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Fresenius Medical Care AG & Co. KGAA (NYSE:FMS)

Q4 2012 Earnings Call

February 26, 2013 9:15 am ET

Executives

Oliver Maier - Head of Investor Relations & Corporate Communications- Fresenius Medical Care Management Ag

Robert Maurice Rice Powell - Chairman of Management Board and Chief Executive Officer

Michael Brosnan - Chief Financial Officer of Fresenius Medical Care Management AG and Member of Management Board - Fresenius Medical Care Management

Analysts

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Holger Blum - Deutsche Bank AG, Research Division

Marcus Wieprecht - MainFirst Bank AG, Research Division

Volker Braun - Commerzbank AG, Research Division

Michael K. Jungling - Morgan Stanley, Research Division

Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Oliver Maier

Welcome back, everybody. Good morning, good afternoon, everybody in the audience, everybody joining us on the Internet. Joining us today is obviously, Rice Powell, the CEO of Fresenius Medical Care; and Mike Brosnan, the Chief Financial Officer. Before turning it over to Rice, I would like to remind you that we will be making forward-looking statements and our actual results may differ materially from these results. We, therefore, encourage you to review our materials provided today in the 20-F filing for these factors.

So that's all from my end, Rice, the floor is yours, please.

Robert Maurice Rice Powell

Thank you, Oliver. Good morning, good afternoon, everyone. Before I begin my prepared remarks, first let me say that it's a privilege for me to be here. Sixteen years with the company, I've done a lot of different things, predominantly in North America, and this is a chance for me to do a lot of new things in different parts of the world. I'm quite excited to do this. And it's not lost on me that I have some rather large shoes to fill, following Dr. Ben Lipps, but I will do the best I can in the time that I have.

And also, before I get into the first slide, I would sincerely like to thank my colleagues on the management board and all the employees at Fresenius Medical Care for the dedication and hard work that they put in throughout 2012, years past and also years to come in the future.

When you look at delivering shareholder value, we understand at FMC that it's important that we give you an outlook of how we are going to continue to do that. I do think it's important that you recognize we are the market leader in a growing market. The dialysis market is going to grow about 4% in constant currency, on a volume basis. Patient basis is about 6%, but think about the fact that in 2020, this will be a USD 100 billion market and when we finished in 2012 it was a $75 billion market. So plenty of room to grow and thrive in this particular space that we're in. And I think we all know what drives this and what the conditions are among our patients, that continues to see them grow at about 6%.

Obviously, in health care, if you cannot provide the highest standard of care, you won't be successful. We've set a very high bar for the competition and we will continue to do that. I think integral to our success is vertical integration, an undying focus on bringing the best quality product and service that we can and also approaching every unmet medical need as a therapy, and how do we get the most out of that therapy for our patients. And we have to continue to invest in what I believe to be our best resource, which is our people. We have a culture of innovation and we will continue to do that in our R&D efforts both from a product standpoint as well as looking at new therapy opportunities. And we'll continue to expand geographically, where appropriate and when appropriate.

2012 was a record year for us. I'm just going to give you a very top line view and Mike will take you through a lot more detail in his prepared remarks. But looking at the blue shaded area, $13.8 billion in revenue, $2.3 billion in EBIT, and net income at $1.187 billion or the adjusted net income at a $1.118 billion. Why do we call it a record year? Two very clear issues for me drive this. One, our dialysis services business grew at 15% in constant currency and the global products business grew at 5%. And for the first time ever, we generated over $2 billion of operating cash flow, $2,039,000,000, I believe, to be exact, a record for us.

Looking at the regions and how we progressed through the year. North America continued at roughly 65% of the total revenue and International at 35%. In North America, you can see that just above $9 billion in revenue for the year, organic growth of 4%. International had a very strong year at $4.7 billion in revenue growth, 9% constant currency and organic growth at 6%. 2012 was a year of focus, particularly around integration. We had large acquisitions, both in Europe as well as in the United States, and we spent a lot of time working on those. I would also like to compliment my colleagues in Europe. We had a tremendous cash collection year, one of the best we've ever had. And in the midst of all of those activities, Europe continues to bring new therapy to the market, better outcomes, a great example of that is hemodiafiltration.

And I would point you to Asia Pacific and just notice that we broke $1 billion in revenue in that region for 2012.

Now looking at the services franchise. A couple of numbers that I think are key for you to look at on this slide. If you look at the number of clinics, 3,160 clinics as of December 31 of last year, 9% growth in our clinic base. Then if you come down the chart, what you see is we delivered 38.6 million treatments on a global basis, 12% growth. And then 258,000 patients, which was 11% growth. So clinics at 9%, treatments at 12%, patients at 11% growth. Another way to look at this is, every 7/10 of a second, somewhere in the world, Fresenius Medical Care dialyzes a patient. Every day, 24 hours a day, 7 days a week, we're dialyzing.

A little clarity on the clinic situation. When you look at this, you can see on a total basis, we had 65 De Novo clinics and then 276 acquired. I'd be remiss to not remind you that we did have divestitures among those clinics, as a result of working with the antitrust authorities in the various regions. So the net effect of that, was about 197 clinics that actually stayed with us once we'd gotten through the divestiture process.

Again, looking at organic revenue growth and dialysis services, I'm going to focus on the full year figures down at the bottom half of the page. I know Mike's got some detail that he'll take you through on the fourth quarter as well as full year. But you can see, for the service business, approximately $10.5 billion in revenue for the year, constant currency growth at 15%, organic growth at 4% and same-market growth at 4%.

I would highlight to you that, 1 year ago, in North America, we were working very hard to achieve about 2.9% in the same-market growth and we told you then that we were going to reengineer the process, we were going to relook at how we do this, to get that growth to a more acceptable number, and I'm proud to say that we've done that. And I think part of it lies, the success lies in our engineering roots. We tend to go into the service side of the business with a very practical eye and look how to make processes better, if it's at all achievable, and we've done that.

Now, looking at patient care. We're in the business of health care, you've seen this chart many times. Again, I'd like to just remind you, we're now looking at metrics across the world, U.S., EMEA and Asia-Pacific. I won't take you through each of this specifically. You've seen them, you should be familiar with this. I think what's important is we continue to make progress in the general direction that we want to go. In some individual cases, we may drop 1 point or 2 down from where we were the prior quarter, but over the trends, over an the entire year, you'll see we continue to improve. And I take great pride in looking at the hospitalization days, we want to continue to drive these down, but nice performance there.

And as we've told you in the past, some of the issue we have in the Asia Pacific days is we're just not exactly sure how great some of that data is at this point. There's a lot of going on in China, in the hospital market, but we'll continue to report that and hope that we can get you better clarity on those numbers, should you need it.

Now, looking at the products business. Very strong year in the International segment and I want to spend a little time talking about North America, because I'm just not sure people are really seeing the true performance here. But again, looking at the bottom half of the page in the blue shaded area, you can see the total product revenue at $4.5 billion. Recall that includes the external book of business that we have, as well as the internal book of business that we do among our own clinics. Now, we measure the effectiveness and success of our sales people by looking at the total external revenue, the very bottom number there of $3.3 billion. Because this is where we're out, selling third-party, no relationship to our own internal clinics. What you see in that situation is that our growth in constant currency is about 5%. Very strong performance internationally, at 7% constant currency.

Now, let's talk about North America because I want to make sure people get a good picture here. When we say products, generally you, and many people, lump several things into that. They think renal pharma, they think the traditional dialysis products, which happen to be on this poster board here, if you look, dialyzers, machines, things of that nature. No question, you've seen it. We had pressure on our pharma business in the U.S. We renegotiated the Venofer contract to stabilize that situation. Set that aside for a moment and just think, dialyzers, bloodlines, machines, things of that nature. What you'll see is we took one of our best external customers, Liberty, Renal Advantage, we brought them internal. So we wiped out a large amount of external revenue that has now come internally to us. If you make that adjustment, 3 or 4 key figures for you to consider. Number one, the dialysis products business, once you account for having brought a big customer internal, in the year 2012, the product business grew at 3.1%, okay, right about market. When you look at hemo disposables, the dialyzer, the bloodline, a bag of saline, things of that nature, we grew at 7.2%. And then lastly, when you look at PD disposables, we grew at 3.6%. So a much different picture than what we perhaps had depicted here, and we'll try to find a better way in future sessions to give you a better idea of this.

One thing I will note, though, when you look at our hemodialysis machines, year-over-year, we were about 2.5% to 3% down in the sales of machines 2012 versus 2011, translates to about 900 or so machines. And what we have seen in other periods of fairly uncertain economic times, many times you'll find people will decide, I will keep my machine an extra year or 2. I won't outlay the money for a new machine this year, I'll make do with what I have until I get a better sense of where the economy's going and what my finances look like. We've been through this before and we see it rebound. What I am very comfortable saying to you is I do not believe there's another machine manufacturer out there that's picking our pocket, so to speak, or getting sales that we normally would get. I'm very comfortable with the way that is progressing in the U.S.

Now, there's some topics of interest, and this is very North American-centric. But I felt like there are a lot of things that have been in the press lately that we should just really take a moment and talk about those, so if you will just bear with me here for a moment. In North America, our legislative focus really is centered around 3 things: integrated care, which is a new RFP proposal that came out not long ago; we'll talk about sequestration; and we'll talk about rebasing of the bundle, which will be in 2014.

First, we, as a company are very pleased that the integrated care proposal, or the Comprehensive ESRD Care, that's what CEC stands for, we're pleased that CMS took the action. We believe in integrated care. We've had very good experience on a very small pilot in integrated care. Now having said that, it's a complicated proposal. There are a lot of questions that we have about that proposal, and as I'm speaking to you now, there's an open forum phone call going on in the U.S., where people are having an opportunity to talk to CMS and try to get some questions answered. A couple of things that we need to know, and I clearly expect someone's going to ask me, will you participate in this integrated care proposal, and it would be our plan to do so. However, we do need some questions answered, very basic. An example, right now the quality metrics, the measures at how CMS will look at the performance of Fresenius Medical Care are unidentified. We don't know what the metrics are at the moment. It's very hard for us to design clinical interventions to improve outcomes if we don't know what we're going to be measured against. So one of the first questions we'll ask today is, have you decided what the quality metrics are? And if you haven't decided, might we have a chance to suggest to you what we think the quality metrics should be? But it's a fundamental point.

Another great example is, in the demonstration that we did several years ago, the way the laws around health care and dialysis are structured, we were able to get waivers of certain prohibitions. Meaning, we, in our demonstration project, were able to provide dental benefits for patients, vision benefits, we were able to provide transportation to get them to the clinic. And I know that may seem awfully strange to you that we can't do that in the U.S., but that's the way it's been structured. But in this demonstration project that we did, we had waivers. We were able to create interventions around those things, offer those benefits, and we think that helped us get to better outcome, while saving money. Nothing has been addressed in this current proposal about those types of things. So it's another fundamental question that we have. Are we going to be given waivers so we can institute some of the benefits that we believe have the best outcomes for our patients? But again, we're positive, we thank CMS for doing this. I can honestly say there's probably no government program that's ever been invented that was perfect. But as long as we dialogue and communicate with them, we think we'll find a common path forward.

Sequestration. We told you, we guided you in the third quarter, that it was worth about $85 million to us. The one change that you should know today is that we didn't have a sequestration impact in January and February. It is expected to come March 1. Pretax, and I think Stephan [ph] alluded to this, it's worth about $7 million to us per month. So we've had a little benefit in January and February. The question that I know you want me to answer, I cannot answer. I don't know what will happen. If I could tell you what the U.S. government was going to do, I wouldn't be standing here. I would be doing something different. But we are staying as close to it as we can, but we fully expect that this will impact, come Friday, the sequestration will begin. And then we'll have to see where it goes from there and we'll keep you apprised of that.

And lastly, rebasing of the bundle. First, let me give you the calendar. The rebase of the bundle, we should get the first proposal from CMS in the July timeframe of 2013. Then we'll have a comment period, which will run probably into October, roughly, and then, come early November to mid-November, they will give us a proposed rule for how they see the rebase of the bundle going forward in January of '14. This is the exact calendarization that happened when we went into the first bundle. For those of you that happened to be at our Capital Markets Day in London, a couple of years ago, we stood up in front of you in September and said, "In another month or 2, we'll get the final proposal." We did, and then we knew how we were going to go forward. We expect this will be the same situation. And in between now and then, we are meeting with CMS, we're offering them data, we're doing everything we can do to help the productive and where this ends up. Please, please, don't take the CBO score of $4.9 billion and run your models just assuming that's what the cut's going to be. Remember CMS is not bound by that number. I think you'll find it's not as dire as people have reacted when this first came out, and we will do everything we can to keep you posted.

Another topic we should talk about is OMONTYS, been a lot going on there, of late. If you remember, we had decided back in July to start doing the pilot study, and we had planned to put about 10,000 patients on. We actually put on about 13,000 patients on a permanent basis, meaning they got the drug and they continued to use the drug. We had dosed as many as 18,000 patients total, but just because you get dosed once doesn't mean you necessarily stay on the drug. We had made a decision, February 13, to pause the pilot study and to begin to do the analysis and the calculation on our results. And we had told you back in the third quarter earnings call, we thought sometime in Q2, we would have results of that. That is still on track to happen. We are going to do that analysis. Subsequent to that, and unfortunately, as you probably well know, the decision was made on Saturday, this past Saturday, by FDA, Affymax and Takeda, based on reactions, some of which happened in our facilities, we communicated that information, as we should, to both FDA and to the manufacturer, a decision was made to recall. We will comply with that recall. We will simply take people off of that drug and we'll go forward with those patients on Epogen from Amgen. So we will stick to our plan, we'll evaluate. We may come through this evaluation and look at this and say, these are great data that we generated, but we can't speculate -- I won't speculate on, is this recall forever? Does the product come back? Does it not come back? It's really not for us to decide or know. We're not the manufacturer. So we'll simply have to deal with it as it comes forward. But we will conclude our study and our data analysis, because we think it's important.

And then lastly, just a couple of things, more of a legal nature. I wanted to make sure that people are aware that we had a matter, as a result of the RCG acquisition years ago, that was in the courts in Tennessee, regarding a Method II company, a supply company that RCG had founded and was operating, and that was resolved favorably for Fresenius, that nothing had been done inappropriately and that Method II company had functioned as it should have.

Secondly, something that will be a bit of interest to you. The GranuFlo litigation, you should probably be familiar with that. You should expect that sometime in mid to late March, there'll be some press about that, that will come out. So I want you to know that. It will be about simply the fact that, in Boston, Massachusetts, the multi-district litigation process is beginning. The judge, the attorneys, all of that, will be meeting and going forward. I have nothing to offer you as to what the outcome will be, but I wanted you to know I am sure there'll be some press, basically stating that the multi-district process has begun. So we'll keep you apprised of that, but I thought it would be something of benefit for you to know.

Happy to tell you that our 16th consecutive dividend increase is coming. You can see that EUR 0.75 is what we are suggesting that we would pay for the ordinary shares, and we are revising our policy as well. I'm sure you're figuring that I just took Mark [ph] and Stephan's [ph] slide and copied it, but we didn't. We actually went off on our own and thought about how we wanted to do this,, and we sort of ended up in the same place, twin sons from different mothers. But we did get there and we think it makes sense, but we're delighted that we're going to be able to do this for our shareholders.

And I think at this point, it's my great pleasure to bring up Mr. Mike Brosnan, whom I've worked with for the last, almost 16 years. Mike?

Michael Brosnan

Good afternoon and good morning, to everybody. I will walk you through the numbers and the outlook for 2013.

Rice did not speak specifically about the fourth quarter, so I'll just comment on that a bit now in terms of revenues. We did have very good growth at 14% constant currency, to get to $3.7 billion in revenues for the quarter. Organic revenues grew at 8%, with care growing at 19% constant currency, and products at 4%, also on a constant-currency basis for the quarter. International revenue growth was very good at 6% constant currency, and that is also equal to the organic growth. We did not have any appreciable acquisition effect in the International business for the fourth quarter year-over-year. Care grew at 8% and products grew at 5% in the quarter on a constant currency basis. Very solid growth numbers for International and, in particular, I'll point out it's an improvement in same-market growth compared to the third quarter, where, as was pointed out to us several times in the third quarter call, we had hit a bit of a low in the third quarter for the International business. But it's now back to what we're accustomed to in those markets.

In North America, care revenues grew 22% but they were influenced by the out-of-period revenue, that we indicated would take place in our Q3 call. Without that revenue, the growth would have been 17% and the organic growth would have been 5% for the quarter. So obviously, the delta of 12% is a consequence of the Liberty acquisition and the impact on revenues in the fourth quarter. Same-store growth was 4%, so pricing was slightly positive in the fourth quarter in North America.

On the product side of the business, the business declined by 3%. Rice commented on the impact of bringing our customer internal with regard to Liberty and Renal Advantage. The impact on the fourth quarter of bringing that customer to an internal status was 5%. So excluding Liberty, products would have grown at 2%. That growth was impacted by the pharma sales, so products alone would be on the order of magnitude Rice mentioned, overall about 4%.

All of this translated into an operating income growth of 14% or $669 million for the quarter. And on an adjusted basis, our margins improved slightly to 18.1%. And for the quarter, by way of referencing on an adjusted basis, the $669 million does not include the impact of renegotiating the Venofer contract for $100 million, and the relatively small amount of the fellowship that was established with the American Society of Nephrology for $10 million, both of which took place in the fourth quarter.

Continuing in terms of margins. The margins in North America were influenced by the out-of-period revenues that we indicated in our Q3 call, as well as a favorable impact from the Liberty acquisition. This was partly offset by increased personnel expenses and increased costs associated with building our pharmacy business in the U.S. The best way to look, I think, at the margin question in the fourth quarter, particularly as it relates to the U.S., is to look at revenue and cost per treatment. So if we were to look at revenue per treatment in the U.S. for the fourth quarter, it was $368 per treatment, up from $351 per treatment in the fourth quarter of 2011. That's $17 per treatment in terms of an increase. $14 of that $17 was from the out-of-period revenues, which leaves a positive rate development in the U.S. in the fourth quarter of $3 per treatment. This is essentially the Medicare rate increase with a positive development on commercial rates, net of commercial mix. And this is somewhat offset by reductions in pharmaceuticals, which we've been reporting on for the last 2 years, relative to the creation of the bundle with Medicare and the lower utilization, particularly of Epo, in the U.S.

Cost per treatment increased $7 per treatment. This was principally from investments in our pharmacy business, coupled with increases in our labor costs, a slight increase in bad debt, and that was partly offset by reduced costs associated with pharma in the services business, largely driven, again, by lower utilization.

Margins on the International side were down 200 basis points. About 1/3 of that decline was due to a closing of the Lenay [ph] Clinic in France,, and the year-over-year effect of having a small divestiture gain in International in the fourth quarter of 2011. So the combined effect of closing the Lenay [ph] clinic and a corollary divestiture gain that we had last year, accounts for about 1/3 or 60 basis points of the 200 basis point decline. And the balance is largely due to foreign exchange and an increase in our bad debt provision in the fourth quarter.

Continuing to move through our results. In a break from the past, the chart does not show all the detailing of the P&L, but I will just briefly talk about interest, taxes and noncontrolling interests related to performance in the quarter.

In the case of interest expense, it has been higher, as has been the case all year, largely due to our capital markets activities to finance our acquisition program in fiscal 2012. In addition to that, we had about $7 million of onetime costs taken in the quarter. $2 million of that related to write-offs of amortized costs associated agreement [ph] that was extended and finally, $5 million relating to onetime costs associated with the new credit agreement that we closed in the fourth quarter.

Our debt, as you know, has gone up about $1.1 billion year-over-year. So that obviously drives the increased interest expense. Tax expense on adjusted taxable income represents about 33% effective tax rate, which is consistent on a year-over-year basis. And noncontrolling interest is consistent with what you saw in the third quarter, which is about 8% of pretax income. So reported earnings as adjusted were $327 million, up about 5% on a year-over-year basis.

Turning to the right-hand side of the chart and talking a bit about the full year. Rice articulated the detailing around revenues for the full year, so I won't repeat that here, other than to say we had very good revenue growth for the year, as he commented. That translated into growth in operating earnings of 12% year-over-year or $2.3 billion on an adjusted basis. Margins in North America were influenced by the Medicare rate increase, a favorable impact on the margins associated with the Liberty acquisition and the out-of-period revenue that I've already commented on, in terms of its full year effect. This was partly offset by looking at the per treatment information on a full-year basis for the U.S. Our revenues on a per treatment went from $328, excuse me, $328 per treatment to $355 per treatment. That's about a $7, excuse me, that's a typo, $348 to $355. It's a $7 increase year-over-year. And the revenues benefited from the year-over-year effect of the out-of-period revenues that I've already commented on for the quarter. To put that into context for you, that's worth about $2 per treatment in terms of the full year value. So $2 of the $7 relates to out-of-period revenues. The difference between what we recorded in fiscal 2012 and the difference between what we recorded historically in 2011. Unfortunately, this year, that activity happened very late in the year, so the reason I indicated in my guidance in the Q3 call was we knew that it was coming and we knew that it would be concentrated in the fourth quarter, whereas in prior periods, it was a much smaller amount. 2012 was roughly 2x the 2011 values. But it all came in one quarter, so it's worth $14 dollars per treatment in the quarter. When you consider the year-over-year effect, you're looking at essentially about half as much, or the incremental affect in 2012 was about $45 million. And that translates to about $2 per treatment when you think of it in terms of the longer view, not just the quarter in which it took place.

The revenues also benefited from our expanded services and from the Medicare rate increase. And we guided for the year for commercial rates to be break even to a slight positive in the U.S. and, in fact, they were. We also indicated in our update regarding revenue per treatment in the third quarter, that our increase year-over-year would be in the 1% to 2% range, and if you take out the effect of those out-of-period revenues to be totally transparent about it, in fact, our rate increase year-over-year was about 1.5%. So it was within the range of our guidance.

Cost per treatment in the U.S. was up $1, from $282 per treatment to $283. That was the effect of labor, expanded services and bad debts, which were partially offset by reduced pharma costs, and also was within our guidance of 0% to 1% increase for the year that I indicated in our last call.

Moving to International margins. They're down about 30 basis points from 17.4% to 17.1%. Most of this was due to growth in the service business at lower margins than the products business, and the growth of the company's business in China with a modest effect from foreign exchange.

Continuing to move through the P&L. Interest expense is unremarkable. You're seeing a consistent trend with regard to what I've indicated all year long, given our increased capital market activity. The effective tax rate on adjusted earnings is about 34%, which is also consistent year-over-year. If you look back to the reported numbers, the effective tax rate is substantially lower, 31.4%, and that's because of the impact of the $140 million nontaxable investment gain we realized with the Liberty RAI transaction in the first quarter of fiscal 2012.

Noncontrolling interest, if you look at it as a percentage of pretax income, is slightly lower for the year and that's because you didn't have the annualized effect associated with the joint ventures we acquired with Liberty. So I'm anticipating 8% is a more reasonable annualized effect, which is what you're seeing in the fourth quarter of 2012. Reported earnings as adjusted are $1,118,000,000, up 4% year-over-year. That was a long chart.

Turning to the next slide and starting to talk about our cash flows, starting with day sales outstanding. As Rice commented on already, we had over $2 billion of operating cash flows in fiscal 2012, which is a record for the company. And in large measure, we can thank the performance of the organization around the world, in terms of managing receivables and bringing DSOs down, as a credit to that operating cash flow. North America, at 55 days, maintained their days in what, frankly, I believe is an outstanding range for DSO in the industry, in that country. 55 days in 2011 and finishing at 55 days in 2012. International improved the picture dramatically by 9 days from the peak at the end of the first quarter of this fiscal year, 124 days at the end of Q1, improved by 9 days at the end of the year. As we've commented on before, that is, in large measure, due to the activities undertaken in Spain, as well as payments we received in Italy. But it also speaks to the fact that, routinely, the organization around the world is focusing intensively on ensuring that we're being paid for the services we're providing from, largely, our governmental payors on a global basis.

As you all know, when it comes to cash, we had a great year and it means we just need to do it all again next year. I'm not going to talk specifically about the fourth quarter in terms of the cash flows. It's very consistent with what I've reported in each quarter over the course of the year. Excellent cash flow from operations, CapEx within our guidance, so I'll just briefly comment on the full year. Starting the year with a little under $500 million in cash, $2 billion in operating cash flows, as I've commented on, capital expenditures a little bit under $700 million, which is about 4.8% of revenues. Again, consistently below our guidance, where we typically indicate about 5% of revenues for capital expenditures. The split between maintenance and expansion capital is 60-40. So we're continuing to divest, excuse me, invest in de novo facilities around the world. Acquisitions at $1.6 billion is largely the Liberty transaction, but we also filled out our portfolio with additional acquisitions in vascular access in the U.S., as well as acquisitions in the International markets, where we felt it was appropriate. The dividend payments, the net beneficial cash flow associated with our financing activities, finishing the year just under $700 million in cash. So an excellent year in terms of cash flows.

Debt-to-EBITDA, on the left-hand side, you can see we're finishing the year at just under $8.3 billion in debt. On the right-hand side of the page, $2.8 billion in leverage, about 20 basis points less than our absolute max in terms of guidance. So we performed consistent with our guidance with regard to managing the balance sheet. And essentially, no change in ratings over the course of the year.

I'm going to transition to our 2013 guidance, but before I show the guidance, I want to talk a little bit about what we think is the right way to look at the base for viewing our 2013 guidance. And in part, at least, the reason for this is, as the year has progressed, it's been a very active year for us. We've done a number of different things. We've classified them consistent, we felt, with the way our company typically operates from a historical perspective. And we also looked at it consistent, we felt, with the guidance that we had provided for 2012.

In looking at some of the reports that came out after the third quarter and up to, and including, some of the reports that came out just prior to today's meeting, it's clear to us that there is a fair amount of confusion and there's a lot of differences in terms of the way folks are viewing our financial results and whether to include or exclude the Venofer refinancing, include or exclude the investment gain and include or exclude the out-of-period revenues. So I think, you've heard Rice report, if you look at the left-hand side of the page, the light blue EBIT adjusted, we've essentially prepared all of our year-over-year commentary that you've just heard using an adjusted EBIT number of $2,329,000,000, and that led to the $1,118,000,000 that I just commented on in terms of after-tax results. That number excluded the Venofer special charge of $100 million and the contribution to the foundation, which you see here on this page. I'm deducting the charge to get to the reported EBIT that you'd find in some of our regulatory filings.

If you then look at a couple of things that we typically include in our operating results, and you look back over the years, you'd see, with our high level of acquisition activity, $1.6 billion in 2012, $1.8 billion in 2011, that we typically have included our divestiture gains or losses, as well as our acquisition spending, what it takes to close these deals, in our operating activity. So the gains which we reported in the second quarter for $35 million, you're aware of. The $68 million is the $90 million of out-of-period revenue that we recognized in the fourth quarter, netted against $22 million of acquisition spending to achieve and close the deals that we routinely discuss. Our thinking with regard to 2013 is that we would -- we think it's appropriate to combine all of those activities and use as the base for evaluating our 2013 guidance, as our reported EBIT number of $2.2 billion, the dark blue column in the middle.

Now you might ask me, why would I highlight the divestiture gains, the acquisition spending and the out-of-period. And the reason for that is, we're guiding to about $300 million of acquisition spend for 2013, substantially less than what we actually undertook in 2012 and 2011. So it seems, to me, reasonable to give you a base for 2013 that essentially says, we don't anticipate seeing that level of activity in our 2013 guidance.

Similarly, with regard to the $90 million of the out-of-period revenue, I've commented earlier on 2 things. One, that was worth $14 in the quarter, that would translate to about $4 per treatment for the year, and I commented that, that activity was roughly 2x our 2011 activity. So the actual 2012 over '11 impact on our revenue per treatment is about $2. When you look at 2013, we're not anticipating that level of activity at all with regard to out-of-period revenues. So I'm applying the $90 million -- I'm essentially saying that the $90 million in out-of-period revenues, more or less, offsets against the $110 million Venofer contract, and that's why I think that $2.2 billion is the right base for 2014 -- '13.

What we've excluded from all of this is the $140 million investment gain. I think everyone fully appreciates that was a highly unusual item. We didn't report it in our operating earnings all year long. We excluded it from our guidance all year long and it is, in fact, in our regulatory filings, not included in our operating income. So therefore, we're excluding that from our guidance from 2013 as well.

So I've taken some time to explain basically, the left-hand column on the chart, the 2012 base period, recommending to you that you look at our reported numbers for fiscal 2012, against which to evaluate our 2013 guidance, reported at $13.8 billion in revenues, $2.2 billion in EBIT. The net income of $1.1 billion I have adjusted by the investment gain, and I think that's consistent with the way we treated it all during 2012 and I don't think that you'd want to assume, in 2013, that, that should form part of our base business. So the net income, as a base for comparison to '13, would be $1,047,000,000.

For 2013, our guidance is indicating we anticipate that revenues will exceed $14.6 billion. That's indicating, roughly, a growth rate in excess of 6%. Our EBIT between $2.3 billion and $2.5 billion, which will indicate a growth rate of 4% to 13%, and net income of $1.1 billion to $1.2 billion for the year.

I'm going to devote my attention to the right-hand side of the page, where we've highlighted several things that are influencing this guidance. In the U.S., Rice has already commented on, I believe, the medical device tax and sequestration. In the U.S., they continue to wrestle with their spending issues. That has resulted in a number of bills coming out of the legislature, which have, in fact, had an impact on our industry, such as the medical device tax and, perhaps, will have an influence on the industry with regard to sequestration. It would appear today that the medical device tax is here to stay. We indicated in the third quarter that, that would carry with it a cost of something on the order of $20 million to $25 million. Is it possible that somebody might have a notion to change that? Perhaps. But I think our operating assumption is that, that is going to be a part of our cost structure in 2013. The number will vary, dependent on the products that we sell, and that's why we've given you a range. And that, essentially, will lead us to some of the cost mitigation activities that we're going to have to undertake in '13 as well.

Sequestration. We disclosed the $80 million to $85 million that -- the can was kicked down the road for 60 days so we've picked up about $14 million or $15 million of that. So we think at this point, sequestration has about a $70 million potential effect on the year. The low end of our range assumes that sequestration goes into effect.

Acquisitions are here simply to point out that we're guiding to about $300 million of capital spend for acquisitions. Obviously, the earnings effect associated with those is largely dependent on the timing associated with those deals closing. At $300 million, it's a relatively small effect for the full fiscal year.

In currency, we see no particular change. That's just to remind you that we've provided some detailed updated currency guidance at the beginning of 2012. We typically don't do that every year. I see no reason to change the guidance I gave you with regard to the influence of currency on the business this year, it's consistent with what I said last.

Moving to the bottom side of the page. These are things that are, perhaps, a little bit more under our control and very much worth highlighting. First, I commented in the fourth quarter that we did have some -- an effect in our cost per treatment with regard to building our pharmacy business. We've had a pharmacy in the United States since the formation of the company. We enhanced that operation when we acquired Renal Care Group in 2006. And it's our intention, with the move in the U.S. towards integrated care, to substantially increase our pharmacy operations in that market. We're committed to the philosophy that incorporating the pharmaceutical needs of our patients into their treatment regiment will improve the information we have on the patients with regard to adherence. It will allow us to work more proactively with the medical community with regard to determining -- or to advising, with regards to protocols, and to looking more specifically at outcomes. And we believe, as a result of our participation in the pilot that Rice mentioned, that all of these things, when you think in terms of integrated care, will improve patient outcomes. So we anticipate in fiscal 2013, to double, or perhaps triple, the number of patients that we have enrolled in our pharmacy, and begin to use that information proactively to improve the overall care and the overall outcomes that our patients experience.

We've also indicated in the back half of the year that we have seen some challenges with regard to our commercial mix. And just to be clear on that, commercial mix is a metric which is a function of the growth rate of your commercial patients relative to the growth rate of your overall patient population. So it is not intended to suggest that we have fewer commercial patients, we don't. Our commercial patient population continues to grow and has grown in each quarter. But our -- the mix of our dominant patient population, which is Medicare, is growing faster than the commercial patients and, therefore, you see the mix effect. We had a very similar situation in 2011, when we saw that our same-market treatment growth had declined to a level that we found unacceptable and we addressed that expeditiously, to the point where we've now corrected that decline and are showing appropriate same-market treatment growth rates for our patients, or for our treatments in North America. Our intention in 2013 is to do exactly the same thing, with regard to ensuring that we can get the commercial patient growth rate back to a level that we believe is appropriate.

And then lastly, looking at cost mitigations, I foreshadowed that when I was talking about the medical device tax just a few minutes ago. This is just to emphasize that we have indicated over many, many years that we get accretion in our margins. In the last several years, we've indicated 10 to 20 basis points a year. It is part of the fundamentals of our business. We do that through both our acquisition program, which provides some synergistic benefits, but we also do it through straight cost evaluation and focused on the cost side of the business. So you'll see activities in 2013, across the company, relative to ensuring that we stay focused on the cost side of the equation. We minimize costs wherever possible, never compromising the quality of our products or the quality of our patient care.

I think, with that, I'll close my remarks, and Rice and I will take questions. Thank you.

Robert Maurice Rice Powell

Thank you, Mike. Just a real quick summary slide, then we'll get into your questions. Please don't leave here doubting that we don't believe that we have future profitable growth in our scope. We believe we can do this. One thing I'd like to point out to you, it's very important to me. When I say to you we have 3,160 clinics, we have 258,000 patients, let's not forget the individuality of the treatment. We have a human being that we're treating, that's very ill and they need us to do a good job. And I want you ever think, as these numbers get larger, that we lose the impact that we have every time we touch a patient. We take great care in that and I'm happy to see these numbers get larger, but at the same time, don't, for one second, think that we don't look at each patient as an individual that needs to be treated and handled with utmost care, expecting the best outcome. I think, sometimes, that can get lost in the message.

We talked about this as a market niche that's growing and why it's going to grow. I also want to talk about profitable growth and continuity among the management team. You have a management board that's been together for a number of years. We have people with tenure, at 20 years, 10 years, 15 years, so be comfortable that you have a group of people that have worked together for a long time.

Many of you have asked me the question, is the strategy of the company going to change with Ben's retirement and Mike becoming CEO? And the answer to that is, no. But also understand, the strategy that Fresenius Medical Care has had for a number of years was a strategy that came from the management team collectively. Ben was very good at articulating that strategy and carrying that message, but many of us have worked long and hard on developing that strategy, and we still believe in it. And we're going to continue on the path that we've undertaken.

We talked about the dividend and the increase there and the change in the midterm policy, and I remember that I didn't define midterm and we'll define that as 2 to 3 years.

And then lastly, we will have a Capital Markets Day this fall. It will be in November. We'll do it in Boston and the reason we're doing this is, the American Society of Nephrology meeting is in Atlanta, very early in November, a lot of people will be there. So we're trying to have our Capital Markets Day sometime after that. We'll be in touch with you on that, but I wanted just to let you know so you could kind of put it in your calendar. And we're hoping, given the calendarization on the rebase of the bundle, that we would expect sometime in November to get the real final rule. We'd love to have our Capital Markets Day as close to that as we could so we have more certainty for you at that period of time. But we'll just have to see how that plays out.

And with that, Oliver, I'm going to turn it back to you and we'll do Q&A.

Oliver Maier

Great. Thank you, Rice. Thank you, Mike, for the presentation. So same procedure as before, we're going to take questions from the audience first and then I'm going to move to the questions from the audio line. So Martin is going to be first.

Question-and-Answer Session

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Martin Brunninger from Nomura. Just to confirm your increased revenue per patient. Is that a matter of collection from Q3? And is right that you said you should get more market share of commercial patients to get back to the appropriate level, maybe kind of elaborate what you meant with that. And second on OMONTYS that you highlighted, what was your assumption for 2013 and conversion from Epo to OMONTYS and how does that impact your profits for 2013, before you issued your guidance?

Robert Maurice Rice Powell

Mike, you want to take the first one and I'll take OMONTYS?

Michael Brosnan

Sure, yes. Just to confirm, the -- what I said was that we're seeing our commercial patients grow, but they're growing at a rate that is less than our overall patient population and that's why I've commented about the mix declining a bit in the third quarter. So the intention would be to improve the rate of growth of the commercial patients. I think that covers your question.

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

And how do you intend to do that, to grow the commercial patients?

Michael Brosnan

It's very similar to when we were challenged to get the same-market treatment growth back to levels that we felt were appropriate. It's very much something that needs to be integrated into a daily basis across the country, with regard to the folks at the clinic level and how we interface with the sources that traditionally provide commercial patients, in particular, hospitals.

Robert Maurice Rice Powell

In the case of OMONTYS and the conversion, we were very conservative. We had no big assumptions about what would happen. I mean, we really went into this pilot trial not knowing what the outcome would be. So several people have indicated, what will happen now? We will simply continue on. We've been a customer of Amgen's for a number of years, as you know. But we really didn't have any "bet the farm" sort of outlook on OMONTYS at the time we did this. I'm happy to tell you that the pricing that we had on OMONTYS was for a pilot study. I think I said this at the JP Morgan conference, we really had not begun negotiating a commercial contract with them. We were waiting to get through the pilot to really see how things went. We just weren't interested in getting too for ahead of ourselves.

Michael Brosnan

And, Martin, let me follow-up, too, because I was thinking about acute onset when I said hospitals. Obviously, the ongoing source of commercial patients is also focused on our physician relationships as well.

Martin Brunninger - Nomura Securities Co. Ltd., Research Division

Does DaVita HealthCare Partners still -- does it have an effect in your view that you lose some commercial patients?

Robert Maurice Rice Powell

I don't think that it does. Keep in mind that HealthCare Partners is in Florida, Nevada and California. We have good presence in those states. It's been our best intelligence, as we've looked at this, that we've not felt like that we were losing commercial patients there. I actually think the activity around commercial patients is really very local in the markets, and you really have to be out looking at what you're doing and having good data as to where those patients are going and working with your physician partners. This is not an elegant term, Martin, but I would say it is really fundamental blocking and tackling and being out in the community and seeing what's going on.

Holger Blum - Deutsche Bank AG, Research Division

Holger Blum, Deutsche Bank. Just wanted to come back on the guidance range of $100 million on net income, which is relatively broad. I understand, $40 million, $50 million is sequestration, as a non-factor [ph] , left for this year. What are the other major variables explaining the $50 million, $60 million delta in potential outcome?

Michael Brosnan

I think you can look at the right-hand side of the page, that's why I went through that so carefully, as I think that what will contribute to that is what happens with regards to some of those other factors. The ability to mitigate costs associated with things like the medical device tax, how we grow our pharmacy operations and how we attack the growth of commercials in the U.S., coupled with the fact of a relatively modest impact associated with the timing of closing acquisitions. I wouldn't add to that. I think that's a pretty comprehensive list.

Holger Blum - Deutsche Bank AG, Research Division

Okay. And then if you look back and follow your adjustments for the earnings space in 2012, it implies that you had a net income decline of 2% or EPS decline of 3% against 10% top line growth in 2012 on a clean basis, or bid [ph] on paper with a Medicare increase and a few other items, that should of been a somewhat better year, I guess. So what are the major, let's say, items which were really causing the underlying decline, then, in earnings? Is this Liberty, for instance? Maybe you could say a word there, to what extent that might have been dilutive in the first year of consolidation. What are your expectations there for '13?

Michael Brosnan

Yes, yes. Well I think -- and again, some folks may debate how you treat the renegotiation of the Venofer agreement, but we have indicated that we'd get about 40 basis points of accretion in margin, and when you look at the charts that Rice and I presented, we were showing a 16.9% margin, adjusted in 2012, over 16.5% in '11. So I think in terms of profitability, we felt we achieved our margin goals in a difficult environment.

Robert Maurice Rice Powell

And -- no question. We were later getting where we wanted to get with Liberty but, again, we were dealing with the Federal Trade Commission on when we could integrate and do some of those things. So I would tell you over, we feel like it was a tough but a good year in that regard, enough said.

Holger Blum - Deutsche Bank AG, Research Division

And just to bring about the adjustments you made, that we rather should know, if you look at '13, we base our numbers to a lower base, that we should look at reported EBIT, which would mean on reported EBIT, you would have been some margin contraction and even net income decline if I take the...

Michael Brosnan

No, that's correct.

Holger Blum - Deutsche Bank AG, Research Division

Correct basis, so I'm more...

Michael Brosnan

A margin decline in '13, you mean. You're talking about '13?

Holger Blum - Deutsche Bank AG, Research Division

In '12. If I say, I should look at EBIT of 2.2, would be versus 10, top line?

Michael Brosnan

Yes, I'll answer both, I just want to make sure which year I was talking about. In 2012, on a reported basis, the margins are 16.1%. So the swing is absolutely the renegotiation of the Venofer contract and, to a lesser extent, the contribution, which is de minimis. That's an 80 basis point swing for the year. So if you look at '12, the way we've presented it in 2012, you get to the 16.9%. If you look at '12, simply on a reported basis, which is what I've suggested as a base for '13, you'd be at 16.1%, so you'd have contraction of about 40 basis points. The Venofer, the opportunity to renegotiate that deal, we felt was important to the business. When you look at 2012, it seemed like the appropriate point in time to take advantage of the fact, as Rice mentioned in the third quarter call, that we had the right to look at that contract again. That was negotiated in the deal, back when we closed it several years ago. So we acted on that in 2012 and if you -- no question, if you include that in the numbers, then there's a contraction of margins. But I think there's no mystery as to why the margins contracted, it's because we renegotiated that deal. We rebalanced the economics between the parties and, most importantly, there were volume commitments in the old deal and we restructured the arrangement which, I think, is much more appropriate given the current market, such that we're not going to be bound to multi-year fixed volume commitments as we go forward. So that's why we did it and it's an 80 basis point effect on the margins between the as adjusted and the as reported.

Holger Blum - Deutsche Bank AG, Research Division

That's clear. But you, although, have, let's say, nonrecurring one-time benefits in the same magnitude. So you would have a real margin decline, all but Liberty is a higher margin business?

Michael Brosnan

No, I don't view the other items as one-time benefits. First, the investment gain, we never reported as part of our operating earnings at all during the year, period. So we took no sleight of hand advantage with regard to the $140 million investment gain. And with regard to the other activities, we've had several years, in fact, 3, where we've had substantial spending on acquisitions, 2010, '11 and '12. And historically, we have always included all of the activities related to acquisitions in operating earnings, with one exception. That was the RCG acquisition, because it was -- it dwarfed everything else we had done for -- but assured the formation of the company. And the out-of-period revenues and, perhaps, my explanation was too long-winded before, because out-of-period revenues are not unusual in the U.S., given the way health care revenues are recorded. They're not unusual at all. We had, had out-of-period revenues at a much lower level in 2010, 2011. And the reason I highlighted it in 2012 was, it was about 2x the normalized level and it was happening at the end of the year. So I felt, in fairness, I had to give you an indication that something would be happening in the fourth quarter. So I don't view that as a one-time effect at all. What I have done in looking at 2013 is ask myself the question whether I see, after a 2- or 3-year period, whether I see those activities continuing into '13. So I've -- and I don't see it. So therefore, what I tried to do, in a very simple way, is ask myself the question, what do I think is a good base and a base that won't require me, every quarter in 2013, to remind everybody of all of the activities of 2012. So the conclusion we came to was the best thing to do is use the reported numbers. But it's not, in my view, taking a one-time activity, such as the Venofer charge, and trying to argue that the out-of-period revenues was a one-time activity, because it wasn't. It was a quarter affect of $14 a treatment, a full year standalone effect of $4 a treatment and a year-over-year effect to 2011 of $2 a treatment. So it's very -- it was very much in the normal course of business for 2011, 2012. I don't know if it helped saying in a different way. I'm happy to take another question on it. It's an important question.

Holger Blum - Deutsche Bank AG, Research Division

We can discuss it off-line. I don't think it's conditional [ph] if you switch the base, looking at '12 -- both '12 and '13 growth rates, but I'll leave it.

Michael Brosnan

And I take your point. I'm focusing more on the absolute numbers for '12 and '13. Absolutely appreciate that changes how you want to interpret the growth rates. And as we talked about this before this meeting, appreciating that having read a number of your reports over the course of the last several months, different people will have a different point of view of that. So the intention is, we never tell you what to do, God forbid. But we felt we owed you at least management's view on how to look at 2013. But I absolutely appreciate that you may have a different view with regard to how to measure the growth rates. I think what we were trying to do is give a solid base to '12 and give our absolute dollar numbers for '13. And how that finds its way into the biosphere, we'll read about it.

Oliver Maier

I think there's one more from Marcus.

Marcus Wieprecht - MainFirst Bank AG, Research Division

Yes, Marcus Wieprecht from MainFirst Bank. One question on your P&L line is famous income from equity method investees. Maybe you could remind us, please, what the metrics are behind that line. It's quite substantially down and I have in the back of my mind that's somehow related to the joint venture you have. But some refresher, for me at least, would be helpful.

Michael Brosnan

Yes, happy to, Marcus. It is -- there are a number of factors in that line, but the principal one is the Vifor-Fresenius joint venture, pharma joint venture. We had accelerated some of the costs associated with getting the PA21 the drug filings in place, particularly in the U.S. So that's what largely drove the change, the reduction in equity income associated with that. It's picking up our share of the costs associated with accelerating the filings for the phosphate binder drug PA21.

Oliver Maier

One more from the audience. That's Volker.

Volker Braun - Commerzbank AG, Research Division

Two questions related to cash flow, if I may. First of all operating cash flow of more than $2 billion represents roughly 15% of sales, which is a record mark. What would you consider as sustainable level, is this a sustainable level? And with regards to your acquisition budget of $300 million, what does that mean for your plans regarding the expansion of de novo networks? Maybe a few words on that, but, in particular, in the International market?

Michael Brosnan

15% is a very attractive number and I would -- I wish I could say we'll sustain that for the mid-term, but I'm not going to say that. The 15% was influenced by a lot of -- as I already said, a lot of work around the world relative to managing DSOs. Some of that was because the DSOs had climbed over the course of the last couple of years, as a result of the sovereign debt crisis, in particular. So we made substantial progress getting the DSOs back down to a reasonable level. We also had some legal settlements in 2012, which I'd commented on earlier in the year. The Baxter litigation had with it an escrow, and when the patents for the hemodialysis litigation were invalidated, most of that escrow came back to us. We also had a settlement with -- here in Germany with the tax authorities, that resulted in their finally fulfilling a refund that we were due. So the working capital elements, the improvement in working capital, contributed to that 15% of revenues. So I would still guide to a midterm expectation that we'll be probably greater than 10% of revenues in terms of operating cash flows. And relative to your question on de novos and, frankly, off the top of my head, I don't recall the International de novo number, we typically don't guide to it. You want to comment on it?

Robert Maurice Rice Powell

Yes. So we did 65 de novos in '12, about 43 in the U.S., 22 in the International markets. I think we're pretty comfortable that, in any given year, we'll be somewhere between 60 to 100. And if you look at what I think we're counting on for CapEx spending next year, somewhere in the neighborhood around $700 million, is that right? We think that gives us ample room to be able to do that. We're not really interested in backing off of that number. If we are in the right place, it's the right time to put a de novo in, we'll certainly do that.

Oliver Maier

Okay, now, I think it's time to open up the audio line so, Jerry [ph] , if you don't mind, I think we can start accepting questions from the outside.

Operator

[Operator Instructions] The first question is from Michael Jungling, Morgan Stanley.

Michael K. Jungling - Morgan Stanley, Research Division

I have 3 questions. The first question is for Rice. I can see on Reuters, a headline that I think you mentioned to the press, that the CEO expects a slight reduction in reimbursement as a result of the U.S. Medicare rebasing. What do you mean by slight? And secondly, what gives you the confidence that it will only be a slight headwind for you in 2014. Question number 2 is on the U.S. cost per treatment, how you're thinking about cost inflation for renal drugs and also labor? And then the final question I have is in relation to Renal Advantage. I think in the Q3 you highlighted that you're a little bit behind integration activities and, as a result, there were some cost savings that you could make going forward or catch up. How much did you make good in the fourth quarter and how much of integration savings are left for 2013?

Robert Maurice Rice Powell

Thank you, Michael. I guess I'll have to learn to be careful how I define slight when I speak with the press but, no. In all seriousness, the discussion that we had was simply that, as I said today, I hope people don't take the $4.9 billion number and really run with it. I think it will be vastly different than that. And the discussion that we had was, when asked, "Well do you think reimbursement would go up?" I said, "No, I do not." But I'm comfortable that CMS is looking at the co-morbid conditions and all of the inputs on the rebase. Everybody tends to focus just on utilization of Epo, but keep in mind, there have been price increases and they've agreed that they're going to look at that. So I do think there will be some reduction, if you will. I never defined slight and I don't think I could define slight today. I oould certainly tell you what I'd like it to be, but I don't think that's going to get you what you're looking for. So I'll have to tell you, it's still undefined at this point and we'll watch with great interest as this unfolds over time. Mike, you want to take the cost per treatment. I'll come back around here.

Michael Brosnan

I have to apologize, I didn't hear the question. Could you repeat the question, Michael, your second question?

Michael K. Jungling - Morgan Stanley, Research Division

Yes, sure. When we look at U.S. costs per treatment for 2013, how should we think about cost inflation for renal drugs and also labor?

Michael Brosnan

I actually was not planning on guiding at that level for 2013 because of the number of factors that we indicated on the page. So I'm probably not going to give you a specific. I would -- other than to say, we typically do see some inflationary aspects to our cost per treatment year-over-year. So I certainly think that would be the case with regard to our labor costs. On the pharma side, it's not as clear as perhaps it's been for the last couple of years. Because from a utilization perspective, obviously, with Epogen having been at the forefront in 2011 and, to a lesser extent, in 2012, I don't think we know enough today to give you a firmer guidance on cost per treatment other than what I've indicated for operating margins overall for the company. I don't know if you have a different view, Rice?

Robert Maurice Rice Powell

No, I would say this, that I don't know how we would peg the labor at the moment. As it relates to utilization, we feel like we've hit a fairly constant baseline in our utilization of our pharmaceuticals. There are some things that we are continuing to look at with our algorithms. There could be some additional movement there. But, Michael, at this point, were not far enough along to really do that, and obviously, there's things that we have to consider in terms of the clinical outcomes and how do you approach those things. So it's probably not in our best interest to say too much more than that, at the moment, but know that we are sensitive to it and looking at it. In the case of Renal Advantage, as I said when we announced the deal, this was a very different situation. When we came together with the acquisition of Renal Care Group, we had published synergies and we were very comfortable at the synergies that we were looking to take there. We didn't really see a big synergy opportunity, per se, with Liberty, Renal Advantage. But I will say that we've gotten a better pace. We've picked up our base on the integration. I feel much better what we got accomplished in the fourth quarter. But you know, Michael, we never really commented on dollar savings or what we think we would get out of there. But clearly, one of the things that we had not done, and this is what I commented on, that when we looked at the situation with payer mix and where we were with revenue per treatment, not having been able to look and talk to the Renal Advantage book of business if you will, for a couple of months, it really put us behind the 8-ball, and I think we're making progress there, so I think I'll answer it that way.

Michael K. Jungling - Morgan Stanley, Research Division

Maybe some housekeeping questions, just on the financials. For 2013 guidance, and I excuse myself if I missed it, but could you give some guidance on how you see sort of net interest and also how you see the tax rate? And when it comes to acquisitive growth, what is the spillover from acquisitions in 2012 to 2013? If I also include the $300 million of additional acquisitions, the CapEx that you've earmarked? So 3 questions on the financials and then I'll be quiet.

Michael Brosnan

Yes, your first question on net interest. I think that we'll probably have a relatively stable, maybe a slight uptick in terms of the actual cost, the actual interest expense, just anticipating that rates won't stay precisely where they are today. But no material change from the numbers that you see in our 2012 actuals. On the tax rate, I think we're probably in the 33% to 34% range, in terms of the effective tax rate. And I must have a hearing problem today, I missed the third question.

Robert Maurice Rice Powell

Acquisition spillover.

Michael Brosnan

Oh, acquisition spillover. Yes, just -- we did close the Liberty transaction in late February, so there's a couple of months on that, and that's about $60 million a month in revenue. So a relatively minor effect with regard to the spillover on Liberty. And the other acquisitions that we closed in fiscal '12 are relatively small. So I think you're probably looking at a revenue effect of -- on the order of $110 million to $130 million, and I'd apply our normal margins to that in terms of a spillover effect.

Operator

Next question is from Lisa Clive, Sanford and Bernstein.

Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division

One question. You mentioned your pharmacy business and the fact that you plan on expanding that quite a lot, particularly as you move into integrated care. You recently announced a deal with DaVita. Could you just explain how that fits into the equation as well? And then a second question, on your use of OMONTYS. The letter that you published, I believe it was on the 13th of February or so, didn't actually mention any deaths in the patients who are trying OMONTYS, Can you confirm that, that was, in fact, the case? I know you did cite that there were some hypersensitivity issues, but just trying to get a bit of a better sense of your experience with the drug. And then just lastly on the potential for a claw back, what is your sense today in terms of the small independent clinics, in terms of their level of profitability. I had seen a presentation from MedPAC in December that indicated that actually it doesn't seem like their profitability has really shifted much from 2010, when I think Medicare itself calculated they were making a 0.1% profit margin, and I guess maybe you've alluded a little bit to that, the fact that you've seen deferrals of purchases on the equipment side. Could you maybe just talk about how you think their financial health is these days?

Robert Maurice Rice Powell

Sure, Lisa. It's Rice. So with the deal with DaVita that we announced, I guess, back in December, it really doesn't impact our belief that the pharmacy is important and the tools and the advantages that having our patients on our pharmacy gives us. We think that's fundamental to Fresenius and we are in control of that and we'll continue to drive patient uptake, because we think we will get better outcomes, better compliance. We had to make a decision, in terms of how to best use our capital, did we build out? Should we go build out a logistics chain to deliver the drugs, literally, get product to the clinics or should we just make-buy versus decision? We talked to a number of the players in the market that do that, but we've had a long relationship with DaVita. We work well with them, in addition, to competing with them. And we felt that they had a very renal-patient specific outlook on this with their pharmacy and we were comfortable that they're doing the fulfillment and the literal shipping of the drug. We thought that made sense, we felt we would get the attention that we wanted in doing it that way. So think of it as a make-buy decision and we really were looking for somebody that would give us great service in the logistical aspects of delivering the pharmaceuticals, the oral drugs, to our patients. In the case of OMONTYS, I believe there were 5 deaths, in total. That's what I saw in the literature. I believe 2 of those were attributed to cardiovascular situations, and then there were 3 deaths that people believe are hypersensitivity-related. I believe, Lisa, that at least 1 of those was in one of our clinics. I can run that down for you. I think perhaps 1 or 2 were in our clinics, I don't believe all 3 were. But again, as I've said, we certainly reported the hypersensitivity situation and let me just kind of give people a little more clarity. We had said we were going to do 10,000. We let that kind of run into 11,000 and then we made a conscious decision that we wanted to put a significant number of patients on, in a month [ph] , to really pressure ourselves operationally to do that, and just to see, could we continue to get the good results that we had been getting. And it's when we had that next bolus of patients that some of these things began to show themselves to us. So as disappointed as I am that this had to happen, I'm glad that we structured and went through the thought process that we did, because I think it ultimately helped get us to the point where we published the letter that we did to our medical directors on the 13th. And then lastly, I would agree with you, I don't think there is much change in the profitability on the small guys. We kind of see this in a couple of places. As I've mentioned, the machines, we've seen it there. And obviously, being in the business the way we are, many times we will see independent care providers come to us, wanting to sell their clinic, perhaps get out of the business for any number of reasons. So I think that, that very slim profit margin that you mentioned is still there and I think that certainly has got to weigh into the approach that CMS will take when they look at the rebase of the bundle and how that will go forward.

Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division

And if could just stick-on one last question. There was a previous question around labor costs. That's obviously a huge portion of the cost of providing a dialysis treatment. I remember a few years ago, you talked about how you had established a training facility in the Philippines and that was helping improve your supply of well-trained dialysis nurses. I understand they are in high demand. Is that something that you think is a real sort of structural advantage versus particularly the small players, in terms of keeping your labor costs down to some extent, and what else can you really do there?

Robert Maurice Rice Powell

Yes, Lisa, What I would say is, I think it's a great program that we have. I think one of the things that we haven't talked about of late is that, as we set that program up and we had nurses come into the U.S., they were -- they scored some of the highest scores possible in standardized testing that they take. Unfortunately, as the administration has changed and things have gone on in the U.S., it is bloody impossible to get people into the country with work visas and to be able to take advantage of that opportunity. And what we've seen is, other parts of the world now, particularly in Europe and other places, are beginning to utilize these nurses coming out of the Philippines, because they have an easier time getting them in the country, getting them work visas, et cetera. We've had constant, constant dialogue with the immigration authorities in trying to work through these issues and we've made some progress of late, but we do think it's an advantage that we have. But we've just not been able to see significant numbers of nurses coming in, like we had hoped, just based on the things that are going on in the U.S. today.

Oliver Maier

Okay, Jerry [ph] , I think, due to the time constraints, we have time for one more question.

Operator

The last question will be from Veronika Dubajova, Goldman Sachs.

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Veronica here from Goldman. I have 3 questions, hopefully a couple of them pretty straightforward. One, Mike, I appreciate you don't want to guide on cost per treatment but I wonder if you might help us think about revenue per treatment in North America in 2013, given a couple of the moving parts that you have there, that might be quite helpful. My second question is on the integrated care pilot. DaVita was out there when they reported with, what seemed like quite negative commentary on the pilot and their take on it was that it was fairly disadvantageous to the large [indiscernible] organizations. I wonder if you share that view or if maybe your view on that is not as stringent. And as you think about this program being rolled out, what are the key pieces of feedback that you're passing back to CMS, aside from simple questions like, what are the quality requirements, et cetera. And my last question, just hopefully housekeeping. Hemoglobin, the percentage of patients between '10 and '12, saw a slight drop in Q4. It was much bigger than what we've seen in Q1, Q2 and Q3. I'm just wondering if there's anything funny about the numbers or if you can comment on that?

Robert Maurice Rice Powell

Mike, you want to take number one?

Michael Brosnan

Yes, sure. Veronica, I think our revenue per treatment for 2012 was $355 for the year, and what I would say is that I'm going to use the phrase, like-for-like. What I would say is on the like-for-like basis, I'd expect a modest positive in the rate per treatment in the U.S. And by like-for-like is I have to adjust for sequestrations, so that's worth about probably $3 a treatment. So sequestration out of the equation, I think I'm looking at a slight positive in the U.S.

Veronika Dubajova - Goldman Sachs Group Inc., Research Division

Okay, and Michael, if I could just jump in there, does that mean that including sequestration, there's a chance that, like-for-like, that you see revenue per treatment down year-on-year, on a reported basis?

Michael Brosnan

If sequestration is not corrected, yes, I would say, based on what I've guided to the $14.6 billion in revenues and the operating earnings at $2.3 billion, then I could see that revenue per treatment could be down, yes.

Robert Maurice Rice Powell

Veronica, it's Rice. On the integrated care, let me say it this way. No, I'm not as, perhaps, exercised about this as Kent is. I am still delighted and appreciate that Marilyn Tavener and her staff made a decision and they moved forward it. Is the architecture of this proposal, could it be better? Yes. But I believe that we remain positive. We think, by working collaboratively with CMS and trying to be proactive and positive, it will result in getting some of these answers taken care of and hopefully getting them done in such a way that it doesn't disadvantage us. I clearly understand where Kent and DaVita are coming from, but we're going to look at this as the glass is half full. And there are a lot of smart people involved with this and we'll figure out how to make this work for everybody because, at the end of the day, I just very firmly believe that integrated care is the right way to go. And then lastly, on the hemoglobins, in the fourth quarter, they are down a little bit. I would tell you that I'm not worried about that. I don't think there's anything going on there in a major way. Again, we do see movement from time to time on that. But if I'm incorrect, I will talk with my Chief Medical Officer, but I think I'm right on this one. I don't think there's anything substantive there, but happy to come back and let you know that if they have a different opinion.

Oliver Maier

Great. Thank you so much, everybody, and I think this actually concludes our meeting actually, for today for Fresenius Medical Care. Thanks, everybody, actually for being here and looking forward to seeing you next time. Thank you.

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