P&L Check Fresenius Goes For High Debt, High Growth

Healthcare giant Fresenius is gearing up for acquisitions worth $2 billion. The high pace of expansion is likely to raise some questions among shareholders.
Fresenius CEO Stephan Sturm is going for growth.

Stephan Sturm, the new chief executive of healthcare company Fresenius, will announce plans to continue the company’s proven strategy -- a combination of organic growth plus acquisitions -- at his first AGM this Friday.

Mr. Sturm took up the top job in mid-2016. Only a few weeks later, he announced the largest takeover in the history of the company: the purchase of the Spanish hospital chain Quironsalud for €5.8 billion ($6.3 billion).

He also announced plans to take over US drug maker Akorn for the equivalent of €4.4 billion. And Fresenius is investing up to €670 million in the acquisition of Merck's biosimilar drugs division.

Even if the high pace of expansion raises some questions among shareholders, the acquisitions do not affect the company's 2016 balance sheet. Bridge financing was agreed to in 2016 for the purchase of Quironsalud, but the purchase was not concluded until January 2017.

Fresenius' 2016 financial statement is characterized once again by growing revenues and profits. The company is increasing its dividend for the 24th time in a row. It's comforting business as usual for the shareholders of the DAX-listed company, who will be asked to approve a 13-percent dividend increase to 62 cents at the shareholders' meeting. In addition, the Fresenius share has outperformed the DAX in a volatile environment in 2016. While Germany's benchmark index rose by 7 percent, Fresenius shares gained 13 percent. The healthcare group benefits from the fact that it operates in fields that are mostly unrelated to the economy.

Its Fresenius Medical Care subsidiary, which is also listed on the DAX, accounts for more than half of Fresenius' sales and operating result. The Kabi and Helios divisions are each responsible for one-fifth of sales. Kabi sells nutritional solutions and liquid generic drugs worldwide, and Helios is the largest operator of private hospitals in Germany. Finally, the small Vamed division plans, develops and manages healthcare facilities.

Overall, Fresenius grew by 6 percent in 2016, to €29.1 billion in sales, and it did so organically. Acquisitions played only a small part and were offset by sales. While currency effects still accounted for about half of the growth in 2015, the situation changed in 2016, when the devaluation of Latin American currencies and Chinese yuan dampened growth by one percentage point. Although Fresenius still slightly outperformed the health markets, the company lagged behind its growth rate in 2015, when it grew organically by 9 percent.

The healthcare group used 2016 to increase its liquidity and reduce debt. Operating cash flow rose by 7 percent to just under €3.6 billion, mainly due to strong figures at Kabi and Fresenius Medical Care.

Free cash flow rose by 6 percent to just under €2 billion -- enough to pay for €675 million in acquisitions, as well as the dividend. Fresenius also managed to reduce its net debt by around half a billion, or approximately 4 percent, to €13.2 billion. As a result, net financial liabilities as of December 31, 2016 were 2.3 times the EBITDA, compared to a ratio of just under 2.7 a year earlier.

However, this is only a snapshot. Through the acquisition of Quironsalud, net financial debt as of the end of March 2017 jumped by about €5 billion to €18 billion. And if the Akorn takeover proceeds as planned, Fresenius will be heading towards a debt level of 3.3 times earnings before interest, tax, debt and amortization, in the course of the year.

The rating agencies have already indicated that they want to keep Fresenius at its current investment grade rating. Standard & Poor's currently rates Fresenius at BBB-, Moody's at Baa3 and Fitch at BB-. Fresenius has regularly demonstrated the ability to continuously reduce its debt but low-interest phase has also made refinancing much easier for the company. If this changes in the future, Fresenius will have to cope with a larger interest burden.


Maike Telgheder is an editor at Handelsblatt, covering the health economy, pharmaceutical companies and chemistry. [email protected]