Dialysis firm FMC warns health spending cuts to hit profit

FRANKFURT Tue Feb 25, 2014 12:07pm EST

FRANKFURT (Reuters) - Fresenius Medical Care (FMEG.DE), which makes kidney dialysis machines, forecast a shock fall in net profit for this year due to healthcare spending cuts in the United States.

Shares in the German company, which operates more than a third of dialysis treatment centers in the United States, dropped almost 6 percent on Tuesday after it reported its first decline in annual net profit in 12 years.

Fresenius Medical Care (FMC) makes about a third of its revenue from Medicare, a U.S. government healthcare program for elderly and disabled people.

The U.S. federal agency that sets reimbursement rates for Medicare said in November it would spread a 9.4 percent cut, initially proposed to take effect in 2014, over the next three to four years.

"Looking ahead we are faced with a challenging environment, in particular with structural changes due to growing pressure on reimbursement systems," FMC Chief Executive Rice Powell said.

FMC said it expected a 2014 net profit of between $1 billion and $1.05 billion, compared with $1.11 billion last year and analysts' average forecast of $1.19 billion in a Reuters poll.

DZ Bank analyst Sven Kuerten said FMC's forecast for a second successive fall in annual profit was particularly surprising since the reimbursement cuts announced in November were not as harsh as had been expected.

Analysts at Berenberg said FMC's outlook was "shocking."

FMC's closest rival in the United States, DaVita (DVA.N), by contrast, raised its 2014 operating profit outlook earlier this month due to a slower rollout of new U.S. health insurance exchanges, where individuals can buy health coverage with income-based government subsidies.

Fresenius (FREG.DE), the diversified healthcare group that controls FMC, also issued a disappointing 2014 outlook on Tuesday. It expects only 2-5 percent profit growth at constant currencies, slowing from a 12 percent gain to 1.05 billion euros ($1.4 billion) last year.

But it forecast annual net profit to jump to between 1.4 billion and 1.5 billion euros by 2017 as a result of its recent purchase of hospitals from Germany's Rhoen-Klinikum (RHKG.DE).

FMC's shares closed 5.7 percent lower at 49.82 euros, the biggest faller on Germany's blue-chip DAX index .GDAXI. Fresenius stock was down 4.2 percent at 114.05 euros.

COST CUTS

FMC launched a cost-cutting program last year to cope with tougher conditions in the United States as part of which it could shut a ten or more clinics and freeze hiring.

"We will close clinics that are not profitable and don't have any prospects," Powell said. He said closures were most likely in metropolitan areas where there are multiple facilities for patients to choose from.

FMC has 3,250 clinics worldwide, more than 2,000 of which are in North America.

The cost-cutting program should yield savings of up to $60 million this year and higher sums in 2015 and 2016. Powell said the program should be largely complete by 2016 or 2017.

FMC is looking for growth elsewhere and Powell said he would consider buying Swedish rival Diaverum BRICAS.UL if owner Bridgepoint BRDG.UL put it up for sale.

Bridgepoint has been looking to offload the Swedish dialysis clinic operator, which could fetch more than 1 billion euros. Sources told Reuters last year that Bridgepoint had hired JP Morgan to review its options.

Any attempt by FMC to buy Diaverum could face opposition from national anti-trust authorities, bankers have said, but FMC could allay their concerns by selling off parts of the company.

"We have been talking to anti-trust authorities about such issues before," Powell said.

(Editing by Mark Potter and Erica Billingham)

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