the quarter. You can see that we're driving 2% constant-currency growth and, respectively, 3% in both North America and international.

I think in order to give you a little perspective on this, let's take a look at FMC's performance as we look at it against our most, probably, comparable competitor, which is Baxter. They announced, yesterday, in the third quarter they had 1% constant-currency growth. We sit here today at 2%. And then, looking at the nine months year-to-date figure, they were at 2% constant-currency growth and we are at 7%. And those figures for the nine month are in our presentation somewhere in the back there. You can look at that. But, again, we're greater than three times their nine-month data.

I would say to you when we look at the products, we feel good about where we are. We see good growth in machines, dialyzers, good PD growth in North America, great growth on machines in Asia-Pacific. A couple of tenders have not come to fruition yet in the EMEA region, but we have no reason to believe this performance is not rational for somewhat, I would say, of normalization, given how high we've been in the earlier quarters of the year. But we're comfortable with that performance as we sit here today.

My last slide and my summary slide, I think three points. I've already made them, but I'll make them again.

Impressive performance in North America. If you've gone through the segment reporting, you've seen that in the United States revenue per treatment was up 1.4% and the cost per treatment in down around 2.5%. So we've crossed the area that we needed to cross in order to show improvement in the dialysis services business in the United States.

Our experience with Mircera is going quite well. At the end of Q2, I had told you we had 42,000 -- 45,000 or so patients that had multiple doses of Mircera. As we closed out third quarter, we're now around 77,000 to 78,000 patients with multiple doses of Mircera. Patients are doing well. The drug is safe. It's efficacious. Clinicians are happy to administer the drug. So we continue to move forward and feel comfortable about the experience with Mircera.

And, again, my last comment on the international business, we've talked about the influence that the foreign exchange headwinds are having on us. We've talked about the divestitures that we had within the quarter. And we've basically said for you that normalized growth in the products business for Q3 we think makes sense given the outperformance that we saw in the first half of the year.

And, with that, I'll stop my comments at this point and gladly turn it over to Mike and let him continue on.

Great. Thank you, Rice. Moving to chart 12 and just continuing with the discussion of the full P&L. Rice spoke in detail about the revenues so I'll move to the operating income.

The operating income, as you can see, we're reporting both before and after the one-time items that we described in the investor news we distributed this morning. So, operating income increased $24 million to $614 million in total. We're up roughly 4% over last year. And when you adjust for one-timers, that's $31 million and about a 5% improvement.

Margins, year over year, increased 20 basis points before and 30 basis points after, considering the one-time adjustments. And I'll talk in more detail about the performance of the operating segments in a few minutes.

Net interest expense increased $1 million, very slight. That is the result of higher borrowed balances at lower rates. And taxes, you can see, doesn't show much impact year over year; a 10 basis point change at 32.8%. But as I indicated in the second quarter, I'd anticipate my effective tax rate for the year to be at the low end of the range I provided of 32% to 33%. The rate you're looking at in the third quarter is influenced by the fact that the divestiture of Venezuela, the loss was not tax-deductible. So that bumped up the rate in Q3 of 2015.

Non-controlling interest, the major portion, as you know, of non-controlling interest is in North America. The international regions, combined, have only about $3 million of a $284 million line item. And the non-controlling interest is tracking, generally, to the development of operating earnings in North America. As a consequence, net income, at $262 million, is down slightly unadjusted. And when you look at the effect of the one-time adjustments, you can see a 2% increase in net income for the quarter at $284 million.

So, moving to the next chart, chart 13, and looking at the performance of the segments. The year-over-year margin adjusted for one-timers, as I said, increased by 30 basis points. If you look at the weighted contributions of the various regions towards that, you can see that North America contributed 130 basis points to that improvement and the international segments, in total, were down, contributing a negative 70 basis points, with about 50 basis points coming from Asia-Pacific, 10 basis points from EMEA, and 10 basis points from Latin America. Corporate costs reduced margins overall by 30 basis points.

In North America, operating margins were up $102 million to $515 million. Margins increased, when you measure against North America alone, 190 basis points from 15.2% to 17.1%. And the margins were influenced by the dialysis business, obviously, with a strong margin increase and strong growth in our care coordination business at comparatively lower margins. Delivered EBIT was up $77 million or 22%.

The dialysis business operating margins improved 260 basis points from 15.6% to 19.1%. This was largely due to lower costs for healthcare supplies, a favorable impact from commercial, partially offset by higher personnel costs and increased consulting costs and legal costs due to the GranuFlo litigation and the FDA remediation. Delivered EBIT was up $68 million or roughly 20% in the dialysis business.

Care coordination earnings were up $16 million or 91%. Year-over-year margins increased from 5.6% to 6.8% in the quarter due to the favorable impact from our cardiovascular and endovascular specialty services, pharmacy services, as well as the hospitalists and the intensivists services we provide. This was partly offset by an unfavorable impact from the non-dialysis laboratory services business and the lower margins in the urgent care business. Delivered EBIT was up $9 million or 69% year over year.

So, moving to the international segments, I'll talk about all three, which we've been reporting since the first quarter, and we still provide this summary information for your convenience in the investor news. As Rice indicated, and before I enter a discussion about each of the individual reasons, the margins were affected in all three regions by the impact of foreign currency developments.

We had a similar experience in the second quarter, which we discussed in detail at that time. But the foreign exchange has continued to show some volatility. Obviously, when you look year over year, we're affected by the stronger dollar that developed, really, at the beginning of this year, in comparison to the euro and the devaluation of the renminbi. But we're also seeing increased volatility in some of the secondary currencies.

EMEA was down $29 million or 19%. The unfavorable currency effect more than explains this decrease and overshadows the operating performance. Margins decreased from 19.2% to 18.5% or 70 basis points. The unfavorable FX effect was partly offset by lower project costs and a favorable impact from manufacturing, which was delivering savings related to materials and efficiency improvements. Our delivered EBIT in EMEA reflects a similar growth rate to operating earnings.

Asia-Pacific was down $22 million or 25%. Here, also, the unfavorable currency effect was higher than the decrease in operating earnings. The margin was also impacted by increased costs associated with further developing our sales models in the region, a slightly adverse impact from manufacturing due to lower volumes, and this was partly offset by the positive effects of our acquisition that we accomplished mid-year last year and favorable revenue rate developments in some of the countries in Asia.

Latin America, excluding the divestiture of the dialysis services business in Venezuela, decreased by $10 million. And this was largely a consequence of the inflation in the region, an unfavorable impact associated with manufacturing, and the FX effects that I mentioned a few minutes ago.

Corporate costs, excluding the effect that we had in 2014 associated with the closure of a small manufacturing facility, we had an increase in corporate spending of $10 million or about 30 basis points. This increase was largely due to legal and compliance costs.

Turning to my next chart, 14, and talking a little bit about our cash flows. You can see a small bullet point at the top of the page. Our days sales outstanding have been stable at 71 days worldwide. When you look at our operating cash flows, we're continuing to show strong performance at $1.4 billion in operating cash flows or roughly 11.4% of revenues on a year-to-date nine-month basis. Our debt levels are consistent with our guidance and coming in at 2.9 times and there is no change in our credit ratings, as you can see on the bottom right-hand side of the page.

Turning to chart 15 and looking at our outlook. As Rice indicated, we are confirming the outlook for 2015 with a revenue increase of 5% to 7% in current currencies or a 10% to 12% constant currency, and the increase in net income with a range of zero to 5%.

For clarity, the sale of the European marketing rights for some of our renal pharmaceuticals to the Vifor Fresenius Medical Care Renal Partnership is being recognized as those rights are transferred at the country level. Therefore, we do anticipate additional gains, in line with what we said in the second quarter, showing up in the fourth quarter of this year.

As a reminder, we had indicated in the second quarter that we had two one-time effects; one being the divestiture of Venezuela, which was accomplished in Q3, and you see the loss associated with that. And the other being the sale of the marketing rights. You can see that we realized some of those gains in Q3 but we expect to realize the balance, consistent with my guidance, in Q4. We're also confirming our projection for 2016, as you can see on the page; revenue growth of 7% to 10% constant currency and growth (inaudible) of 15% to 20%.

And, with that, I'll turn the call back to you, Oliver.

Great. Thank you, Mike. Thank you, Rice. And I think, Brock, we are now ready for the Q&A session.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator Instructions). Alex Kleban, Barclays.

Yes, hi. Thanks for taking the questions. I guess I'll ask three. First one is; could you give us more color on the U.S. cost per treatment bridge from last year into this year in terms of absolute numbers for increases in wages and operating costs versus the favorability on pharma and supplies?

Second would be; can we get a steer on the -- what do call it -- on the associated income coming into the P&L that you're going to expect from Vifor into this year and into next year, just to understand where the split on the Mircera between what's getting booked to Vifor and what's going straight into the P&L?

And then lastly, just to ask about how things concluded in your mind with the dialogue with CMS around the draft proposal and if you have a better sense now of, in a worst-case scenario sort of if the draft were to go ahead unchanged and become final what kind of impact would you be thinking about and what kind of favorability you get from case mix adjusters based on the initial proposal? Thanks.

Thanks, Alex. It's Mike. I'll take the first two. In terms of the cost per treatment bridge, as we've said, on the actuals year over year, we've said pretty consistently this year that we anticipated, obviously, some effects with regard to our ESA strategy and that we also were dealing with a year where there was no increase from CMS with regard to Medicare patients so we had to mitigate costs of the increased payable costs year over year. So, the story in Q3 is consistent with that, particularly when you look year over year. We're seeing both of those effects in the numbers.

In terms of providing any additional granularity and looking at numbers going forward, it's been a number of years now that we haven't provided detailed guidance on revenue or cost per treatment. So, we're going to continue in that vein.

Your second question with regard to a parsing out Vifor versus what of the pharma will show up in North America, the same answer really. We haven't really provided that level of granularity in terms of guidance so we would let the numbers speak for themselves. And, obviously, both elements of the pharma strategy are included in our guidance for 2015 and the projection for 2016. Rice?

Yes, Alex. It's Rice. On the draft proposal from CMS coming out here, we assume, probably any day now, what I would say is we are expecting it to be, in general, as it was proposed. We've not heard or seen anything in the halls of D.C. that would tell us it's going to be radically different. So we think if it comes through, generally, as proposed, we should be okay.

As I said back in Q2, we were a little surprised at the amount of attention the case mix adjusters were getting. We put that in our commentary back to CMS, but we'll see what they come back with. But, if it comes, generally, as advertised, I think we'll be fine.

Okay, that's good. Thanks. I'll get back in the queue.

Veronika Dubajova, Goldman Sachs.

Good afternoon and thank you for taking my questions. I also have three. The first one is just on the North America same-store treatment growth. It was very impressive this quarter. I guess, Rice, I just would love to get your thoughts as to how sustainable you think that is going forward. Are there some benefits of some contracting work maybe that we shouldn't be extrapolating? Just kind of your general thoughts on that, that would be great.

My second question is on care coordination. And, not to be nit-picky, but the growth rate was only 17% in this quarter versus 30% at first half. I guess, presumably, this is just as you're normalizing the business a little bit. But, to the extent that you can talk about how we should be thinking about that growth rate for the rest of the year and then medium term, that would be fantastic.

And last one for Mike on GranuFlo. Any update on the litigation there and when we might have further visibility into pace of settlements and any provision you may have to take? Thanks very much.

Yes, Veronika, hi. It's Rice. I'm going to do one and three. I'll let Mike handle two. But, yes, when you look at same-store treatment growth, we're pleased with that. I think, generally, you're asking me if it's sustainable. I would say that we're generating that performance from really good door-to-door blocking and tackling and trying to make sure that we're being as aggressive as we can be in the way we approach this. I think that we're in a good place. I think there's a bandwidth there. I'm not going to be too specific on that. But we've worked hard to take it from 3 to 5. I think if we're in that 4 to 5 range, it would make sense for me. But, at this point, I think that's probably the way I would leave it with you.

And I think on care coordination and the 17% growth, Mike, I'll let you handle that one and then I'll come back around on the GranuFlo litigation.

Yes. Yes, Veronika, I'd say most of this is just the seasonality in some of those businesses. But, I would remind you that the organic growth is the legacy care coordination businesses so it has nothing to do with the businesses that we acquired during calendar year 2014. So you're looking at the vascular business, you're looking at the pharmacy, and you're looking at the non-dialysis laboratory business. I commented in the care coordination overall remarks that we are seeing some softness in the laboratory business this fiscal year. So, I think that's probably accounting for a good portion of the drop in the organic growth that you're referring to.

Yes. And on the GranuFlo situation, what I would tell you is, as we talked to last time in Q2, we had anticipated and were planning for a trial in St. Louis in September for some of the cases that did not get swept into the multi-district litigation. Those cases did not happen. Plaintiffs decided to not bring those trials forward in September, as they had been scheduled. So they have been pushed out in time and we'll see where that goes.

So, probably, the next most important bullet point for us to think about is we are scheduled for trial in suburban Boston, in Waltham, to be exact, November 30th. That is Judge Kirpalani's court. These are a few of the cases that did not get put into downtown Boston, into Judge Woodlock's court.

So, we're in a place now where November 30 we start the suburban trial. I can't even begin to tell you how long that could or couldn't go. We're scheduled for the largest portion of the multi-district litigation in Judge Woodlock's court, in downtown Boston, and that is planned to start sometime in the early days of January.

That's great. And can I just quickly ask as a follow-up on the care coordination, Mike, maybe can you give us a sense of the businesses that you have acquired how fast are those growing organically? I mean it's not organic growth for you, but if you can just give us a sense, that would be quite helpful, as we think about modeling care coordination going forward. And then I'll jump back into the queue. Thank you.

Let us think about that for a bit. We'll come back to you, Veronika.

We're going to look it up, Veronika. We've got some data sitting in front of us. Give us and we'll come back to you on that one, okay?

Thanks.

Sure.

Ian Douglas-Pennant, UBS.

Thanks for having me on. I wonder whether you could just say a few words on the alternative payment model for dialysis CEC that's recently started a kind of trial program.

Also, on your care coordination acquisitions, and we've seen many fewer and smaller-scale acquisitions this year versus last year, could you just update us on why that is and whether you expect that rate of acquisitions to pick up again either this year or next year. Thanks very much.

So, Ian, it's Rice. Let me just make sure. On the alternative dialysis payment, you're talking about ESCOs?

Yes, exactly. Yes.

Okay. Yes. With the ESCOs, what update I can give you is that we did finally get the program started in October 1st. So, it's a fourth quarter program. We offered to participate and we were accepted in six sites; Chicago; Charlotte, North Carolina; and Columbia, South Carolina. I believe it was Dallas, Texas -- and, oh, Philadelphia and San Diego. So, that's where we sit today.

Keeping in mind the way that program is structured, there is a 90-day window that we have the ability to decide whether we stay in all of those locations or not. And there's not much more I can tell you than that. We're in the midst, right now, of beginning the program so we're looking to see where that is. We have very little data at this point.

And then, can you just repeat your second question? I had a little trouble. You cut out a little bit on that. I know it's care coordination related, but I couldn't get all of it, Ian. If you don't mind, please.

Sure. Sorry, if you don't mind, one follow-up on the ESCO question. What changed there? Because I mean you didn't seem happy with the original plan as proposed. What's changed to make you willing to move forward with that trial?

And then, the question on care coordination was around the rate of acquisitions. We've seen that rate of acquisitions slow down materially in 2015 versus 2014. Why is that? And should we expect that to pick up this year or next year?

Great. Thank you. Well, let's say participating in the ESCOs doesn't mean I'm personally happy about it. So, I would say it this way; we still think there are some issues with the construct of the way it was set up. However, we do think if the government is going to go forward with that flawed scenario, if you will, that we should participate so we can really test and understand if our concerns are real or not. So we're doing this on a small, small basis here to see how we get started.

But I still do think and I believe the team in the U.S. feels that there's just some structural issues in the way it's set up. But we're going to try to do our best. We're going to participate. We'll see where we go over the next 90 days or so and then make some decisions about whether we're in with all six locations or not.

I think on care coordination and the rate of acquisition, I would say to you that; yes, it's quiet at this point because we're working feverishly to integrate what we did. Let's keep in mind that we spent over $1 billion acquiring these assets. We need to make sure that we've got them integrated and they're functioning where we want them to.

So, we continue to look. We'll continue to be opportunistic. But I think you also have to appreciate that we are also looking not just in the U.S.; we're looking globally. And we also look at acquisitions in the core business as well. So, just because we're not doing something today doesn't mean we're not looking. And we'll have to kind of go from there. And, Mike, do you want comment on that?

Yes. I was just going to add to your remarks, Rice, and say that the other thing we do pay close attention to is valuations and carefully look at how much we're paying for the assets that we're considering. And, as you know, we moved very quickly in 2014 after our capital markets day to make what we feel were great additions to the portfolio. And the way valuations in healthcare services have taken off this year, that's also something we factor in, in terms of when we would consider doing larger deals.

Great. Thanks very much. I want to ask about the star ratings as well, but I'll jump back in the queue for that. Thanks.

Sure.

Gary Lieberman, Wells Fargo.

Good morning. Thanks for taking my question. Two questions. Just to clarify; the 78,000 patients on Mircera, that's all in the U.S. or is that internationally?

Gary, it's Rice. No, that's all in the U.S. That is just U.S. only.

Okay. And so, with 180,000 patients total, sort of where do you think the upper limit is to the number of patients that you think you can get on Mircera and over what timeframe?

Well, let me give you just some large, ballpark numbers. Keep in mind that, of our 180,000 patients, there's a certain subset of those patients that do not take EPO at all because they really are in a fortunate situation where they don't need the help with their hemoglobins. And so, you have to back that out. And then, from there, you have to kind of look at; where do we go beyond that point?

I would tell you we still have room with where we are today, rather than being too specific. There's still room to be made. We still have patients on the Amgen products, both Aranesp and EPO. We'll see how that rolls out over time, as well. But, as you and I've talked before, we're just continuing down the path. We'll continue with more patients. But I do think folks have to keep in mind that there are some number of patients in the industry that do not require any type of ESA; be it ours, Mircera, Amgen's, whomever.

That's helpful. And then, to an earlier question, just in terms of the way that it's running through the P&L. I appreciate that you don't want to give too much detail. But the way that it's running through the P&L now, is that the way that it's going to stay or are there any changes that we should expect to see where it gets booked?

Yes. No, I mean the way we're reporting today is the way we will go forward. We're not doing anything differently. We're working through the JV, as we had told you guys. So this is going to continue as it is today. There shouldn't be a change there.

Okay. And then, last question, separate topic. There's been a lot of activity in the U.S. sort of in the broader care markets sort of with the acquisition of IPC, or the expected acquisition of IPC, and AMSURG's hospital bid for TeamHealth. So can you comment on any impact that might have on your broader plans or anything that you've seen in the market, maybe, because of that?

Yes. No, I don't think so. I mean when we consider the IPC team combination, we were competing individually against IPC so we don't see that coming together as necessarily anything that's going to change our strategy or make us react or conduct our business any differently. As you know, our history is we take all competition seriously. But we don't see it being something that's going to make us radically change what we believe our strategic plan should be and how we want to approach this in our care coordination activities.

Okay, great. Thanks very much.

Sure.

I'll take the break just to address Veronika's last question.

Okay.

And I think that, because I appreciate you're doing a certain amount of modeling on care coordination in the aggregate, I think something in the mid-teens is probably a reasonable expectation for organic growth, as all of these businesses seasonalize into the organic calculation.

Tom Jones, Berenberg.

Good afternoon. I had a couple of questions. The first was on your kind of insurance-type business. There was a pretty substantial jump in medical months under management and medical costs under management between the end of Q2 and the end of Q3. It's a bit of your business which doesn't really seem to get a lot of attention, but it's growing furiously. So, some further color on what you're doing there and why and how you think that might develop would be interesting.

And then, secondly, I just wanted to pick up on something Mike said. He said the Asia-Pac margin was hit by some additional spending you're doing, developing sales models in the Asia-Pac region. Is there anything you can add or elaborate on in that context?

Sure, Tom. Hi, it's Rice. Mike, go ahead, if you want pick up Asia-Pac on the comments you had there. And then, I can come back around on the medical months.

Yes. Just nothing extraordinary. It's not the largest region so we just continue to look at investments in the salesforce and investments in our distributor network in that part of the world to make sure we're being effective in all the countries with maximizing our sales opportunities.

I see. Okay.

Tom. Hi, it's Rice. I think, really, what we're looking at here under the medical months under management and the huge growth is just as we're continuing to build that business and with the year-over-year comparisons, we're just getting huge numbers.

But what I would tell you is we are still working on licenses. We know where we want to be. We're moving forward. I think you and I had a conversation about this in Q2, where you had asked me; where were we focusing, particularly in the C-SNIP (ph) area? And let me come back and tell you that we are in Arizona. We're in North Carolina and California, particularly Southern California. We're at somewhere around 900 gross patients. And I say gross only because there will be some dropouts so I think you have to really consider somewhere 700 -- between 900 because there will be some dropouts.

So, we are moving forward with that. We know where we would like to go with licenses in the next year. I'll leave that on the table for the moment. But I think we're really just working the plan, trying to get ourselves set up to be ready to go in an effective manner.

Perfect. And then maybe one follow-up question, if I may. On the Shiel business, on the non-dialysis lab business, I mean you bought this back in 2013, I think, and basically stopped talking about it after a quarter and now you're talking quite negatively about it. What are your kind of thoughts about that business? Is this something it's kind of, perhaps, where we should be, perhaps, thinking about you exiting this business or is that a little bit aggressive at this stage?

No, Tom. Let's be clear. Mike's the one that said something bad about Shiel, not me. No, no. I'm kidding. So, a couple of things. And you're right. We did this acquisition at the very end of 2013. But, at the time, we kind of laid this out, but let me refresh it.

If you remember when we did this, we really thought it was a way for us to leverage the dialysis lab asset that site in New Jersey. And across the Hudson River sits the Shiel lab business in the Navy Yard in Brooklyn. And that was to be a three-year plan because we had to basically expand and re-do the New Jersey location of FMC.

That's coming to a close. We're now ready to start moving out of the location in Brooklyn and move those testers and that equipment into a bigger space and see some leverage on those assets. So, that is still within the scope of timing that we gave you. We're pretty much on track, but it was kind of a long road, if you will, before we really we're going to see some improvement there by leveraging that asset.

And then, secondly, the other thing on the sales line -- two things that really impacted us. One is we had a large payer that came in and drove a fairly significant rate reduction for us that we had to deal with. And so, that's hurt us on the sales line.

And we've seen a little bit of the sales model shifting from, traditionally, what has been door-to-door, physician office, hospital selling to, now, because of ACOs and people grouping together and health systems and the consolidation coming in that New York to Philadelphia corridor right there, it's a little bit different sale. It's a bigger system sale than kind of the door-to-door. And we're taking some time to understand that. We probably could be doing a better job there.

But it's kind of a combination of things. But, clearly, within the realm of what we had expected in terms of the operating details, on getting two facilities into one building, Tom.

Sure. And just from your comment about people kind of grouping up and shifting from apart to more organized customers. Should we be thinking about some ongoing and sustained price pressure in this business or is that not the right way to think about it?

No. Well, I think two things. I think we always expect some price pressure from the larger people coming together, kind of as a sales guy, as I used to be, You're out. You're dealing with customers. And they have different pricing among themselves. And then, when they come together and they merge, they kind of look and see who had better pricing and you have to answer for that. So there's a little bit of that pressure that's going to go on. So I think it's very rational to consider there would be some pressure there. But we should be able to work our way through that.

Okay. That's perfect. Thanks.

Michael Jungling, Morgan Stanley.

Thank you very much. I have three questions. Firstly, on the U.S. dialysis treatment, I'm sort of more interested in the sequential decrease from Q2 to Q3. Can you sort of provide some indications why it has fallen $14 and is there scope for this to fall further in the fourth quarter?

And question number two is on Mircera. And do you have access to enough Mircera if you were to move very quickly in 2016 to virtually all of your patients being on Mircera. Is there enough supply for you to be able to do that, potentially?

And question number three is on Japan. And can you update, please, on your activities there and the prospects over the next 12 months? Thank you.

Sure, Michael. Mike, do you want to take one? And I'll pick up two and three.

Sure. Yes, Michael, sequential quarter, not surprisingly, the change does reflect pharma including Mircera. It also has in it the effect of one more dialysis day and some of the other operating efficiencies we've been working on for some time now, in terms of cost containment and GEP.

Relative to our ramp in cost per treatment, I'm going to come back to what I said at the beginning of the call. We haven't guided at that level for probably four years. I think the important thing is we're getting very good execution, as Rice commented when we started the call. And we provided two years' guidance to help people bridge 2015 and 2016 into the bigger picture associated with our 2020 plans. So, our expectations, in terms of pharma as well as our other revenue and cost considerations, are in the guidance for 2015 and the projection for 2016. And I confirmed those earlier.

Yes, Michael, on the supply with Mircera, let me try to say it this way. When we began the process of looking at the drug and moving patients to the drug, we had X capacity to be able to do that. And we knew that we weren't going to get it exactly right because we were really doing dose studies, trying to figure out exactly what the dose is going to be, and how is the supply going to play out.

What I would say for you is we find this to be a very efficient drug. We are seeing that the supply is going to be more than we had initially thought just as we move through and dose patients and seen what responses are. I can't really get into and I'm not going to get into exact volumes and do we have enough, do we not. I've got some confidentiality things I have to maintain there. But what I would say to you is we went into this with one assumption of what supply would be. We're now seeing that that supply is going to be a little better than we thought because we're more efficient with the dose. But let kind of leave it at that, at the moment. I don't want to get myself in trouble with my partners.

And then, relative to Japan, I would say there has been no change; meaning that, as we talked about the draft proposal for foreign ownership of facilities, we've, to my knowledge, not seen that come forward. It's not up for a vote yet. But the book of business that we've had now for a while in Japan is running well and we're maintaining that at this point.

Okay, thank you. And, Mike, in terms of the sequential decrease in cost per treatment, I mean Mircera, the increase in patients happened also in Q1 and in Q2 and the improvement in the cost per treatment was $2 and now we've got $14. So something happened sort of in the third quarter, which is a huge step up. And given that you've sort of indicated to us you've gone from maybe 40,000 patients to 70,000 patients, all these changes seem to be kind of similar between Q1 and Q2 and Q2 to Q3. So I'm still a little bit confused as to why there is such a large great benefit in cost per treatment in the third quarter.

Yes. No, I understand. And I think Rice, as he reported out, particularly I think you're focused on the patient count that he reported in Q1, Q2, and now in Q3. And what he was indicating was the number of patients that had had at least one treatment with more than a single dose. And if you think about the way those things ramp in a patient population over time, if you're at 45,000 patients at the end of the second quarter, then, obviously, you're going to get most of the benefit associated with that once they've been on the treatment for the full quarter.

Hey, Michael. It's Rice. Certainly, draw whatever assumptions you would like, but, as Mike said earlier, there are other pharmaceutical efficiency things that we're working on. There are other drugs that we administer that we're making good progress with. And then, just generally, the efficiency program is bearing fruit as well. So, it is a multi-faceted endeavor. That's why I chose to say execution was the key word here because the guys and ladies in the U.S. are doing a great job at that multi-pronged execution.

That's very helpful. Thank you.

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the question. I have a couple for you guys. I guess, starting off with care coordination, which has been the topic of conversation this morning. Rice, we've seen some of these other healthcare service companies talking about staffing issues and also wage inflation. Just wondering if you guys are seeing any of that with your hospitalist business or any other parts of care coordination and your dialysis business. And then I've got a follow-up after that.

Sure, Kevin. So I would say two things. First, let me take it reverse order. Wage inflation is alive and well. We see that. We deal with it -- you well know that -- in our dialysis business and we do see that in care coordination as well. But I think we're managing it as effectively as we can.

On the staffing issues, what I would say; it has not been much of an issue in legacy Sound. They've had their own locums, recruiting group. They've done a very good job in being able to recruit and manage that. In the Cogent book of business that we acquired, they outsourced their staffing, their locums business. And, yes, temporary employment, we all know that you pay a premium for those people. But, as we've integrated Cogent and been able to start to bring that in-house, we'll be able to control that. I know that was an issue on the IPC call the other day and it makes sense to me. We saw that at Cogent as well. It hasn't been as big an issue with Sound because they just had a different structure and a different approach.

Sure. What about any of the hospital contracts that either Sound or Cogent have taken? Have you had any problems or disruptions with those hospital contracts?

What I would tell you; from my perspective, no. I've not heard or seen. I'm probably at a level that wouldn't know all the details. So, hopefully, you'll be in New York on November 18th and you can ask that question again. But I'm not hearing anything -- Mike is shaking his head as well -- that would tell us we've had a real issue there. But, fair game when we get the right guys in the room in New York.

That will be great. And then, just you talked about the 180,000 patients that you have and there's a subset that don't need EPO or ESAs. Is that just the PD population or could you help us understand that a little bit better, maybe quantify it, Rice?

And then, lastly, one for Mike on the guidance. It looks like your acquisition guidance -- and I might have missed this in your prepared remarks -- but it now is $300 million on acquisitions for 2015. I think last quarter it was $400 million. So, what's changed from last quarter?

Yes. So let's talk about the 180,000 patients. What I would say, Kevin, is; no, it is not just PD or home patients. There are patients that are hemo-dialysis in-center that do not require ESAs. We all have them; meaning we have them, DaVita would have them, U.S. Renal would have some. It's just the way people's bodies react and the way it goes. I'd like to refrain from giving you direct numbers on that. But it's a fact that that does occur.

And you will have some home patients that don't need it as well, but I just don't want you to think it's just the PD book of business. So, it does exist. It's not hundreds; it's thousands. And I'll kind of leave it at that. And let me pass it over to Mike on the guidance for acquisition spend.

Yes, Kevin, thanks. And I had intended to mention that when I went through the outlook, but just it slipped my mind at the time. Nothing in particular. As Rice indicated, we always have a very active pipeline of deals that we're looking at. It's mostly just the clock ticking for calendar year 2015 because you have our nine-month spend with regard to acquisitions. We're sitting here at the end of October and, when we look at what it takes to literally close a deal so it shows up in the spending figures, we thought $300 million would be a more appropriate number than $400 million for this year. So, it's just because we're getting towards the end of the year we thought (inaudible).

Got it. More of a timing. That's helpful. Thank you.

Exactly, yes.

I think we have time for about one more question. We have some other commitments, but I think one more question or two more questions should be actually --

Thank you. The next question is from Frank Morgan, RBC Capital Markets.

Good morning. I was hoping you could elaborate a little bit more on the BPC app program in terms of the update there and the dollars of potential billings that you have under that program. And then, I know, last quarter, you mentioned that you were waiting to get some data back from CMS. Just get an update on that as well. Thanks.

Hey, Frank. It's Rice. Yes, happy to give what I know as to be the update. Relative to data flow, data is flowing. It's still slow. It's a little better than it was when we spoke a quarter ago. I think the better to say it because we've kind of asked the question differently of our team there is; when are we going to have a better idea of cost and what's it look like? And they are telling me Q1 and that seems rational to me. I think you guys heard something similar to that yesterday with the IPC call or a couple days ago.

And then, in terms of what is the range of that, I'll get shot because I'm never going to get this right, but I would tell you that it's probably big enough that you and I could drive a truck through. It could be 400 million. It could be a billion. We don't know enough yet, when we're sitting here without understanding our cost and having to wait to Q1, to really get a handle on that and try to make some projections. It's a pretty wide range. So I'm going to ask you to defer and ask us that question. Maybe in New York you may get the same answer from the guys then. It may be that we need another quarter or we need to get into first quarter to try to give you a better range of that. But it's a range. We've put a pretty wide stake in the ground and I just don't know enough to tell you which way to tilt that range at this point.

Okay, that's fair. Thanks.

This concludes today's question and answer period. Please proceed with closing comments.

Great. Thank you very much, everybody. Thanks for listening today to the call and looking forward to talk to you soon. Thank you.

Bye bye, guy, ladies.

Bye bye. Thank you.

Ladies and gentlemen, the conference is now concluded. You may now disconnect your telephone. Thank you for joining and have a pleasant day.