This Dialysis Market Leader Has Much to Offer Investors

Our sedentary lives, high intake of junk food, stress, smoking, and high consumption of alcohol lead to hypertension, diabetes, and high blood pressure. Together, these factors often lead to terminal kidney failure, contributing to the continued growth of the dialysis market. Another key factor granting growth to this market is the rising population. It is expected that the market will grow at a compound annual growth rate of 7.2% over the four-year period between 2011 to 2015. The number of worldwide dialysis patients reached 2.306 million at the end of 2012, showing a 7% year-on-year increase with highest change of 9% in Asia Pacific region. 

The scenario is expected to largely benefit the world's largest provider of dialysis products and services, Fresenius Medical Care (NYSE: FMS  ) , which has bypassed competitors through a recent acquisition.

The company has the largest network of clinics through which it provides dialysis machines, dialyzers, disposable accessories, and other services in around 40 countries. It is the industry giant with a market share of 33%, followed by Baxter (NYSE: BAX  ) and Gambro.

If we talk about its market position in major products categories, Fresenius had the top ranking in dialyzers, dialysis machines, concentrates for hemodialysis, and bloodline systems in 2012. In peritoneal dialysis products, however, its rival Baxter has first ranking, and Fresenius came in second. 

Historic performance
Fresenius has shown solid growth over the years. The number of patients treated in 2012 increased by 12% compared to 2011. Revenues reached $13.8 billion in 2012. Revenues from services and products increased by 13% and 1%, respectively.

The graph below shows that revenues of Fresenius were lower than Baxter's in the last four years, but Fresenius' revenue growth was better. In 2012, Fresenius' growth was 7.85% as compared to Baxter's 2.14%. Only in 2011 did Baxter show 2.02% better growth than Fresenius, mainly by offering customers the option to replace their COLLEAGUE infusion pumps or receive monetary consideration. The company implemented this recall at FDA's order. 

Source: Morningstar. 

Now let's have a look at debt profiles of the two rivals. The debt-to-equity ratio of Fresenius is 0.9, better than Baxter's 1.2. Fresenius' debt-to-EBITDA ratio increased to 2.83 in 2012, as compared to 2.63 in 2011. This was the result of high investment in the dialysis service business. Its target for 2013 is to keep the debt-to-EBITDA ratio below 3. 

Impact of acquisition
Fresenius continues to expand its products and services business through acquisitions. In 2012, acquisitions accounted for 7% of the company's revenue growth and 5% of its organic growth. Recently, the company has made an agreement to acquire Rhoen-Klinikum AG, Germany's biggest chain of private hospitals. The transaction will add 43 hospitals and 15 outpatient facilities to Fresenius' portfolio. 

Rhoen-Klinikum has shown an excellent performance in the last four years. Its revenues have continuously increased. Although its revenue growth rate plunged in 2011, it still remained positive. Its total revenues in 2012 were $2.86 billion, equaling around 21% of Fresenius' 2012 revenues.

Source: Company 10-K. 

The acquisition will improve earnings from Fresenius' Helios unit, which currently operates 74 hospitals in Germany. It is expected that the unit's total annual revenues will be $7.34 billion after the acquisition adds 43 new hospitals for a total of 117. Overall, Rhoen will add $2.67 billion annual revenues and around $334 million in EBITDA of Fresenius.

As Fresenius expands its market share in Germany, Baxteris is also expanding its global market share. Baxter, the second-largest dialysis market leader, acquired the third-largest dialysis company, Gambro. According to 2012 data, Baxter and Gambro held market shares of 19% and 12%, respectively. Together, these two entities will have a market share of 31%, just 2% behind Fresenius (as shown in the graph below). The acquisition will add new products and therapies to Baxter's portfolio, creating tougher competition for Fresenius.

Source: Company 10-K. 

Final thoughts
Fresenius has shown strong growth in the past. Although Baxter (along with Gambro) poses a serious threat to the company, Fresenius has many positives to help it overcome the threat. The company's revenue growth and debt profile are better than Baxter's. Moreover, the acquisition of Rhoen-Klinikum will add further growth to the company's portfolio and EBITDA, giving it an indisputable lead in the German market. The supportive industry trends are also going to benefit the company. In my opinion, the future is bright for the company's stock. 

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Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 25, 2013, at 10:57 AM, isoa wrote:

    Wondering if you have any insight concerning the hemophilia aspect of Baxter's business given today's headlines.

  • Report this Comment On September 30, 2013, at 9:31 PM, kidney4jenna wrote:

    Just a note about dialysis patients. They aren't all ignorant sloths.

    Polycystic kidney disease (PKD) is an inherited condition, affecting more than 600,000 Americans and an estimated 12.5 million people worldwide – regardless of sex, age, race or ethnic origin. In fact, PKD affects more people than cystic fibrosis, muscular dystrophy, hemophilia, Down syndrome and sickle cell anemia — combined!

    Our daughter's kidney failure is due to a defective bladder. She is on dialysis.

    But yes, you are correct, the numbers are growing daily. Only 11% of the people on the organ transplant list get a kidney each year, so the dialysis business will continue to boom.

  • Report this Comment On December 24, 2013, at 4:00 AM, ngegy wrote:

    Just to point something out: Fresenius SE which is acquiring RHÖN-KLINIKUM AG is not the same as Fresenius Medical Care. I doubt if the acquisition will have anything to do with Fresenius Medical Care which is just a subsidiary of Fresenius SE.

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