July 30, 2019 / 5:53 AM / 23 days ago

UPDATE 4-Fresenius slides as weakness in dialysis unit offsets improved outlook

* Fresenius expects FY 4%-7% revenue growth at constant currency

* Fresenius highlights strong emerging markets growth

* Concerns about U.S. cost savings weigh on FMC (Updates share prices, adds CEO M&A comments)

By Zuzanna Szymanska

July 30 (Reuters) - Shares in German healthcare group Fresenius slid on Tuesday after its dialysis unit FMC reported smaller than expected cost savings and said full-year earnings growth would likely come in at the lower end of guidance.

That assessment overshadowed an increase in Fresenius’s full-year revenue target following strong generic drug sales in emerging markets.

Fresenius shares were down 2.9% at 1450 GMT, while those of dialysis unit Fresenius Medical Care (FMC) slid 5.2%, making it the second biggest loser on Germany’s blue-chip DAX index

Analysts said the market was focusing on FMC’s updated assessment of its participation in a U.S. government programme for kidney disease care, ESCO, which sparked a 41 million euro ($45.70 million) drop in revenue in the second quarter.

FMC Chief Executive Rice Powell said it had cut the savings ratio for the programme, which it uses to calculate sales and earnings “as a precautionary measure”, though it maintained its overall outlook.

“The savings rate is lower than we had anticipated and hoped for,” Powell told analysts in a call, adding the adjustment was not part of the company’s planning when it issued full-year guidance in February.

As a result, FMC believes it will be closer to the lower end of its adjusted net income growth guidance for 2019, Powell said.

Asked whether there was a risk of more substantial corrections linked to the programme, financial chief Mike Brosnan said: “That 41 million euro adjustment was substantial, so I’d like to think the worst is behind us.”

The update weighed on the margins of the company’s coordinated care business, JP Morgan said, adding that FMC had also been hit by lower product sales in Europe.

EMERGING MARKETS STRENGTH

Fresenius, FMC’s parent, meanwhile highlighted continued strong growth of its generic infusions unit Kabi in markets including China, Asia-Pacific and Latin America, while noting increased competition and easing shortages in the United States.

The group could consider small and medium acquisitions opportunities for Kabi, Fresenius chief executive Stephan Sturm told analysts, adding he did not rule out bigger ones.

Fresenius said it now expected full-year revenue growth of between 4% and 7% at constant currency rates, up from a previous range of 3% to 6%. Its outlook included the effects of its February acquisition of U.S. home dialysis firm NxStage.

“We are reporting a good second quarter 2019, with healthy organic growth in all four business segments,” Sturm said in a statement. “We are very confident about the second half and the coming years.”

Fresenius Medical Care maintained its 2019 targets, but JP Morgan said the revenue target would require significant acceleration in the second half of the year.

The unit reported adjusted second-quarter revenue of 4.28 billion euros ($4.77 billion), below the 4.35 billion euros expected on average by analysts in a Refinitiv poll.

Fresenius said its hospitals division Helios, which had long acted as a drag on its results due to decreasing admissions and staff shortages in Germany, recorded strong organic sales growth in its home market.

Sturm said with that business now stabilized, Fresenius could revisit the idea of expanding beyond Germany and Spain, where it now operates, into a third European market in 2020 and beyond.

He said he was open to acquisitions in the hospital market, particularly in Spain. He would also look at opportunities in Latin America if they arose, he said, and selectively consider options in Germany.

Fresenius said its comparable group second-quarter core operating profit (EBIT) fell by 7% in currency-adjusted terms to 1.08 billion euros, while currency-adjusted revenue rose 6% to 8.8 billion euros, broadly in line with analysts’ expectations.

$1 = 0.8980 euros Reporting by Zuzanna Szymanska and Bartosz Dabrowski in Gdynia Editing by Tomasz Janowski, David Holmes and Jan Harvey

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