FRANKFURT Fresenius Medical Care's focus on a life-threatening illness and its buying power with suppliers mean the world's biggest kidney dialysis provider may cope better with cuts in U.S. healthcare spending than many investors think.
FMC's shares have slumped about 10 percent over the past three months on expectation the United States, battling to rein in its budget deficit, will reduce funds for state-run health schemes like Medicare that account for about 30 percent of the German company's revenues.
A 2 percent cut to Medicare spending will come into effect in March, unless lawmakers agree to postpone it, while the federal agency in charge of Medicare is likely to announce a cut in reimbursements for dialysis providers for 2014 to reflect a drop in the use of an expensive drug to treat a side effect.
Congress has even set Medicare a non-binding target to slash spending on dialysis by $4.9 billion spread over ten years.
However, there are grounds for thinking the actual cutbacks, for dialysis providers at least, will not prove too severe.
Dialysis, where machines do the kidney's vital job of cleaning blood of waste and excess fluids, accounts for only about $10 billion of Medicare's $555 billion annual budget and is essential to patients' survival.
Cutbacks are more likely to focus on less critical areas of healthcare, like joint replacements, some analysts think. What's more, with longevity, obesity and diabetes on the rise across much of the world, demand for dialysis is growing.
"FMC has two years ahead of it that will be somewhat more difficult," said Markus Manns, who manages a 200 million euro ($267 million) equity fund with a focus on healthcare at Union Investment in Frankfurt.
"But in the past, initial drafts have always been mitigated in such a way that both the government and dialysis providers were okay with in the end."
FMC, indirectly controlled by a German charitable trust, treats over 250,000 of the estimated 2.1 million people receiving kidney dialysis worldwide - a figure growing about 5-6 percent per year and expected to reach almost 4 million by 2020.
While about two-thirds of its 2011 net revenue of $12.8 billion came from North America, the company is seeing rapid growth in emerging markets as more sedentary lifestyles take hold and rising wealth drives an increase in insurance coverage.
For instance, it expects annual growth in patient numbers of 10 percent in Asia, compared with 4 percent in the United States, which will help to reduce its exposure to the latter.
In the meantime, FMC's size - it operates more than a third of dialysis treatment centers in the United States - will be a big advantage in coping with spending cuts, analysts say.
More vulnerable will be the 100 or so smaller, less efficient firms that account for 25-30 percent of the market.
Indeed, shares in FMC's closest rival in the United States, DaVita, have changed little in recent months, partly reflecting the view in that country that even if Medicare spending on dialysis is reduced, the larger players will be able to take a bigger share of the smaller pot.
The smaller firms often serve rural communities. As it could be politically difficult for Washington to drive these out of business, that may lead to lenient treatment for all dialysis providers when it comes to apportioning spending cuts.
"Many of the smaller dialysis chains and one-clinic operations continue to struggle to generate profits, something which we believe will continue to act as a buffer for the large dialysis organizations," said Berenberg Bank analyst Tom Jones.
THE NEXT BIG THING
It's undoubtedly going to be an uncertain few years.
"Visibility about (FMC's) medium-term financial plans is fairly low," said Credit Suisse analyst Christoph Gretler.
He described the stock's valuation as "not overly attractive," despite its slide to 1-1/2 year lows this month.
But some analysts believe that changes in the way Medicare operates could work in favors of bigger firms like FMC.
Rather than paying for the actual amount of drugs and services given to patients, Medicare is switching to a system of lump-sum reimbursements.
This will reward the industry for finding cheaper ways of providing dialysis, as long as it maintains the same quality of care. Medicare will eventually cut the reimbursement rate to claw back some of the efficiency gains, but only with a delay.
FMC's size is expected to help it cut treatment costs, for instance by negotiating better drug buying terms with suppliers.
For now, the lump-sum reimbursement, or bundled rate, covers intravenous drugs but from 2016 oral drugs will be added and in the longer term, more sweeping reforms could be on the cards.
Under a plan dubbed accountable or comprehensive care, dialysis providers would have to pay for patients' hospital stays due to dialysis-related conditions. In return, providers would receive an additional lump sum per patient, again rewarding them for more careful and less costly patient care.
"This would be the next mega-revolution in the healthcare industry," said Union Investment's Manns.
($1 = 0.7477 euros)
(Editing by Mark Potter)