Fresenius SE & Co. KGaA (FRE) Earnings Call Transcript & Summary

Good morning, good afternoon, everybody. I'm David Adlington. I head up the JPMorgan med tech team in Europe. It's my pleasure this morning to introduce Stephan Sturm and Markus Georgi, CEO and Investor Relations for Fresenius SE. Presentation is slightly shorter than most speakers, so 10 to 15 minutes, and then we'll open it up to Q&A. [Operator Instructions] With that, Stephan, thanks for joining us today, and over to you.

Thank you, David. Good morning, good afternoon, everyone. Happy new year. Thank you for joining. Your interest in Fresenius is much appreciated as always. The COVID pandemic has been and remains a net burden for us as a group, maybe counterintuitively, maybe surprisingly, that is why I am keen to pointing it out. Important words here are our excess mortality among dialysis patients at medical care, a reduced number of elective surgery at our hospital business, Helios, also as far as post-acute is concerned at Vamed. And driven by that, a lack of volume demand for injectable medicine which has, in fact, an impact on our Kabi business. But regardless, we managed to get our numbers over the course of the first 3 quarters of 2021. We even managed to improve the guidance that we had set for the full year '21 in February, clearly, with a different assumption at the time when it comes to the duration and the intensity of COVID over the course of last year. The new year is still fresh. And I have to say something obvious. But -- and hence, I do not have final numbers both for the month of December and for Q4. But at this point, I would be surprised if we did not accomplish those improved targets. And as a reminder for everyone, what we had talked about as part of our Q3 communication was for the group revenue growth in the mid-single digits, earnings growth at the top end of low single digits, both currency adjusted. And we had also targeted for the group, excluding Fresenius Medical Care, which is particularly hard hit by the pandemic, earnings growth in the very low double digits. We're going to report our final Q4 results on February 22. But again, as of today, I would work on the assumption that we have managed to get into that target range. The guidance for 2022 that we will share with you end of February, that is still being worked on. And just as I said that we have a completely different set of assumptions for COVID 11 months ago, we will be extra careful as to what these planning assumptions for '22 are going to be. We will, at the same time, make it very plain what our guiding principles, in particular, when it comes to the dynamic have been. But you should not be surprised if you also saw some caveats. I believe as long as we make it very plain as to what we are basing our guidance on, that should be absolutely fair. We will also provide you with an update on our cost savings program that we launched against excess mortality at Fresenius Medical Care, but then also expanded into group -- into other parts of the group. Again, as a reminder, we have said that by 2023, we would be looking at a EUR 100 million net income contribution after tax and after minority interest. And we continue to believe that when originally, that was rather a top-down target where over the course of the first and second quarter, we were working hard to find initiatives to make that number a valid one. That in the meantime, we are in a position that this is a very realistic target where we may even have some upside, in particular, in those years beyond 2023. But also there, we do expect to provide an update in February '22. As far as the performance and the outlook in the individual business segments is concerned, Kabi, we have talked a lot over the course of 2021 about our performance in North America, where we have faced some higher level of price pressure than the typical price erosion in our lines. That remains very much an effect that is driven by COVID, where the lack of volume demand is increasing the willingness by some of our competitors to make price concessions. We have also seen some but only few new market entrants. All in all, I am reasonably happy with the performance that we've seen over the course of the year. We have not lost market share and are well-prepared for a normalization of that situation. As a small housekeeping item, a lot of talk about manufacturing issues at Melrose Park, starting Q3 2020 and over the course of last year. As of today, we have not heard from the FDA and there has not been a physical inspection schedule. A bigger theme for 2022 and Fresenius Kabi is going to be the performance in China where national volume-based tenders have been a factor over the course of 2021. Wherever we had to participate in those tenders, we have been successful in securing volumes. But at the same time, a very, very meaningful pricing discounts. So Q4 is going to be the first quarter where those effects are going to become more visible, and we will be looking at an annualization effect of that in 2022, which represents a burden on Fresenius Kabi's earnings development. We have also been handicapped by COVID on the regulatory front, where we had hoped to make faster progress with the approval of our pegfilgrastim biosimilar both in Europe and the U.S. today. Unfortunately, we still have not had that all-important visit with the EMA and the FDA. And therefore, unfortunately, the registration, the approval and launch of our version of peg still seems a bit out where on the other hand, as far as our direct responsibility is concerned, we have done everything we could. For Kabi in the rest of the world, we have been looking at a very strong performance over the course of '21. And I am reasonably optimistic that also, over the course of '22, we should be able to generate some volume and revenue growth. Turning it over to Helios. First of all, let me say what you read in the media and listen to in the media is very consistent with our day-to-day experience in our hospitals. Yes, the Omicron variant is highly infective, but we are looking at a much lower hospitalization rate than with the Delta variant or in the original waves. So at the moment, we are looking at a capacity utilization at our German hospital business that is nowhere near the peak that we were looking at about a year ago and also as far as the availability of ICU beds is concerned. We are generally, for the whole of Germany, looking at a situation that is absolutely manageable. Having said that, that overall environment is not exactly a positive for elective surgery. And for our liking, there are still way too many people who push out types of surgery that after all may not be as elective as they think. And therefore, we would probably work on the assumption that patient numbers over the course of '22 would still be at a shortfall relative to the pre-COVID environment. What is unclear as of today is any form of government support, which for the public and church-owned hospitals in most of the cases, is probably utterly needed, and that would then also apply to us. But we're not near any concrete new law or edict. And that is something where I would hope that we can also be a bit more prescriptive with our assumptions on February '22. As far as our Vamed business is concerned, I was already quickly alluding to the effect of COVID on the occupation in our post-acute clinics that we do manage. And as far as the project business is concerned, we still look at a very, very strong order book. Also, Q4 saw quite a number of meaningful order intakes. But progress dealing with these orders is still slower than we'd like, in particular, given travel restrictions that are also COVID-related. So having gone through these individual business segments and also still when taking into account logistics issues and cost inflation in general that is also creating a bit of a headwind for us, that is what we need to reflect in the guidance that we are going to give you end of February. Again, that is something that we're diligently working on. I want to ask for your patience before we can make it more precise. But as of now, I am comfortable talking about positive earnings growth for the group in '22. To which degree remains to be seen. And as far as 2023 is concerned, I am convinced that we can step up the pace even more so, which frankly is also needed to get at least to the bottom end of our midterm targets. Before I hand it back to David and your questions, a quick word on the ongoing review of our group structure. I had promised last February to provide an interim update in February. I'm still committed to doing that. So bear with me for today, but what I am comfortable in saying is that the aim of what we're trying to accomplish here is both additional -- I'm not sure whether I can still be heard and seen, monitor screens have gone blank. I will continue. The aim of what we're doing here is to create both additional value for our shareholders but also to get us more additional financial wiggle room to satisfy the growth that all of our 4 businesses are foreseeing. All of those 4 businesses have ample growth opportunities in order to capture those. We need growth capital. So it is a question whether we're doing all of them justice here. We -- what I want to convey is that simplifying the group structure just for the sake of it, that is not what we're after. I am completely open to reshuffling the structure of the group. But what I would need in return then are proceeds to facilitate further growth in us capturing the growth opportunities in the remaining businesses that all fall under the Fresenius roof for good. And therefore, that is a key criteria that we're looking after. And what we -- secondly, would -- against that backdrop, we have to judge is whether in each and every circumstance, this is the right point in time to go about a -- to go about the divestiture and whether we are better off to see the business -- the respective business perform through the pandemic reduce the cost structure and get to a higher level of profitability. So bear with us, and I would be glad to provide you with further updates as part of the full year results. Sorry for being a bit distracted towards the end of that presentation now, but it seems we have some issues with the connection. But that would be my closing comment. I hope that what I was saying about the group's structure came across and serves then as a basis for you to ask some questions. Thank you for that. David, I'm handing it back to you and I hope that was clear.

That's great. Thanks, Stephan. And your call was still clear to me at least. So maybe just some breaking news, just -- you obviously announced the acquisition of some utility facilities in the U.S. That's what builds on the Eugin acquisition about this time last year, just over a year ago. Maybe you can just sort of touch on the attractiveness of the fertility market and your plans there.

Let me start, first of all, by saying that when we were looking over the course of the last 2, 3 years at what we are particularly good at and then I believe across the Fresenius Group, we are very disciplined in what we do call chain medicine. So evidence-based superior algorithms that leads to better outcomes for patients and health seekers and then rolling them out over across a multiple -- multitude of outlets. And against that backdrop, we were looking at the different types of chain medicines, be it vet practices, be it ophthalmology, be it dentistry. But when we came across fertility, that immediately caught our attention. I was intrigued by the very obvious social demographic need that is ahead of us very visibly. And we believe that we have the proximity to our pre-existing business. At Helios, we know quite a lot of how to run a lab. We have very meaningful lab capacity already in there. We were intrigued by the lack of consolidation in that business. We were able with Eugin to acquire one of the very, very few pre-consolidated platforms, but Eugin itself still being relatively small. And so I believe that this is a story that lends itself to both organic growth as well as to further consolidation. We know a bit about also the digital approach that is completely lacking in the fertility space as far as we can see, so the combination of the physical outlets with digital education to help seeking willing parents. And last but not least, I also do believe that with both Quironsalud and Helios, that we have a very strong quality image. And that is also what is utterly needed in this part of the market where too many practitioners are not participating at the quality level where it should be. And all those were the ingredients that led us to do the Eugin acquisition. We said at the time that this was a platform that we wanted to build further and still, touch wood, so far, the acquisition including bolt-on acquisition opportunities have lived up -- has lived up to all of our expectations.

Thanks, Stephan. You touched on the group structure and the updates you're going to give us at the full year results. I was maybe wondering just in terms of that process has been ongoing now for some time. Has there been any sort of material change in the backdrop? Obviously, the world is a pretty different place to where it was 18 months, 2 years ago. Is there sort of material change in that backdrop that's changed your thinking with regard to the group structure?

David, we have always been very clear that the operating synergies between the 4 group businesses are few and far between. That where they exist, it is primarily between Medical Care and Kabi, where one manufacturers for the other and vice versa. And where given Fresenius Medical Care's ownership structure, any agreement would have to be at arm's length terms anyway. So those synergies, I believe, can also be had on a very contractual basis between a friendly market -- generally friendly market participants. Beyond that, the nonoperating synergies, that is what is more meaningful. So I continue to believe with well above EUR 20 billion of net debt on our balance sheet, the sheer size of the group and the diversification help us to get to a very strong investment-grade credit rating. And it helps us to achieve terms in the credit market that arguably are a bit better than we deserve, simply looking at our credit rating. We are also looking at tax savings when in quite a few countries. We are forming tax groups, and it is possible to offset temporary losses of one group business with profit from the other. And so that is meaningful and something that I wouldn't want to miss. At the same time, what we have got to recognize is two things. The landscape in the capital markets has changed and simpler, less complex stories with lesser moving variables are more on vogue and against the backdrop of our -- in the recent past, unfortunately, more catchy history, earnings growth wise, so that hasn't exactly created or led to our share being overly attractive. And secondly, given COVID, we have been looking at a leverage in the group that has been operating now for too long at the upper end of our target corridor. And coming back to what I was saying in the more or less prepared remarks. The growth options that I do see in each and every business, they don't come for free. For the avoidance of doubt, it is both organic and nonorganic growth opportunities that I do see. But either way, they will require some capital. And so what has primarily led me to have a fresh look at the group structure is the question, can we feed all the 4 businesses appropriately so that they can fully accomplish the growth opportunities that are ahead of them? Or are we doing them injustice? And that is why I am also keen because quite a few market participants seem to be talking about a spin-off of the individual business. I want to make it clear that this is a very important criteria and aspect for us and, therefore, simply handing away one of our group businesses looking at a reduced group size without an improvement of our ability to feed the residual businesses with growth capital, that is not something that I'm overly keen on.

Understood. Great. And then you mentioned during your prepared remarks, you got that '23 guidance out there and you'll lead a step-up in growth, particularly next year. As things stand there, you think that '22 is going to be -- there's not really a linear track to maybe, as you were thinking pre-COVID, more of a kind of a harvesting of the growth into next year?

Well, to remind everyone, we published those midterm targets in early 2019. So this is ages ago and nobody knew about the pandemic, and lots of other things happened in between. So in order to make those midterm targets work, at least in the bottom end, we needed to go about that cost savings program that we have now launched and where you heard me where we're reasonably optimistic as far as the progress that we're making. But at the same time, also in 2019, we were very clear that us reaching those CAGRs that we were targeting would require -- would be back-end loaded. And quite a lot hinged and continues to hinge on our progress with the biosimilars portfolio within Fresenius Kabi, where 2023 is the all-important year. So yes, we do -- we remain optimistic that in particular, once we see a more normalized pandemic situation, that we can make rapid progress with approvals, launches and the rollout of these products into their respective markets. But it will be a little while into 2022 until we see a bit clearer.

Let's move on to Kabi. You mentioned in your new remarks kind of some progress being made at Melrose Park. And certainly, I think you were more upbeat the last time we spoke into Q3. Any sort of official updates in terms of when you might be revisited by the FDA on Melrose Park or any other updates you can give us?

All I can say is we have a standing parking lot reserved for FDA inspectors outside Melrose Park. And they are more than welcome. But as they should, they don't let us know when they intend to come by. But we have done our utmost to prepare ourselves for an inspection. That isn't to say that the inspection, once it happens, is going to go flawlessly. As I said already in Q3 2020, I can recall hardly any FDA inspection without such a 483 observation letter. But are we generally comfortable with what we're doing, quality-wise, in that very important facility? Yes, we are.

Perfect. Okay. And then you've got some price cuts coming up in China. I just wondered how we should be thinking about those? And what we can do to mitigate them?

Well, first of all, not our entire portfolio lends itself to these tenders. It has got to be truly commoditized products. And so what we have been eager to do is to point out to the Chinese officials that for the very special formulations that we also do provide, not only but in particular in the clinical nutrition business line, that those do not lend themselves to these national tenders. And so I am cautiously optimistic that the number of products that are subject to these tenders can be contained. Nice dog, David. Secondly, the -- what you get is if you are successful in winning these tenders is -- could guarantee minimum volume. And what that means is that those massive detailing sales force that we have at Kabi in China is to some degree redundant. And so we can go about SG&A cost reductions. But that is not to indicate that those SG&A reductions can offset the gross profit loss that we are suffering. There is still going to be a negative effect. Thirdly, more of a technical item. People know that one of the products that where we won the tender is Propofol. That is in our wholly owned Chinese subsidiary. But as far as clinical nutrition products are concerned, they are coming out of our joint venture with Sinopharm. And therefore, the EBIT effect is going to be meaningful. The net income effect is going to be mitigated by the minority interest that we need to strip out. Third -- or fourthly, I would say, yes, to some degree, in particular, if we can manage to limit the number of products that are subject to these tenders, we would be looking in '22 at sort of a reset. But from there, what remains is very, very healthy volume growth prospects with -- from that lower base. The typical pattern, that is at least what we would expect, of low single-digit price erosion annually.

Great. And will you have line of sight on the potential impacts out of China by the full year results and the guidance?

We would -- well, that's going to be a key topic to discuss. I am cautiously optimistic that we can at least be fairly prescriptive for '22. We may have to make some assumptions of further tenders happening. But there, in general, we should be pretty crisp.

Perfect. And then moving on to biosimilars. You sort of mentioned the importance of that for next year, in particular. Maybe you could give us an update on Idacio, which is a bit less clear, less familiar biosimilar of Humira. I must have been -- I've slightly loss track on how many European countries you've launched in so far. So maybe an update on that and the financial impact so far, which has been relatively limited and probably not helped by COVID.

Idacio has been launched, like simply in any European country that matters. And we have made good progress in both tender and prescriber markets. Tender markets, we have, in particular, more recently, won just about every tender that we participated in. Even though I will admit that the price pressure relative to our assumptions when we entered the business in 2017 has been a bit more pronounced. At the same time, our volume assumptions at that time were too conservative. We are looking at a further rollout of Idacio outside Europe, so Canada, Brazil, Australia. That is work in progress. But the all-important launch in the U.S. that is scheduled for the summer of 2023, that is what the settlement agreement that we entered into, just like everybody else, just like all of our competitors with AbbVie. That is what is stipulated there.

Okay. Great. And then in terms of the costs on the biosimilars, obviously, you've been spending quite a lot on those over the last 2, 3 years. Is that going to be sort of last year, this year? And how should we be thinking about the costs sort of tailing off from there?

When we announced the acquisition in the spring of 2017, I was acutely aware that quite many of our shareholders still had a good memory of the ill-fated Fresenius biotech adventure. And I wanted to make a clear separation between those 2. Biotechs was R&D and biosimilars in our minds is only D and no R. But still, I wanted to make our shareholders comfortable by self-imposing an investment ceiling on our biosimilars business, and that stands at EUR 1.4 billion, including the upfront purchase price, which was around EUR 150 million milestone payments; and our ongoing SG&A expense originally rather for development now in the later stages, more for preparing ourselves for the market launch. I am still committed to that EUR 1.4 billion. The delays that we are facing related to COVID have clearly not helped, and this is going to be tighter than I had anticipated. But still, I believe that we can get by within that ceiling. And let me also say, one way or the other, that situation is going to turn, either by us performing the business in a way that we get to profitability or by us pulling the plug.

Perfect. Great. Maybe just moving on to Helios, and that's a slightly bigger picture question, which is one of the things we're hearing about in a lot of markets is the number of health care workers leaving the profession due to stress over the last 2 years or so. So we've seen staff shortages and increased wage inflation. I know in Germany, you're protected on the wages side. But just sort of a shortage point of view, is that something you recognize and are concerned about? And how do you try and mitigate that?

I believe that acute care hospitals in generally are, for caregivers, relatively attractive employers. And within acute care hospitals, we at Helios are also appear to be a relatively attractive employer. And therefore, I think back to the time when we were giving quarterly updates about hiring nurses and all of us, I believe, were positively surprised by the progress that we were making. And that, frankly, continues to be the case. I continue to be highly critical of the regulation that has been imposed on us because, frankly, what we, the acute care hospital sector as a whole, have done is we have depleted neighboring countries and also the subsequent sectors where we now have much more of a shortage. We have regardless invested very heavily in training and education. We have increased our apprenticeship capacity over the last 2 years by about 15%. I am very happy to report that we have 5 to 6x as many applicants as we have apprenticeship places. And I continue to believe that investing more into training and education is the right thing to do. So in short, David, here in Germany, as far as a shortage is concerned, under normal circumstances. But if you are at the height of a pandemic, then you have a bit of a shortage. But if we assume a little more normal circumstances, then I would be comfortable that we can avoid an acute shortage.

Great. And the situation in Spain, is that similar?

When we entered the Spanish market in 2016, we were looking at an unemployment rate of 20%, and that also related to nurses. That situation has changed pretty dramatically in the meantime. And we are now, here and there, also looking at a shortage in nursing capacity. That has also led to an increased wage inflation. We have not gone about pretty -- the typical routine of streamlining processes as much in Spain as we have done it in Germany. I do believe that there are still some efficiency reserves left. And in particular, we can facilitate further growth at our hospitals without having to increase our nursing staff at the same percentage rate. So it is not a help, but it is an issue that I believe we can deal with.

Great. I'm afraid that's taking us to end of our time, gentlemen. So thank you very much for joining us today from both myself and Maggie in the background. I hope you have a rest -- great rest of the conference. Thanks, guys.

Thank you all for listening. Thank you for your interest. All the best.

Thanks, guys.