Fresenius Medical Care AG & Co. KGaA
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Oliver Maier:]

Great. Thank you so much, Patrick. I would like to welcome all of you to Fresenius Medical Care's earnings call for the third quarter 2013. Also a warm welcome to the ones joining us on the web today, we very much appreciate your interest. As always, I would like to start our call by mentioning the cautionary language that is in our Safe Harbor Statement of our presentation, the material we distributed today. For further details concerning risks and uncertainties, please refer to our filings, including our SEC filings. We also provided you with some adjusted numbers in Q3 only in the context of a year-over-year growth rate comparison and a like-for-like operational basis. With us today are Rice Powell, our CEO and Chairman of the Management Board; and Mike Brosnan, our CFO. That's it already from my end. Rice, the floor is yours.

[Robert Maurice Powell:]

Thank you, Oliver. Good morning, good afternoon to everyone. Know how much we appreciate your interest in our company and your participation today as we talk about Q3 2013. First, let me start by thanking our employees and our Management Board members around the world. I know that you worked diligently through this quarter as you have in other quarters, and we appreciate greatly the dedication and amount of effort that you've put into taking care of patients in this past quarter. I am satisfied with the performance that we have delivered this quarter. I think you can begin to see very good growth trends in some of the key areas of our business, and we've been able to do this despite several known issues that have created headwinds for us, such as sequestration, EPO price increase in the U.S. that we talked about back in the second quarter when it became effective, but we continue to soldier on and to make improvements in our business. Turning to Slide 4, I'd begin my prepared remarks that the third quarter of this year, we generated 7% growth in revenue, generating a revenue number of $3,666,000,000. You can see our EBIT is down 2% year-over-year at $557 million, and we've also tried to give you some view of what we believe the underlying opportunities in our business are and the performance in our business by backing out sequestration. We're not suggesting that sequestration isn't real or that it is not a headwind for us, but we simply wanted to give you a view of how we see this business, minus that situation that we obviously had no hand in creating. And if you allow us to do that, you can see that EBIT adjusted at $576 million, generates a 2% growth year-over-year. Net income at $273 million, yields just slightly above 1% growth in the quarter, year-over-year. And then on the same convention, by looking at sequestration removed from net income, we adjust to $285 million and a very robust 6% growth under that convention. Several key highlights for us in the third quarter, organic growth in North America improved to 6%, we're very pleased with that. Same-store growth in the international regions improved to 5%. We've mentioned the impact of the EPO price increase as a headwind. My last point on Slide 4 would simply be, we are confirming our guidance, we've stated that we need a strong fourth quarter in order to achieve that guidance. And in looking at some of the earlier reports from several of you today, it would seem that this comment has made you nervous. That was not the intent, I'm simply telling it like it is. We need a strong fourth quarter. We have plans for how we will achieve the earnings and the sales targets within this quarter. Simply put, we need to sell through our plan. Everything that we can sell, we must. Every treatment that we have planned to make, we must do that. So we go into this quarter optimistic, knowing that we have lots to do. But if you do recall, Mike and I had indicated for you in the second quarter call that we knew it would be a very heavy loaded back-end. We saw improvement coming in the third quarter and a much bigger step in the fourth quarter, and we believe we are indicating and delivering to you, that's exactly the way we see this playing out. Moving to Slide 5. Let's take a revenue breakdown and look at it on a regional basis. North America did $2,436,000,000, you see very good growth at 8%, accompanied with organic growth up 6%. Looking internationally at $1,222,000,000, that generates 6% constant currency growth and a very strong 4% organic growth. And then as you look at the breakdown by region, you can see we continue to have double-digit constant currency growth in Asia Pacific and Latin America. A little bit behind where we would like to be in Europe at 2%, but we'll work our way through that. And generally, we have not changed in our revenue split across the regions with North America at 66%, and you can see how they break out in the bottom third of Slide 5. Now if we take Slide 6, and we take a moment and we look at the size and the scope of our franchise, as it relates to our provider business, we have 3 key metrics

[Michael Brosnan:]

Okay. Thank you, Rice. Turning to chart 12 in the material. This is the third quarter profit and loss [ph]. Rice spoke to the quarter on the revenues, so I'll move to operating margins. Despite our revenue growth, as Rice indicated, operating earnings were down 2% or $11 million to $557 million for the quarter. This was principally due to 2 overarching effects. The first, a 4% decline due to sequestration. This was a $19 million impact on operating earnings in the quarter. And the second is an increase in performance of 2% operationally. This change was driven by an increase in North America's operating earnings, after considering the effects I just mentioned of $15 million and improvement in international, which is up $9 million. These increases were partly offset by an increase in corporate spending of $16 [ph] million, and I'll provide some additional detail to this. First, to the margins in North America. Those margins were off about 160 basis points, largely influenced by the effect of sequestration which contributed 60 basis points to the decline. And the remaining decline in margins, from an operating perspective, of 100 basis points reflects revenue improvements and cost increases. If I look at this from a rate perspective, in North America, operating income was influenced by an increase of 3% or $10 per treatment in the U.S., revenue per treatment, moving from $359 per treatment last year to -- $349, excuse me, to $359 currently. This increase was driven by continued growth in our expanded service offerings, as well as the Medicare increase, and this was partly offset by the increase we had on sequestration and an unfavorable payor mix. In addition, we had a number of pricing effects, as we've said in past quarters, that will annualize out this year. We will continue to see some of these pricing effects through the end of the year, as these arrangements annualize and as patients are assigned to the contracts. Having said that, however, on a sequential quarter basis, Q2 to Q3, we saw an improvement in margin per treatment over the second quarter by $2 per treatment, and we expect to see continued improvement in this regard in the fourth quarter. Turning to cost per treatment. First, let me talk about the sequential quarter development on the cost side from Q2 to Q3, we saw a $2 increase in cost per treatment from $293 per treatment from $291. Again, that was associated with our expanded services to support the increased revenue rate, increased cost of pharmaceuticals associated with the Amgen price increase, as well as seasonal flu vaccines, and that was offset by improvements in our labor. This is consistent with the indication we gave in the second quarter, where we said we would expect to see increases in the cost per treatment up slightly on a sequential basis in the second half of the year. Looking year-over-year on a cost per treatment basis, you can see it behaving, as we guided in the second quarter, with an increase of $12 per treatment. Largest elements in this cost was associated with the growth of our expanded services. Beyond that, our cost increase are due to the labor, and the timing of some of our charitable contributions. Last, we are seeing an increase in corporate spending in North America, and this is related to the legal costs as we respond to inquiries and prepare for the issues related to the NaturaLyte and Granuflo products. On the international side, margins were down slightly 10 basis points. This decline was due to an adjustment of our bad debt expense in the quarter and also, some minor cost increases which were partly offset by favorable foreign exchange. On a sequential quarter basis, international margins increased 30 basis points, and this was mainly due to the -- excuse me, decreased 30 basis points, this was mainly due to the summer shutdown of our production facilities. Global corporate costs have increased $16 million. Most of this increase relates to the increased consulting and legal costs related to our global efficiency program, the cost associated with improving our global compliance program. When these costs are combined with the preparations in North America for the Granuflo matter, it does represent a headwind to our operating results as we finish up the year. It's not on the page, but just a brief note on interest and taxes. Earnings in the quarter did benefit from interest costs being slightly better than the prior year due to lower rates and a slightly lower average debt for the period. The quarter also benefited from a reduced tax rate due to tax benefits associated with our internal financings. Reported earnings as Rice indicated, are up 1%. Adjusting for the after-tax effects of sequestration, that's 6%. Earnings per share on a comparable basis were up 3% from $0.91 per share to $0.95 per share. This reflects the benefits in the quarter of our share buyback. Turning to Chart 13 in the 9 month results. You can see, as Rice indicated, net revenue [ph] growth at 7%. Operating earnings were down about 4% or $64 million to $1,595,000,000. And again, you see principally 2 effects

[Oliver Maier:]

Great. Thank you, Rice, thank you, Mike for the presentation, and for the update. I think, Patrick, we are now ready for the Q&A session. I'd try it again this quarter, where I would like to ask everybody to ask max 3 questions, and then queue up again so that everybody actually has a chance to ask questions, because we've seen that a lot of people have actually queued up already. So I would appreciate it if we could at least try. Thank you so much.

[Operator:]

And our first question today is from Lisa Clive from Sanford Bernstein.

[Lisa Bedell Clive:]

I'll keep it to 3 questions. Number 1, your European growth at 2% constant currency, could you give us a split between services and products there, and give us an idea of really where the weakness came from, and how soon we should expect that to rebound? Question #2, if you could just give us an update on your ancillary services revenues. I believe on the last conference call, you mentioned Fresenius Rx had -- was probably going to get to 40,000 or 50,000 patients by year end. Just wanted to know how close you are to that and what we should think about for the trajectory of that business in 2014? And then last question, could you give us an update on home dialysis? What percentage of your U.S. patients are treated at home? And if there is a big Medicare clawback, is that something that can be accelerated in the next 12 months?

[Robert Maurice Powell:]

Lisa, it's Rice. I think I'll take all 3 of these questions that you have. So first, on the European growth at 2% constant currency, as I know you know, I'm not going to give you a lot of detail on the breakout. But what I would tell you is in broad terms, we are probably not where we'd like to be on the product side of that. We're seeing better performance on the services side. A follow-on question that I would anticipate you wanting to know is just simply that when you look at where we are with tenders, keep in mind the tenders don't -- when you win some tenders, which we have done, we indicated to you that we had in the second quarter, you don't always begin to fulfill those immediately. We have some cases where we want to tender and then we begin to ship product a quarter or 2 out, that will be the case as we look at the fourth quarter of this year. For instance, we've got about 600 machines already going to Turkey on a tender in the fourth quarter, even though we've had that tender since the middle of the year, it's a fulfillment schedule that they sort of dictate, we don't. But clinics is fine, products has to pick up, and I believe they will. On the ancillary services revenue, you and I did chat about that the last time, what I would tell you, think in terms of Fresenius Rx, we're hoping to be somewhere in that 40,000 to 50,000 patient range. I think we've got a very good chance of getting there. We're in the high-30s now. Think of that book of business somewhere between $270 million, $300 million this year. Not sure I want to peg a number going into '14 just yet, but I do see good growth there, as well as the vascular access and the lab businesses, they're going to contribute to us, I think, in a very nice way for this year, stepping into next year as well. And then your last question on home dialysis. Now as you know, when I say home dialysis, generally, we're talking 99% of that is PD. We are approaching the 10% census mark. 1 year ago, we were at about 9%, so we're seeing growth there. So I think that, that business is working well for us. And as you know, not every patient is necessarily a candidate to go into PD. You need some residual renal function, you need a lot of training. There's some things that have to go in there to -- for that patient profile to work on a home therapy. But we're still bullish on the therapy and we continue to see it grow.

[Lisa Bedell Clive:]

Sorry, just 1 follow-up question. You mentioned Fresenius Rx getting to the $270 million to $300 million range for the full year. Could you give an update on where vascular access is as well?

[Robert Maurice Powell:]

Sure. I think vascular is going to be somewhere approaching $200 million in this year, and I think that's pretty consistent with what we have looked at midyear when you and I spoke about it last.

[Operator:]

Our next question comes from Michael Jungling from Morgan Stanley.

[Michael K. Jungling:]

I want to -- firstly, I've got a question on the pending CMS decision. What are your thoughts about a 1-year cut versus a phasing over 3 years? What is sort of the latest sense that you've got from Washington? Secondly, also in relation to the pending CMS decision and I'm also interested in the timing of the response that you could have, so if CMS caps at a certain rate, how quickly can you react to potential outcomes? So effectively, do you have like a plan a, b, c and d that you could immediately pretty much respond to? And then the third question I have is in relation to EPO alternatives. If you wanted to switch to an EPO alternative, how much critical [ph] data do you think you would need in the United States before you would commence a switch, if there was an EPO alternative available?

[Robert Maurice Powell:]

Okay, thanks, Michael. You guys aren't working Mike hard enough today, I'll take these Mike and then the rest of them are going to be yours. So on the CMS decision, you know as much as we do, relative to with the government shutdown, it would appear as going to be right before our U.S. Thanksgiving holiday, November 27, before we really find out what the final rules are going to look like. As opposed 1 year versus a phasing, as I said earlier, a really bad number. If this really goes against all the efforts of the industry, and we get a really bad number, a bad number is exactly that, phasing a bad number over 3 years does not do me anything, doesn't give me any favors. So it's really going to depend on where this comes and what are we looking at in terms of the reimbursement cut. Michael, we just don't know. I have no more insight today than when I had a chance to visit with you over the summer, so where this may go. We're just going to have to see where it comes out. What I would tell you is, yes, we've looked at scenarios, we've made some assumptions about dollar levels and 1 year of phasing and 3 year, how we would approach that. We're working those things as best as we can. But obviously, scenarios are just that, you need a real number to know exactly how you're going to react. If it's draconian, and we're looking at cuts, closures, things of that nature, we're looking at those things, we'll communicate them to you when we've been able to get ourselves organized as to how we're going to do this. The thing I think everybody has to realize is that some things that you do for mitigations are much easier than others. But if a mitigation really means that we're going to close some clinics, we've got to find homes for those patients. We have things that we need to do. One of our advantages, though, is the very large footprint we have in the U.S. and being able, selectively perhaps, not be in a location but be able to move patients to a closer location, if you will. And then relative to an EPO alternative, I like how we're dealing in the theoretical on this one. What I would say to you is, yes, we would do a clinical study. Let's, for instance, say, if this was MIRCERA, which is a product that's already been approved in the U.S., but hasn't come into the market based on the patent settlement, we would still run a clinical study. I think people have to recognize that there's some significant differences in dosing in Europe versus the U.S., based on practice patterns and the demographics of patients. Patients in Europe average age is 64, they are a little younger in the U.S. at 62. One of the biggest difference is simply that 58% of the patient base in the U.S. is diabetic, in Europe it's about 30%. So we would need to do a pilot, not necessarily to prove safety and efficacy, but to get dosing down to understand what the dose titration is between European experience and the U.S. experience. And then there's just the logistics of moving a different drug and a different algorithm into the clinics. So all of those things need to go into our thinking about pilot studies, Michael. And quite honestly, given what we learned with OMONTYS, and the way we went about that and the benefit that we got from having done that study, we would always plan to do a pilot. There may be different reasons from 1 product to the next, but I think there's just great experience that we'd want to get from doing that.

[Michael K. Jungling:]

Rice, just a follow-up question on the different response rates. If a cut comes on the 27th, are you able to put everything in place pretty much to have a full year benefit of your reactions to the bundle 1 January 2014, or could it take 6 months before you feel that you are ready to make adjustments post the CMS decision? And then on EPO alternative and MIRCERA, when do you think you'll start your pilot study?

[Robert Maurice Powell:]

All right. Let me take the second question first. We're talking theoreticals as you know, so I really can't give you much comment on that at the moment, it would be inappropriate. But we know how we would do it, so let me leave it at that. Secondly, there is not a lot on the November 28, getting the final cut and knowing what it is, there's not a lot that we can turn on the dime and have done by January 2. There's going to need to certainly be time that goes on in between there. And months is probably the right way to look at that. But keep in mind how much we do really will depend on where we come out with the cut. And is it, as I call it, draconian or is it rational or reasonable? We, like you, are anxious to know but we're just going to have to wait until we get it.

[Operator:]

Our next question comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova:]

I'm actually going to give Mike some work so -- my first question is just on tax. Mike I don't know if you have any guidance for the full year. Apologies, if I missed it in your prepared remarks. My second question is probably more for Rice than for Mike, but Paramax -- I know, when we started out the beginning of 2013, you were quite keen to see an improvement in Paramax in the U.S. for the full year. Mike, I was curious by your remarks to say that it's worsened in 3Q. I don't know if you can kind of give us an update on where you are with those efforts and how we should be thinking about it for the fourth quarter and then into 2014. And my last question is just from the guidance, and if I can just follow up on a few quick points, Mike, that you've made in your prepared remarks for the fourth quarter. Can you confirm that you had an extra dialysis day this quarter, and you'll also have an extra one next quarter? And then when you set the guidance at the beginning of the year, and I apologize for being nit-picky about this, but were you anticipating to book this $20 million gain on the sale of the facilities?

[Michael Brosnan:]

I guess, she did me a favor. Veronica, you gave me something to talk about, talk about the tax rate. I'll say that we're about between 32% and 33% for the year in terms of the effective tax rate, just to give you a sense as to how the fourth quarter will round out. Paramax, do you want to take...

[Robert Maurice Powell:]

Yes. We did -- as Mike pointed out, Veronica, we have been seeing sequentially improvements over the last couple of quarters, and we saw a very slight dip this quarter. It is always on our radar screen. I don't think it's a trend that we are going to continue to see, but we did see it slightly down. But as Mike says, they tend to -- our ability to finish the year strong and get to the guidance, we need to continue to see improvement there, and I know the plans are in place and folks are working. But we do from time to time get quarters, where things dip a little bit. We're not sure why, and it comes right back where we wanted to be. So I don't know that I can give you much more input than that. And Mike, the guidance, it was extra day. And then on the facility's closure, the RCF [ph] we've been working on for a while.

[Michael Brosnan:]

Yes. In terms of guidance, we do have an extra day in the fourth quarter versus Q3, which is I think what your question was related to. And that's part of the reason why we can see an improvement for a stronger Q4 in order to finish up the year and achieve the guidance. Relative to the gain, if -- when you look at our results, it's not unusual for us to look at the franchise and make small adjustments as the years progress. And this is a transaction that we've been working on for a while, so it has been in our thoughts in terms of something we could do. It wasn't as clear to us in the second quarter, whether it was something we could get done in the back half for next year. But the way I would think of this is when you have been commenting about some of the increases in our corporate costs, and I view this as -- the costs have been a headwind to us in terms of our guidance for the year, so we anticipated some of those costs. But they're running at a higher rate than we had anticipated in our original guidance. So I think of this as a way of mitigating some of that cost increase.

[Veronika Dubajova:]

Very clear. I'm sorry, my question was actually year-on-year, if you get an extra day in the fourth quarter or not.

[Michael Brosnan:]

No, no, no.

[Veronika Dubajova:]

Not sequentially. No, you have the same number of days fourth quarter.

[Michael Brosnan:]

Eighty [ph] days in the fourth quarter.

[Robert Maurice Powell:]

We had an extra day year-over-year in Q3, and we will have one more day sequentially in Q4 over Q3.

[Operator:]

Our next question comes from Tom Jones of Berenberg.

[Thomas M. Jones:]

I'll [indiscernible] another couple of questions. I just like to go back to the progression in revenue per treatment that you demonstrated in Q3 versus Q2, the sequential improvement. I'm just intrigued to know, how much of that came from vascular, how much came from pharmacy, how much came from the lab acquisition? And then really, what I'm trying to get at is what is the trend that we're seeing in the underlying dialysis treatment this side of component of the revenue per treatment? That will be the first question. And then the second question, a bit longer term, and maybe one you probably can't answer, given the uncertainty around Medicare rates at the moment. But just wondering how you are starting to feel about capital allocation for 2014. Obviously, you did a buyback this year. My guess is that you're not going to be too keen to be buying a lot of clinics in North America next year, if the rates aren't so hot. So I'm just wondering, maybe some superficial thoughts about how you're thinking about deploying your not insignificant cash flows in 2014.

[Robert Maurice Powell:]

Okay. Do you want to take Tom's first one, Mike, on the progression?

[Michael Brosnan:]

Yes. In terms of the progression, I mean, we're continuing to see good growth in the expanded services. We haven't broken those out historically, and I don't think we plan to do that. Because we do view the success of those expanded services as really being generated from our core business and our national footprint. So we are continuing to see progression in that part of the business in terms of rate per treatment. We also -- as I mentioned, we saw about a $2 expansion in the margin, and we're seeing our contribution in that margin expansion also from the core business, particularly when you look at the commercial business taken as a whole, when you look at it both in terms of rate and mix.

[Robert Maurice Powell:]

Tom, on the capital allocation for 2014, you're right, given what we're sitting here looking at today I'm probably not going to run out and buy a bunch of clinics in the U.S. But as we told before, we are really interested in looking at opportunity for acquisition in the international space, as well globally, if the right technology or product opportunity presents itself. So I don't think it's changed a lot since you and I spoke last. You obviously see that we're doing a little more with De Novos. Around the world, we're going to continue to do that. We will have kind of a wait-and-see attitude as to where we go in the U.S. from a clinic standpoint obviously. And then as you noted, we made a lab acquisition because we really like that geography. There are 20 million people in that New York, New Jersey area. And that type of lab testing is a bit out of the ordinary for what we do. It's molecular protein testing, kind of general testing for patients. And with our lab right across the Hudson River, we really get to leverage the asset. We get to learn some new things. We get to form some relationships with other types of physicians. It just really kind of helps us get our toe in the water on, can we expand our lab capabilities, leveraging a very good asset than we have. And it also puts us in a place to learn some things and have some conversations with ACOs in that New York metropolitan area. So we think it's a nice way for us to kind of ease into the water, if you will, and look at some things that are a little different, another example of, perhaps, changing our outlook on capital allocation.

[Thomas M. Jones:]

And maybe just as the third question, one follow-up to one of Michael's ones. You mentioned the term Draconian rate cut as one potential outcome from CMS. I just wondered how you'd deal with it, if it was truly, truly Draconian. My only fear is you'd get stuck on a bit of a holding plan, because if things are really that bad, then clearly, there might be some pressure coming from congress to -- or from you to congress to put things right. Is there a risk that you get stuck in a sort of limbo land, where you kind of get a worst case outcome and that you don't really get certainty about what the rates are going to be and therefore, you're sort of stuck between knowing what to do on the cost-saving front, but you don't want to do too much in case congress comes back and puts it all right for April or perhaps, a bit later. How are you thinking about dealing with that kind of scenario?

[Robert Maurice Powell:]

It's a really good question. And here is a case, Tom. What I would say to you is, we're really trying to be proactive. A couple of things we've talked about, but let me just update. We're in a part now where 225 members of the 435-member House of Representatives have put 2 letters into CMS about how they'd like to see this reimbursement or rebates being handled. So we've got over 52% of the U.S. House of Representatives have weighed in. From the senate side, we have several key senators that have had personal visits and letters written as well. So we have tried to position ourselves with the industry that we sort of assume worse case, and we're looking at what are the alternatives and how quickly could we try to correct a very Draconian situation, if you will. And I don't want to sell CMS short. Let's see where this actually comes out. But we're trying to supercharge ourselves so that we can cover the ground very quickly, should it come to that on November, on 27. Because you're right, we can't really get stuck in limbo and not be moving forward. We have to be trying to stay out in front of these things and have a plan, assuming whichever scenario comes to fruition.

[Thomas M. Jones:]

Right. I guess we'll just have to wait and see what comes.

[Robert Maurice Powell:]

I think you're right, Tom.

[Operator:]

And our next question comes from Ingeborg Øie from Jefferies.

[Ingeborg Øie:]

Two questions, please. The first one is on the corporate costs, which are running at the higher rate. What do you anticipate going into next year in terms of the ongoing GranuFlo process? And then second question is on the request for proposal in the accountable care space, are we going to experience a delay here with everything that's been going on with the -- with CMS and with government shutdowns?

[Robert Maurice Powell:]

Okay. Ingeborg, it's Rice. Mike, do you want to talk about corporate costs? And I'll pick up integrated care.

[Michael Brosnan:]

Sure, yes. Not ready to quite prognosticate corporate costs in total, but I would say that when you think in terms of some of the things I've mentioned, in particular, the IT costs overall and the Baxter lawsuit and the GranuFlo matter in the U.S. I think we'd expect to see some activity on those matters over the course of 2014, so we'll have continued spending on those 2 fronts. A little too early to tell what the level of spend would be, but I think in the case of the GranuFlo matter, you're probably looking at something in the 2015 range in terms of trying to bring that to a resolution.

[Robert Maurice Powell:]

Thanks, Mike. On Integrated Care, Ingeborg, I think what I would say generally, yes, I do think we're going to see this slip in time. But let me come back and then tell you what we do see, that I think is somewhat encouraging. There was a note from CMS that came out a couple of weeks ago, where they said they were going to hold the applications that had been turned in for a period of time and that they're going to issue a new request for application after the rebase comes out. Now what that tells me is, they simply realize many people have been too focused on the rebase to get all the applications in. So it's pretty commonsensical to me. The good news is, there was a meeting that was conducted this week in Washington with a number of the providers, and there was good engagement and discussion, still about ways to make this proposal or integrated care pilot more effective. So they're still listening. I give CMS credit that they're listening and talking with us. We had some representatives there. But if I had to guess, and I guess I will, I do think if this all kind of sits still until November 27 to 28, when the final rule comes out, it will be hard to see much happen before the end of the year because Washington generally is done by the middle of December. So I do think we may see this slip over a little bit into next year, Ingeborg.

[Operator:]

Our next question is from Martin Wales of UBS.

[Martin Wales:]

Three questions, but let's start with following up on your previous comments. I believe part of what CMS was saying, I was particularly interested in tenders from smaller dialysis providers. I mean, should we read anything into that? Specifically, they're seeking more from smaller dialysis providers rather than the [indiscernible], simply a case that they've been getting it from them in the past or -- well, you tell me. Obviously, you have representatives at the meeting. Secondly, on the acquisition perspective, I think you spent $279 million out of a proposed $500 million this year. Do you still think you'll spend the $500 million, given some of the uncertainties around the U.S.? And finally, I was intrigued in your comments on MIRCERA and wanting to do a pilot study in the U.S. I was slightly puzzled and presumably, there are enough 64-year-old diabetics in Europe. If you get a sense of what the dosing looks like there then what are the extra factors that would make you believe you need to do a pilot study in the U.S.?

[Robert Maurice Powell:]

Let me take your first question, and I'll do MIRCERA, and then we'll put Mike in on the acquisition piece. Yes. But I think we talked about this earlier in the year that CMS was really hoping to have participation in an integrated care pilot from the smaller providers. I think I've given you guys some color all the way back to the very beginning of the year that we were making very good progress with them on the construct of that pilot and all along, they had said, "We really need to see how the smaller providers would work within the system, how they would do this." So I think they very much want to see more participation there. We would welcome that as well. So I think you are right in that, that's part of what is slowing us down, and they're looking for more applications. But any time CMS is willing to talk about the construct of the pilot, we're happy to be there and to give them our input into that. We'll always do that. Let me hit MIRCERA, Mike, and I'll come back to the acquisitions. I think, Martin, you got to appreciate where I'm coming from here. Yes, there are diabetics in Europe, but it's very different. There's 30 pounds difference on average in a patient in the U.S. versus Europe. And yes, you can call me a fatty and I won't get upset. But key to that is, remember, when you have 2,200 clinics and you're administering Epogen in those and now, you're going to bring a different molecule in that has a longer-acting, different dosing regimen, there's a lot of work that we want to do. And a pilot is the perfect way to do that to logistically understand how you're going to make that work, how does one patient get EPO, another patient gets MIRCERA or let's say, OMONTYS in that case. We have found through the years, it is practical, it is commonsensical, and it just make sense to run a pilot and get to understand all of these various factors working with our physicians. It's just simply not simple enough to flip the light switch. Many times, if we say pilot, people get confused, that they think we're questioning the safety and efficacy of the molecule, and we're not. It's much bigger than that. There's just a lot more knowledge we want before we step off in a situation like that.

[Martin Wales:]

How long would such a pilot have to take? Because obviously, you've got access to an awful lot of patients, but at what period of time would you need to run one of them before you could realistically introduce it widely?

[Robert Maurice Powell:]

Well, what I would tell you is our experience with OMONTYS is we were able to really ramp that up rather significantly over a 3- to 4- or 5-month period. I won't speculate on MIRCERA, mainly because I really need to let Frank Maddux, our Chief Medical Officer, and his medical advisory board decide how they would do that. But it's months and not years, obviously. But the OMONTYS experience, as I recall, that we've got a lot of ground covered. And a lot of knowledge didn't work out the way we wanted, obviously, over like a 4- or 5-month period. Mike, do you want to pick up the acquisitions?

[Michael Brosnan:]

Yes. Martin, the short answer is, yes, we've all spent at or pretty close to the $500 million. But just to give you a little bit more detail on that, you're right, $279 million year-to-date and that level of investment does include an investment that we made in the form of a loan in the third quarter to a U.S. middle-market dialysis company in the form of a holdco toggle note. And then with some of the announcements you've already seen in addition to some smaller deals we plan for Q4, the announcement you've seen is the Shiel labs, which will be a Q4 close. We'll spend at or close to the $500 million.

[Operator:]

Our next question comes from Holger Blum of Deutsche Bank.

[Holger Blum:]

I wanted to start on the guidance for next year or for this year and the ramp-up you need to show in Q4. You already alluded to some divestments gains. Are there any other elements that might be of temporary nature or nonrecurring nature in the final quarter? And maybe to that extent, you can speak on the corporate costs, whether that could be a major contributor in the final quarter and although maybe an explanation of the minority line would be helpful. Because those have been going down, both year-over-year and sequentially, despite sequentially better profits. So maybe you can say a word on that, whether that's related to Liberty weakness or you're buying out minorities from doctors.

[Michael Brosnan:]

Okay, Holger. I think -- yes, I think that has my name next to all of those. In terms of Q4, I highlighted the $15 million to $25 million, because I think that's something that would be of interest to the analyst community in terms of a one-timer. Beyond that, I don't see anything kind of what that holds [ph] in the fourth quarter. We do know that we have -- that Q4 will be a challenge. But we think we see underlying run rates coming out of Q3 that will support that challenge. Rice mentioned the number of things in terms of products growth both in the U.S. and on an international basis. We talked about some of the tenders that we think will be coming into the fourth quarter, in terms of both awards and also shipments from tenders that have been awarded previously. I mentioned that coming out of Q3, we won't have production shutdown, which should improve our operating earnings in the fourth quarter as well. We mentioned the additional dialysis day on a sequential quarter basis. So all those things, when we look at them in the aggregate, give us -- do give us a confidence level with regards to the fourth quarter. In terms of your question on minority interest, I appreciate that it has moved around a bit this year. It is dynamic. Because some of the things that we've been talking about do have an effect on the minority interest. Because within the overall mix of the P&L, you can have differing effects with regards to Amgen price increases, with regards to sequestration, in terms of your joint ventures versus your wholly owned clinics. And we also continuously adjust our franchise in terms of our ownership positions with our physicians, both buying and selling. So at the detail level, having looked at Q3 and looked at the year-to-date run rate, I'd say for Q4, it would be reasonable to expect a higher absolute number because the Q4 earnings will be higher and probably something on the order of maybe 9% of operating earnings as a benchmark for minority interest. I mean, the other thing you mentioned or alluded to is the Liberty acquisition. I think that's going well. I think that's, frankly, well in hand now in terms of a run rate basis for us.

[Holger Blum:]

Okay. And yes, finally, on corporate costs, will that remain on the run rate that we've seen in the quarters earlier this year?

[Robert Maurice Powell:]

I think -- I guess my short answer would be for the fourth quarter, that's pretty close in. So I'd say probably, fairly consistent for Q4, maybe a little bit of sunshine but in roughly the same geographies.

[Holger Blum:]

Okay, great. Then the final question from my side, more product-related on your renal drugs, maybe you could -- you mentioned revenues there were up overall 3%. What were the main contributors? How did Venofer perform? And what do you expect in terms of timing of years before Fed binder approval, whether the 1st of December is still the most likely FDA decision date?

[Michael Brosnan:]

Sure. Let me take PA21. I'll work backwards, Holger. The PDUFA date in the U.S. is December 1. We've had no communication from my side or talking with Galenica, that that has changed. I will tell you though obviously the other big piece of the U.S. government we work with CMS, clearly has had an issue with the 3-week shutdown and there'll be some impact there as you well know. So it wouldn't surprise me, that PA21 could slip a little bit, because FDA, I know, was part of the shutdown. But I'm not sure that we would get a formal notice of the PDUFA date, but we'll see. I know the regulatory guys in the U.S. think it won't be affected, but we just don't know at this point. Venofer -- Venofer is going well for us. We're maintaining our share. It's probably the way I would approach answering your question. We've seen no loss of share in that product line for us in the U.S. It's performed well, and we've also seen, particularly on a global basis, good performance on some of our phosphate products, our binders as well. So we're pretty happy with what we see at the moment and don't really know how to judge, will there be an impact in the U.S. on PA21, we'll just have to see how that plays out.

[Operator:]

[Operator Instructions] And our next question comes from Gary Lieberman from Wells Fargo.

[Ryan K. Halsted:]

This is Ryan Halsted on for Gary. You guys called out as a pressure on margins and adjustment of bad debt expense and just looking for maybe some more color on what that was, and if we should expect it to -- I guess, if this is a good run rate going forward.

[Robert Maurice Powell:]

Okay. Ryan, I'll let Mike pick that one up.

[Michael Brosnan:]

Ryan, that was in reference to the international margins, not the U.S. margins. And it actually was a benefit that we had in the third quarter of last year. There was nothing aberrant in the third quarter of this year, but that just put some pressure, if you will, when you look at the year-over-year number. So nothing that I think is worth commenting on for the current fiscal period.

[Ryan K. Halsted:]

Okay, that's helpful. And then, I guess, going back to the managed care, I know you've mentioned that Paramax was, I guess, sequentially weaker. But you had highlighted, I guess, an initiative you were undertaking. And I was just curious if you can maybe comment on if -- how that initiative is going so far.

[Robert Maurice Powell:]

It's Rice. What I would tell you is, we're still happy with the way this is working, even though we did see a little bit of a dip in this particular quarter. But having gone back in a number of quarters ago, and sort of reengineered our process. And looking about how we approach commercial patients, if you will, and how we interact with them, we made some changes to the process that we follow. I still think it's working. I feel pretty good about it. One dip in one quarter is not going to make us go back and relook at that, because we're pretty thoughtful and pretty intense when we went through that reengineering work, if you will, back some number of quarters ago. So let's see what Q4 brings for us. But right now, we're not going to readjust ourselves because of the small dip in one quarter.

[Ryan K. Halsted:]

Okay. And then, I guess, lastly, as far as guidance, I know you've obviously highlighted a lot of the moving parts that makes the fourth quarter somewhat challenging, but I guess, as we head into November, just curious how you're feeling so far about that guidance range.

[Michael Brosnan:]

From my perspective, if you were to ask me this question, probably for all your money, I'd give you more color. We haven't closed the books on October yet, so it's a little early. I know -- you think the way we do -- let's see what October brings, and then we'll figure out how good we feel about it or how nervous we might be. But what I would tell you is, the one thing that I can look at daily, are sales around the world for products, they look strong, they look good as I was looking at that. But beyond that, we don't have a lot of clarity on the care side of the business this early in the month after we just finished October. Mike, you got any insight you want to...

[Michael Brosnan:]

No, I wouldn't add to that. I would agree with what you said, Rice.

[Operator:]

And we have a follow-up question from Ms. Lisa Clive of Sanford Bernstein.

[Lisa Bedell Clive:]

First question, just on thinking about potential response to a potentially large cut from CMS. If you do close clinics, obviously, lots of logistics involved. But how should we think about the proportion of patients that you would be able to retain from clinics by moving them to neighboring clinics? I assume you would obviously want to try and keep as many of these patients as possible. So just what's a rough estimate that we should have in our heads or the percentage of those patients that you would still be able to treat? Second question, bundled pricing for private patients has been, obviously, a big issue this year. I think you'd indicated previously that you're pretty happy now with where you are. In 2016, the orals are going to get added from Medicare. Are your bundled contracts with the private payors, did they include the orals? Is that something that you would seek to do, sort of in lockstep with Medicare in 2016 as well? I'm just trying to understand whether we could end up in a similar situation, where we have some rate headwinds due to structural changes.

[Robert Maurice Powell:]

Yes. Lisa, it's Rice. Let me work backwards. When you look at the private bundled contracts today, they don't include the oral drugs. We've had some discussion with some commercial payors, if you will, about the opportunity to look at this. But let's also make sure we have a similar definition on the oral drug. We would be focused on renal-specific drugs only. Our pharmacy is really based on the renal drug. It's not the full complement necessarily of drugs that a dialysis patient takes. Let's see where the government goes in '16, where we end up with this. But what I would tell you is that we've had some discussions about it with payors. But there's not much going on with that right now. I think there's just too many fish to fry at the moment but certainly, something you can come back and ask us later on. But I don't know that I can give you much more color than that today. And then on the clinic piece, obviously, should we make a decision that we were going to close a clinic, we would believe, on average, if you look around the country where we are, the vast majority of those patients we would be able to get them in one of our clinics versus having them have to go someplace else. It would be probably one of the most intense looks that we would have at if a clinic closes, how do we make sure all of these patients have a place to go, and that they're going to continue to have continuity of care in some way. So that's something we've looked at pretty intensely. But I would say to you, if you don't like my word vast majority, if you're looking for numbers, I'd say, we're thinking 65%, 70%, 75% of them, we'd be able to manage that, and we would look at that upfront going into those kind of exercises, Lisa.

[Lisa Bedell Clive:]

Okay, that's really helpful. And then last question on Fresenius Rx, just thinking about the number of patients you have in that program right now, I guess, what was it, you said 40,000 or 50,000 today. Are those mainly private patients? I'm just trying to understand, out of the 170,000 patients you treat in North America, how penetrated you are? And how -- and could you get to peak penetration? I mean, what is peak penetration? Could you actually provide Fresenius Rx services to all those patients over time?

[Robert Maurice Powell:]

Yes. So honestly, Lisa, I can't tell you the breakdown between commercial and Medicare. I don't know that I've ever looked at those figures. I'm sure somebody's got them. But again, what I would tell you is, we're hoping to finish the year somewhere in that 45,000 to 50,000 range. We certainly expect, if every patient wanted to be with FMC Rx, we would find a way to be able to do that. We don't think that's probably likely, because we certainly all know and have experience that some patients are very used to dealing with their corner pharmacy, and that's where they want to be. And we're not going to upset that process. So we don't really ever consider the whole population is going to be available for that reason. But we can certainly scale this as we need to. But I really don't know what the breakdown would be, of different payer types of the members of the -- within the pharmacy, I couldn't tell you that.

[Operator:]

And another follow-up question from Mr. Michael Jungling from Morgan Stanley.

[Michael K. Jungling:]

I have 3 very brief questions. Firstly, on the cost savings that you may do in 2014 on the procurement side, could you just highlight very, very broadly, what sort of categories of procurement you'll be focusing on? I think you mentioned previously that procurement wasn't a huge focus. And after you've sort of appointed a new head of procurement, I'm just sort of curious what these broad categories may be. Secondly, could you highlight what the impact was of the EPO price increase in the third quarter? I'm guessing it's around $10 million, but maybe I'm wrong. And then thirdly, if the CMS proposal came true as proposed, could you give us a sense of how many clinics you think you have to close? Is it 5% or 10% of clinics in the U.S.?

[Robert Maurice Powell:]

Sure. Michael, let me take the first one. In terms of the types of procurement that we would be looking at, probably the simplest way to look at it is, we have 43 factories. Most everything that we sell, we make ourselves. So there is a big effort going on there, as you look at the raw materials and [indiscernible] assemblies and the things that go into the production of goods. Then if you take the other side of the house, which is I think much bigger, which is the provision of care, think of all the things across 3,200 clinics that we purchase

[Michael Brosnan:]

Yes. I guess, I would say, just to guide you, it's between $8 million and $10 million.

[Robert Maurice Powell:]

Yes, so you were close.

[Michael Brosnan:]

You're close, yes.

[Robert Maurice Powell:]

And then Michael, I hate to do this to you. Can you just repeat your third question? It was on CMS.

[Michael K. Jungling:]

Yes. If you look at the proposal, and that's just Draconian, could you give us a sense of how many clinics you would close? Is it 5% of the U.S. clinics? Is -- just general sense of the magnitude of the clinic closure, if it happens.

[Robert Maurice Powell:]

Yes. So let me do it this way. I'm going to give you an industry number, because I don't think I want to just give you an FMC number, specifically. But on an industry basis, we think that you're looking at loss-making clinics today, somewhere in the 10% range. And then if this cut were to go through as proposed, we think you actually see that jump up into 30%, 35%, something like that. So it's a pretty big chunk across the whole dialysis industry in the U.S., Michael.

[Michael K. Jungling:]

So if FMC is more efficient in the industry, could it really be that you would close maybe 20% of the clinics also or so in the U.S.?

[Michael Brosnan:]

I'm not going to you to a number, because I don't want folks in other places to draw conclusions from the number I might give you. So let me leave it at that. But just take the industry scenario, and then you can do your own calculation or your own figuring of where we might land in there. But I'd like not to get too detailed into that at this point in time.

[Michael K. Jungling:]

Okay. And then just perhaps on procurement, if I look at those 3 categories, would you say that I forget who that was, but the head of procurement that you've appointed, would you say that he's pretty much done his homework or she has done her homework for all 3 categories, meaning that you are pretty close to the -- able to set off from those procurement savings?

[Michael Brosnan:]

Well, a couple of things. What I would tell you is, we've done a lot of homework. We've looked at a lot of detail of how we procure what, when, where, why. And I think the nice thing about procurement is it really allows you to go in and simply look at the facts and pull that together. So I don't think Mike and I feel like we're way out on a limb here with what we're looking at those categories' being. There are other places -- there are other pieces of this cost equation that are a little more difficult, perhaps, to get your arms around. This is one we think is somewhat straightforward, so I think we're pretty comfortable.

[Robert Maurice Powell:]

Yes. I think we have a disciplined approach, is the way I would say it.

[Operator:]

There are no further questions at this time. I'll turn the conference back over to Mr. Maier for any closing comments.

[Oliver Maier:]

Great. Thank you so much, everybody, for participating in today's call. So much appreciate it, and I'm pretty sure we're going to talk soon. I'm looking in my magic ball. I guess it's going to be November 27. Thank you so much. Take care.

[Robert Maurice Powell:]

Bye-bye.

[Michael Brosnan:]

Bye-bye now.