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Fresenius Medical (FMS) Q3 Earnings Miss, FY17 View Intact

Fresenius Medical Care AG & Co. KGAA FMS reported adjusted earnings of 59 cents per American Depositary Share (ADS) in the third quarter of 2017, missing the Zacks Consensus Estimate of 61 cents. Earnings per ADS increased 9.3% on a year-over-year basis. In the last quarter, the company had missed the Zacks Consensus Estimate by 9.4%.

In the quarter under review, revenues increased 10.8% on a year-over-year basis to $5,093 million but missed the Zacks Consensus Estimate of $5,364 million.

The stock has a Zacks Rank #4 (Sell).

Segmental Analysis

Revenue Details

Health Care Services and Health Care Products revenues increased 8% at constant currency (cc) on a year-over-year basis. The Health Care Services segment gained from increased organic revenues from Care Coordination, growth in dialysis services and contributions from acquisitions. Higher sales of dialyzers, machines, peritoneal dialysis products, renal pharmaceuticals,  bloodlines and  products for acute care drove Health Care Products revenues in the quarter.

North America Revenues

By geography, North America revenues rose 2% year over year and accounted for 58% of total revenues. Health Care Services in the region grew 8% at cc while Health Care Products revenues increased 6% at cc on a year-over-year basis. Third-quarter organic growth at the segment remained solid at 6% on a year-over-year basis.

This was fueled by higher dialysis treatments and an increase in U.S. revenues per treatment. The Dialysis Care business grew 3% at cc on a year-over-year basis in the region. Meanwhile, the Care Coordination segment saw an improvement of 32% (29% at cc).

EMEA Revenues

Revenues in the region increased 6% on a year-over-year basis at cc. Health Care Services revenues from the EMEA segment increased 5% at cc on a year-over-year basis. Health Care Products revenues rose 7% at cc in the third quarter.

The Health Care Services segment was primarily driven by growth in same-market treatments, partially offset by a decline in organic revenue per treatment. Meanwhile, Health Care products primarily gained from a 4% year-over-year hike in Dialysis product revenues.

Asia-Pacific Revenues

Revenues from Asia Pacific grew 14% at cc on a year-over-year basis. Net Health Care Services Unit grew 21% at cc. Meanwhile, Health Care Products Business increased 9% at cc on a year-over-year basis. In Asia-Pacific, the company witnessed 5% organic growth.

The Health Care Services segment in the Asia-Pacific region was supported by the acquisition of Cura Group in Australia. Dialysis treatments in the region increased 7% at cc driving Health Care Products sales in the segment.

Latin America Revenues

Revenues in the region increased 11% at cc on a year-over-year basis. We note that Health Care Services segment at the region decreased 1%, while Health Care Products increased 9% year over year.

Despite a lackluster performance in the company’s renal pharmaceutical unit, higher sales of machines and disposables and Dialysis treatments drove revenues in Latin America. Precisely, Dialysis treatments increased 1% on a year-over-year basis in the third quarter in this region.

Major Q3 Highlights

Fresenius Buys NxStage Medical

In an initiative to boost its long-term ‘Growth-Strategy 2020,’ Fresenius signed an agreement to acquire all outstanding shares of NxStage Medical NXTM for $30 a share in August. The transaction has been valued at $2 billion and is subject to close by 2018.

Fresenius expects the acquisition to prove accretive to earnings within three years from deal closure. Furthermore, the deal is expected to provide annual pretax cost savings of $80 million to $100 million over the next three to five years. Fresenius also expects integration costs of about $150 million over the next three years from the time of announcement. Per management, the takeover will boost revenues at the Care Coordination segment (read more: Fresenius Medical Inks $2B Deal to Take Over NxStage Medical).

Divestment of Shiel Medical Laboratory

In an initiative to optimize its portfolio, Fresenius announced the divestiture of its Shiel Medical unit to Quest Diagnostics DGX in September. Notably, Shiel is a clinical laboratory provider primarily focusing on non-renal lab services. The lab specifically serves in the New York-New Jersey metropolitan area. Management at Fresinius expects the transaction to close by the end of the fourth quarter of 2017.

Post the deal closure, Quest Diagnostics and Fresenius will jointly work on identifying patients with early-stage chronic kidney disease, with potential to benefit from treatment to slow progression to end-stage renal disease (ESRD), based on the former’s laboratory data analytics (read more: Quest Diagnostics to Buy Shiel to Widen Footprint in NY-NJ).


For full-year 2017, Fresenius reiterated its guidance. The company estimates revenue growth of 8-10% at cc. Net income attributable to shareholders is likely to increase around 7-9%.

Our Take

Fresenius ended the third quarter on a dismal note missing the Zacks Consensus Estimate on both counts. However, the company reiterated its full-year guidance. We believe this is in tune with the ‘Growth Strategy 2020’, under which it aims to boost revenues to $28 billion by 2020, corresponding to an average annual growth rate of around 10%.

A wide range of dialysis products, initiatives to gain market traction, strengthen international foothold, strategic acquisitions and divestments act as major catalysts for the company. However, a lackluster performance by the renal pharmaceutical unit is likely to dent Latin-American revenues. Having a strong international foothold, Fresenius faces a highly regulated environment in almost every country in which it operates.

Furthermore, the company has to fulfill specific legal requirements that include tough antitrust regulations. Thus, regulatory hurdles and competition in the niche markets are major headwinds.

Peer Release

PetMed Express, Inc.’s PETS adjusted earnings per share of 43 cents for the second quarter of fiscal 2018 were up 79.2% from the year-ago quarter. Also, earnings surpassed the Zacks Consensus Estimate by 43.3%. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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