FSNUF - Fresenius SE May Soon Be Free Of Headwind Woes

• 3.2% Dividend Yield, 28% payout ratio, with a 29th consecutive dividend increase in 1Q22.
• Global footprint, with a dominant share in Europe and an increasing share in emerging markets.
• Some headwinds in labor costs and supply chain sustaining longer than expected, but tailwinds in regulation, growth in telemedicine, and growth in private healthcare in Europe.
• Acquisition of Ivenix (IV technology) and a majority share of mAbxience (biosimilar developer/manufacturer) to help accelerate growth in the Kabi segment.

Fresenius SE ( FSNUY ) is a German healthcare company that provides a variety of products and services for the medical field, including dialysis, hospital management, biosimilars, and supply.

Fresenius maintains a 25-30% payout ratio, with a 29th consecutive dividend increase in 1Q22 - representing a 14 % CAGR since 2008.

Fresenius is split into 4 major divisions, Fresenius Medical Care (30.8% stake), Helios, Kabi, and Vamed. Combined for 2022, organic sales growth is expected to be 4-7%. Despite a promising 1Q22, organic net income is now expected to decline for FY22 amid significant staffing shortages in multiple segments, and sustained supply chain problems. However, we do not believe that this problem is structural to the company and that the difficulties Fresenius faces are temporary.

Helios

Helios is the largest private owner-operator of hospitals in Europe, owning and operating 87 hospitals (6% market share), 130 outpatient clinics, and 6 prevention centers in Germany. Through a series of accretive acquisitions, Helios now includes Helios Spain ( formerly Quirónsalude ), which adds 50 hospitals (12% market share), 97 outpatient clinics, and 300 occupational risk prevention centers in Spain. In addition, Helios Fertility (formerly Eugin Group) adds 8 hospitals in Latin America and fertility expertise. Helios does expect further bolt-on acquisitions to continue in FY22 despite a weaker 2Q, acquiring individual facilities in Brazil and North Carolina. Without acquisitions, Helios is still expanding with significant medical center expansion in Spain with admissions to facilities increasing in Germany.

Combined, they saw sales growth of 9%, expecting strong organic growth, particularly in Spain, as COVID-19 restrictions wind down and people return to work. The mix remains concentrated in Germany, with 62% of sales coming from Germany and the remaining 38% from the rest of the world.

Helios is experiencing tailwinds across Europe, as more people download private telehealth apps because of COVID-19 and as people return to work. Spain is seeing a marked increase in the private health insurance market (~2.5% annual increase since 2020). Additionally, Helios Spain is the #1 trusted brand in healthcare in Spain according to Merco and is in the top 30 most reputable companies in Spain.

Fresenius Medical Care

Fresenius Medical Care ((FMC)) (32% stake) is the world's largest provider of products and services for kidney disease/failure patients. FMC operates 4,100 clinics globally and treats approximately 345,000 patients a year.

FMC plays a major role in the "strategy 2025" plan, which will seek to refocus the company on the firm's core competencies of the firm; new product introductions, operating efficiency, and standardization. In addition, FMC will see significant tailwinds over the next decade, as the company is on track to perform 25% of all at-home dialysis treatments in the US. Globally, it is expected that over 1.6 million people per year will experience acute kidney failure by 2030, representing a significant increase in demand.

Presently 69% of sales come from North America, with Asia and Latin America representing a small-but-growing 15%, and Europe representing 16%. Sales saw growth of 9% in 1H22, but severe difficulties with staffing and macroeconomic conditions have led to a decrease in net income by 10%. However, there has been a "meaningful" decline in morality associated with COVID-19, which is reducing downward pressure on margins.

Kabi

Fresenius Kabi specializes in the intravenous provision of drugs, nutrition, therapy, and related IV medical devices.

Kabi has a comprehensive portfolio and continues to expand it with a focus on developing biosimilars in oncology and auto-immune disorders. As some of the largest brands lose patented status, Kabi estimates that the market growth of biosimilars will jump nearly 30% by 2028 - primarily driven by the ever-increasing costs in healthcare in the US.

The FDA has accepted the review of a biosimilar candidate for the popular arthritis and immunosuppressant drug Actemra (generic name tocilizumab). Actemra has nearly $1 billion in sales per year and was recently approved on an emergency basis for the treatment of COVID-19.

Sales are split evenly down the middle with 33% coming from North America, Europe, and Emerging markets. Emerging markets are expected to represent a higher share of sales over the next decade as healthcare spending grows by approximately 6% per year in emerging markets. However, organic growth is only at 3%, primarily due to staff shortages .

To strengthen Kabi's biosimilar development and manufacturing portfolio, Fresenius acquired a 55% share in mAbxience and all of Ivenix in March of 2022.

mAbxience is a Spanish-Argentinian biosimilar firm expected to launch several global biosimilars between 2024 and 2029 in the oncology and immunology areas. In addition, Kabi is taking advantage of the significant synergy in the manufacturing facilities of mAbxience, which has been contracted to produce COVID-19 vaccines for AstraZeneca. This provides Kabi with a fully vertically integrated biopharma business.

Ivenix is an American IV delivery system with "smart" infusion delivery systems through computerized pumping systems allowing more precision in IV drug administration.

Vamed

Fresenius Vamed is a hospital project manager, encompassing project development, planning, construction, and operation. Vamed has over 1,000 successful projects in 98 countries specializing in post-acute care. Primarily these services are used in Europe, representing 84% of sales.

A particular tailwind is the massive explosion in telemedicine , growing 20% per year, and expected to continue growing far into 2026. Regulatory tailwinds include the German government outsourcing 40% of non-medical administrative services to private providers as a cost-saving measure. These tailwinds have ensured a 4% organic growth globally, with a massive 150% increase in net income year over year. In 2Q22 Vamed also hit a record high project backlog, with €3.73 billion in projects in the queue with an additional major contract won with a hospital network in Angola.

Risks

Throughout the COVID-19 pandemic, Fresenius was hit particularly hard with excess mortality of patients and staffing shortages. This continues today, with excess mortality remaining high and staffing and supply shortages remaining difficult. This is expected to alleviate within the next few years, but it seems that it will continue to impact 2H22.

Many segments within Fresenius rely heavily on government contracts or referrals, as much of healthcare in Europe is dominated by state-owned entities. Therefore, should Fresenius be priced-out, or otherwise lose referral of patients or projects into its network, it could be very adverse for sales and margins of various segments.

Biosimilars are a fiercely competitive market with margins tending to be very thin for startup players. Fresenius has acquired a majority share in the Spanish biosimilar research and manufacturing firm mAbxience to create synergy within its Kabi segment. Should this integration not go smoothly, it would adversely affect Fresenius.

Conclusion

Fresenius was hit particularly hard during COVID-19, which applied significant headwinds towards its growth and 2025 goals. However, these seem to be dissipating, allowing it to begin to expand its generics/biosimilars and hospital operations business with extensive M&A.

Additionally, despite heavy capital deployment, and a weaker-than-expected 2Q22, the dividend remains strong and the footprint continues to expand vertically and horizontally. We believe that Fresenius is a good choice to take advantage of an emerging biosimilars market along with a growing private healthcare market in Europe through a dividend and potential capital appreciation.

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