P&L Check

Dispute puts Fresenius' health at risk

German, Fresenius, Medical Care, Akorn
Fresenius' Akorn deal is in ER. Source: Bloomberg

It could potentially be one of the most expensive cases of buyer’s remorse in history. The German healthcare group Fresenius had agreed to a $4.75 billion takeover of the US generic drugmaker Akorn last April. But after signing on the bottom line, Europe’s biggest listed healthcare provider watched as Akorn’s performance plunged. Worse, it claimed it had discovered evidence that the US firm had doctored data on its pipeline of products.

Last month, the Germans got cold feet and backed out of the deal. Akorn promptly sued, accusing Fresenius of making “materially false and misleading” statements about its operations. Predictably, the share price of both firms tumbled. A court in the US state of Delaware must now decide Akorn’s fate.

The unresolved mess is undoubtedly weighing heavy on Fresenius investors. Shares are down 16 percent over the past year. But they also have reason for cheer: In 2017, sales and earnings at the DAX-listed company reached record levels in almost all areas of business.

Akorn said that it categorically disagreed with the allegations and would enforce the merger.

Ignore the US spat and you’ll find that Fresenius’ four main divisions are doing well. The biggest cash cow is Fresenius Medical Care, a separately listed DAX spin-off in which Fresenius owns a controlling 31 percent share. It is the world’s leading kidney dialysis equipment supplier. The second biggest money-maker is Helios, Europe’s largest hospital operator, and third is Kabi, a drugs and nutrition provider that Akorn would have merged with. Finally, Vamed builds and manages clinics.

FMC, formed in 1996 by the merger of Fresenius’s dialysis division with the US firm National Medical Care, keeps the lights on at its parent – but the question is for how much longer. FMC runs as well as supplies dialysis clinics in countries from Brazil to Japan, although the US accounts for nearly three quarters of its sales. Last year, revenue rose by 7 percent to €17.8 billion. But earnings took a hit (down 2 percent to €2.4 billion) after US regulators forced a settlement over allegations of corruption in Africa and Asia.

Aside from the corruption settlement, the weak earnings highlight slowing growth in the dialysis market. Shareholders at FMC have been mollified by a 10 percent increase in dividends this year, but the prospect of a downturn in future is one reason why its parent, Fresenius, has been hard at work trying to diversify its business.

That tactic may have failed spectacularly with Akorn, but Fresenius has had better luck elsewhere. Helios, its in-house cash cow, acquired the highly profitable Spanish hospital chain Quirónsalud last year. That helped push earnings (EBIT) up 54 percent to €1.05 billion, reducing Fresenius’ dependence on FMC in the process. Kabi and Vamed also enjoyed strong profits on the back of solid growth.

Together, the four divisions pulled in sales of €33.9 billion for Fresenius, up 15 percent on 2016, and pushed net profit up 16 percent to €1.8 billion. As a result, shareholders will receive a fat dividend rise of 21 percent to €0.75, the 25th dividend increase in a row.

But that’s unlikely to calm nerves about the Akorn deal. In a court paper revealed earlier this month, Fresenius accused the drugmaker of “blatant fraud at the very top level.” But a spokesman for Akorn said that it categorically disagreed with the allegations and would enforce the merger. A hearing is expected in July, and Fresenius CEO Stephan Sturm said this month that he expects the mess to be cleaned up “over the course of 2019.”

He’s clearly confident it will be concluded in his favor: Fresenius’ latest figures did not include Akorn in its medium-term growth target of 7 to 10 percent sales growth by 2020. Mr. Sturm will need that confidence if he expects investors to trust him with taking more risks in the future.

Maike Telgheder is an editor at Handelsblatt, covering the health economy, pharmaceutical companies and chemistry. To contact the author: telgheder@handelsblatt.com

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