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Executives

Oliver Maier - SVP of IR

Ben Lipps - Chairman

Lawrence Rosen - Finances

Analysts

Tom Jones - JPMorgan

Kevin Ellich - RBC Capital Markets

Gary Lieberman - Wells Fargo

Lisa Bedell - Sanford Bernstein

Leslie Iltgen - Bankhaus Lampe

Rodolphe Besserve - Société Générale

Ed Ridley-Day - Barclays Capital

Michael Jüngling - Bank of America/Merrill Lynch

Holger Blum - Deutsche Bank

Martin Whitbread - Morgan Stanley

Andreas Dirnagl - Stephens

Martin Wales - UBS

Scott Bardo - Credit Suisse

Hans Boström - Goldman Sachs

Jack Scannell - Sanford Bernstein

Fresenius Medical Care AG & Co. KGaA (FMS) Q2 2009 Earnings Call August 4, 2009 9:30 AM ET

Operator

Good day and welcome to the Fresenius Medical Care Earnings Release of the First Half Year 2009 Results Conference Call.

At this time, I would like to turn the conference over to your host today, Mr. Oliver Maier. Please go ahead, sir.

Oliver Maier

Thank you, Katie. Good afternoon and good morning, everybody on the call. Thank you for joining us for Fresenius Medical Care's meeting today, which will cover our second quarter and first half year results and achievements.

By now you should have received all the material, the copies and the press release and all the material also available on our web page.

Let me start, as usual, to comment on our Safe Harbor statement. This presentation today includes certain forward-looking statements. Actual results could differ materially from those included in the forward-looking statements due to various risk factors and uncertainties. These and other risks and uncertainties are described in detail in the company's reports filed with the SEC and the Deutsche Berger.

Concerning our Q2 2009 press release and investor news at the end of our presentation, which we use today, we included, in compliance with the Section 401 of Sarbanes-Oxley, a complete bridge for any non-US GAAP measure that we utilize and relate such to the nearest US GAAP measure available.

With us today is Ben Lipps, Chief Executive Officer for Fresenius Medical Care. Ben will give us an update on the business development. LARRY Rosen, our Chief Financial Officer for Fresenius Medical Care, who will brief us on the results in detail for the second quarter and half year for 2009.

This is it from my end. Ben, the floor is yours.

Ben Lipps

Thank you, Oliver. Ladies and gentlemen, let me extend a warm welcome to you, our Board members and all the employees and associates around the world who are joining us on the Internet. As Oliver said in terms of the agenda, I'll cover the business update, Larry will cover the financials, and then we'll open up for questions and answers.

Turning now to slide four, let me say that I'm very pleased with the solid performance we had in Q2 and the performance of our team around the world, despite the strong currency fluctuations that we've seen and also the cost pressures that we carried over from 2008.

Before I start through the numbers, I'd like to share with you a decision that we made relative to continuing some very important new therapy programs during these six months. As I mentioned in the last two analyst meetings, it would take us about six months to essentially work out some of these costs, and we expect them to be improved in the back half of the year.

We felt that it was very important to continue these programs to focus on quality. I'm very pleased to mention that over the past year we've seen our mortality in both Europe and in the US improve by over 100 basis points. So we're clearly making progress in our clinics, our physicians and everyone working together.

There are three interesting new therapy programs that we've been basically working with for almost three or four years, and these are the Clinic Nocturnal program in the US that has about 1,000 patients, growing rapidly around 30% per year.

Our Online Hemodiafiltration therapy, which we're offering in Europe. We have over 12,000 patients on this therapy. Again we are allowing it to expand at almost 50% this year.

The third program was our demonstration project, or our Integrated Care, or now as it's known, our Accountable Care model, where we essentially are allowing it to grow at about 30% and where we are looking to improve the coordination and therefore the outcomes for the patients in these programs.

Even though it's preliminary data at this point, I'd like to just share it with you before I get into the numbers. We were looking basically at, could we do something to improve the nutritional status of these patients.

I am pleased to say, the preliminary data shows that in the Clinic Nocturnal, where we dialyze three times a week in our clinics for seven hours, we now have over 93% of the patients with a albumin greater than 3.5. You know that's quite a bit more, I'll show you later normally.

In the Online Hemodiafiltration, we're essentially at the 90 level also in terms of albumin. In our study on demonstration projects we're at 93% and there we give basically supplements to those patients if needed. So we are very pleased that we have three ways to improve the nutritional status.

The other area we were looking at in terms of Clinic Nocturnal, and essentially Online Hemodiafiltration, is can we have more of our patients reach (inaudible) standards with respect to phosphate concentration or removal. Even though these are early data, I am pleased to indicate that in the Nocturnal program, we now have between 55 and 60% of our patients there, and in the Online Hemodiafiltration between 60 and 65.

The long and short of it is, we have continued these programs and we feel that they are something that you just can't slow down or you can't start and stop and I am very pleased with the results to-date.

Now, as far as the rest of the area of quality, all of our plants are running around the world near Six Sigma in the products area. So again I feel that our focus on quality has not slipped at all, based on a very turbulent year with respect to the economic environment around the world.

Now, moving to slide five, I'll talk a little bit about the revenue. I think you've seen we basically reported it today. In dollars we increased 4% revenue to $2.76 billion. In constant currency that's 9%. Net income, up 5% in dollars and clearly if you look to that the dollar strengthened versus the euro by about 13% and so if you look at it in terms of euro income year-over-year it's up about 21%.

The good news also is our organic growth is at the high end around 8% and of course the EBIT, Larry will talk about later, margin reflects basically higher personnel cost, pharma cost and some raw materials which we talked about in the last couple of quarters, which we have plan to mitigate in the second half of the year.

Moving now to the next slide, slide six, you can see pretty much for the half year we're on the same track. The euro has stayed about a 13% increase over the dollar. We're reporting in dollars and we have a 3% increase in revenue to 5.3 billion. For the constant currency it's 9%. Net income is up 6% in dollars and if you look that in euros it'd be about 20%. Again for the half year, our organic growth stayed in the 8% range. So we're very pleased with our overall business by regions and also in terms of our growth for 2009.

Turning to slide seven, you can see the revenue by region. I'll point a few numbers here. North America had a very good quarter, almost 1.9 billion at growth rate of 9% which is the high end of their target. International, almost $900 million. Again it's in constant currency, that's a 9% growth. We've seen a very strong growth in Latin America in constant currency, again double digit. We continue to have about the same mix of services and products. About 74% of our revenue is in service.

Moving now to slide eight, I'll talk a little bit more about the global service business. Again we had a very strong revenue growth in North America. 9% growth in North America. International continues to grow at double digit in constant currency, around 13%.

We essentially have about 190,000 patients that we're treating in our approximately 2,500 clinics. So again the revenue hit the high end of our target with respect to growth in constant currency in the Dialysis Services business.

Turning now to the next slide, we'll give you a snapshot of our performance and the key metrics in the global service business. We, as I mentioned before, we now have a organic revenue growth for the second quarter of 9%, 8% in the US, 11% in international. We've also achieved our target in North America to have a same market growth rate of 4%.

In the US it's 3.6, which has been our target for the year. So we're very pleased with the same market growth. In the international region, we continue to operate between the five and 7%, same market treatment growth coming in at 6%.

Looking at the revenue per treatment, our target for this year was a 2% constant currency growth. In international we've achieved that even with a number of very difficult headwinds. In fact we have seen revenue increases in nine of the 33 countries that we operate in. Again that is a testimonial to our quality and our payors understand clearly that quality and how it benefits them in other hospitalization cost.

In the US, we had a 5% increase and I'll cover that a little bit more here in the next slide. We did complete 24 de novos. The bad news is, we still have about 50 of them waiting for certification in the US The good news is CMS and the various regulatory bodies have noted the difficulty that we are imposing on patients in terms of traveling and scheduling.

They have made a commitment to essentially speed up the certifications. So, we really feel that everybody is getting behind these. So, we hope as we go through 2009, we'll be able to bring some of these on line and that clearly will be a help to us in terms of our operating cost, because we're kind of sitting there right now all ready to go treating a couple of patients.

Moving now to slide 10, I want to talk about the revenue per treatment in the US, a very strong quarter. We saw a 5% increase in the revenue per treatment comparing 2008 second quarter to 2009 second quarter.

As you remember, we had mentioned that our target for 2009 was a 2% average year-over-year because we felt that basically with all the issues in terms of black box warnings and everything on EPO that it all pretty much the physicians had come to their new prescribing patterns and we just felt that would be pretty stable this year.

Clearly we are ahead of that target. We are at 3% at this point in time and that's probably will end up in being that target for the year. Now the good news is that of this reimbursement increase quarter-to-quarter, 90% of it is rate, Medicare and commercial and 10% of it is utilization. Primarily we're swinging at the high end of our EPO at this point and as I mentioned we do oscillate back and forth at around a norm. So, again a very good performance on the part of the team in North America, in the revenue area.

Turning now to slide 11. On slide 11 we'll talk a little bit more about the quality. Again, I think, one of the things that we always note each quarter is that we're now in the 95 to 96% of the time we are providing to the patient basically the prescription for dialysis that's been ordered by the physician. So, we're pleased with that. That's probably where we'll stay. Doing it better than 95% is probably going to be difficult.

In terms of hemoglobin levels, I've put a new metric on the chart. It's metric is 10 to 11. In other words, what number of patients are between 10 and 11 grams per deciliter. You can see, we're making progress on that chart, both in international and in North America, moving from basically 60 to 63% in North America. I am sorry I think I misquoted. It's really 10 to 12 grams per deciliter. Basically what our physicians are focusing on is those patients that are sub-10, what can we do essentially to improve their outcomes. That's basically what we're doing and what they are doing to essentially improve the number of patients in that bandwidth.

Looking at albumin, I think we're pretty well stuck in the albumin area with the reimbursement system being what it is. I think I've talked about that. We did have three programs underway trying to improve this because it's one of the strongest drivers of mortality in this entire, as was identified 20 years ago.

Now, the other thing is, I got to mention that Portugal, where we're operating a bundle, were also at 93%. So I think, if we get some of these reimbursement things done properly we would be able to provide better patient care.

In the phosphate area, we're making no progress. We're doing a better job in Europe, but we're stuck at the 52. Essentially, what we're doing in that area is, we've got another project going on where we actually have developed a phosphorous kinetic modeling. Interestingly, we're just in pilot stage.

We have a few hundred patients on it. In those clinics where we're operating that now, we're operating between 55 and 60% patients reaching the phosphate level. So, basically, we've got a couple of approaches to triangulate this, and we think that this is one of the areas that we believe that we need to make some progress in the next few years.

Now, hospital days, we continue to improve in the US Again, every four-tenths of a day is worth about $60 million worth of savings to the payors. So everybody wins including the patient. Probably, in the international area we're in the high single digit. Don't believe that we'll be able to improve that too much. So, essentially, that's probably the target that we're going to hit for in the US also, but that's going to be sort of the end of the improvement.

Moving next to page 12, I'll talk a little bit about the products. We've seen a increase in the external revenue of 7%, North America at 10, and international at six, constant currency. I think the good news is, we had basically worried a little bit at the beginning of the year that with the economic turmoil going on, there may be essentially a drop in machine sales, especially in the international area, some of the tenders. I want to say that our machine volume has stayed in the 11% range. So, we really have not seen a major impact in terms of the economy on the machines.

As far as the disposables and the pharma, which is part of the products, basically that continues to grow pretty much on target. So, the machine business and dialyzer products business around the world continues to meet our expectations and essentially grow quite well.

Moving next to slide 13, trying to basically give a little bit of an update on the US legislation. Really there is nothing conclusive that I can say at this point. I think you probably see as much as I know in the press every day, but I do get the feeling that it's moving, the healthcare reform initiatives are moving in a direction of lessening the threat to the dialysis patients. Honestly that's just a day-by-day thought.

So we're very active as a group in Washington, as an industry, to make sure that whatever happens that the dialysis patients clearly are protected with respect to quality.

We still are intrigued by the Accountable Care Organization model, which seems to have broad consensus. This is very similar to what we are doing in the demonstration area. I think we as a company, as well as DaVita, everyone have a commitment to if indeed something like this Accountable Care Organization is available for dialysis patients.

We will work with our physicians, with our product customers and we'll see if we can make sure that this is a win-win for everyone, because we know from our demonstration project it clearly is a win for the patient.

As far as bundling, there is rumors that basically the bundle rule will be out soon. Again, I'd like to caution that, if it does come out it'll go through a review and comment process, which will probably take months. I want to also indicate that it's basically the devils in the details.

We're optimistic that CMS will clearly, and as they have in the past, they'll get it right, but we'll have to look at the risk adjusters, the outlier payments, look at everything, but we will work with CMS as we have been. I think as the whole industry has been to make sure that this is right for everyone when we start in 2011, which is the intension, I think, of Congress when they pass it.

So at this point, I don't have much to report except we're all very active and I think we're aligned that we want this to work for everyone.

So my last slide, on slide 14. Again if you look at the first half year, we've seen strong organic growth. We're clearly on target to achieve our guidance for the year. I continue to see improvement in our quality. We have not backed off on any of our quality programs around the world. We feel this is the heart of the company.

I believe that we have continued new acceptance of our products. I am particularly impressed with the acceptance we've had with our new Liberty Cycler internally as we worked out the bugs. We, for the first time, have seen PD grow within our organization. So I think that clearly we've got the right products and they are performing well.

Now we do expect margins will improve in the second half, as I had indicated. We will be trying to work out to mitigate some of the cost that we've been struggling with in the first half. Actually it's kind of fun to do, but at the same time we've not sacrificed any of the programs that we should be doing. We will be continuing to invest in basically longer-term R&D. We've got some exciting things going in this area. We'll continue to do that. You'll see our corporate R&D will be a little higher than where it has been in the past. These are programs that we should be doing for the next five to eight years.

So that's pretty much my presentation this morning. Let me turn it over to Larry who'll handle the financials.

Lawrence Rosen

Okay. Thanks, Ben and good afternoon, everybody. Let me start with slide 16 and provide you with an overview of our earnings development.

Revenue and earnings were significantly affected by the volatile currency environment, reducing both through the translation of depreciated local currencies into US dollars. Further, we were affected by currency transaction effect, mainly related to product purchases from Europe and Japan.

As Ben has shown on his slides, our revenue was 2.76 billion, and grew at 4% in actual reported currency, and 9% in constant currency. Here, growth was carried by a strong organic growth of 8%. Our operating income was 418 million, a decrease of 3% year-over-year.

This absolute decrease was partially a result of currency translation effect. Just to give you an impression, in Q2 2008, the translation rate for the euro into US dollar was 1.56, and the respective average rate for this year was 1.36, and appreciation of the US Dollar of 13%.

Mainly, our international business, which generated 154 million of operating income, was affected by these translation effects. Our operating margin decreased from 16.1 to 15.1%. This decrease reflected the following developments.

First, we faced cost increases in a number of areas like pharmaceuticals, including Heparin, personnel, and unfavorable currency transaction effects from the purchases of products in Europe and Japan. The higher revenue per treatment, especially in North America, covered most of these absolute increases, however the margin declined due to the almost equally high increase in cost per treatment.

Second, our pharma business saw a mix shift and a resulting margin effect, caused by generic competition to PhosLo, which decreased our sales of this own phosphate binder. The lower revenue was more than compensated by the revenues of the licensed IV Iron drug Venofer, albeit at lower margins, and finally, third, increased legal expenses.

Net interest expense of 76 million decreased mainly due to lower short-term LIBOR and EURIBOR rates. The low tax rate of 30% was impacted by the two items. First, a tax claim currently being litigated in court has been revaluated based on positive new inflation that become available during the second quarter of 2009.

This led to a recognition of a non-recurring tax benefit of $16 million. Second, associated with revised presentation requirements for tax expense related to non-controlling or what used to be minority interest, we reduced tax expense and increased by the same amount the net income attributable for the non-controlling interest for all comparable periods.

This had no effect on the bottom line than net income attributable to FME. As a result of all these developments, net income attributable to FME increased by 5% to 221 million in the second quarter.

Now going on to slide 17, you see the development during the first six months. Again there were significant effects of currency fluctuations.

The revenue development during the six-month period was very consistent with what we also saw for the second quarter. Revenue of 5.32 billion represents an increase of 3% in actual currency over the comparable prior-year period, and again, a 9% increase in constant currency and also 8% organic growth.

Operating income of 813 million showed a decrease of 1%, again, partially due to currency translation. Our operating margin was 15.3%, a reduction of 50 basis points year-over-year. The reasons for this reduction were generally the same as just mentioned for the second quarter.

On the next slide, I'll try to provide even more perspective on the operating margin trend. Again, finishing up this slide, again, interest expense benefited from lower LIBOR and EURIBOR rates reflected in a decreased net interest expense of 149 million as compared to 165 million in the prior year.

Due to the recognition of the tax benefit discussed before, the tax rate for the first six months was reduced to 32%. Thus net income attributable to FME was 419 million, up 6% and well in line with our full-year guidance.

Now on to page 18, here we try to provide you an overview and even more perspective on the major impacts on our operating result in Q2. Here we list the plusses and minuses listed in priority order.

On the positive side were increases in commercial payor rates, normalized pharma utilization rates, primarily EPO, cost efficiencies in our product business and in manufacturing, in particular in North America. This also includes lower freight and distribution costs resulting from lower energy prices.

Some of the negative impacts mainly related to the US were significantly higher costs for personnel and other service business costs. The latter represents items like location costs, cost to comply with the new conditions of coverage, and a backlog of de novo clinics, as Ben mentioned, which are awaiting certification and which need to operate on a low number of commercially insured patients until Medicare certification is received.

In addition, pharmaceutical costs, mainly Heparin, which is not separately reimbursed, had an unfavorable effect on the EBIT margin. Further, we saw a product mix effect caused by the revenue shift from PhosLo to IV Iron due to the generic competition for PhosLo, and also increased corporate expenses related to IT project costs, especially for the introduction of the new medical and billing system, as well as higher legal expenses.

On to page 19, you can see here visually our margin trends. Focusing on the total Group results on the bottom chart, the EBIT margin decreased by 100 basis points compared to prior year. Here, primarily the margin development in North America is reflected, as well as higher legal and R&D expenses at the corporate level, and higher depreciation and product mix effects in international.

During the first six months the combined EBIT margin was 15.3%, a reduction of 50 basis points and the development was largely driven by the factors already mentioned. At least some of the margin reduction we saw in Q2 can be attributed to temporary effects, which should reverse over time, allowing growth, scale and efficiency effect to again provide a slight upward bias to future margins. This is something we expect already in the second half of this year.

On to page 20, I'd like now to turn to our DSO development. In the international segment, DSOs increased slightly by three days to 112 days as compared to Q1 of 2009. This increase reflected minor payment delays by public healthcare organizations and also, to a lesser extent, private insurers. Considering the difficult environment, this was a development that could be expected.

In North America, we were able to reduce DSO by two days compared with Q1. The reduction was a result of, first, some US states attempting to become current with their creditors to qualify for parts of the US stimulus program, and second, the positive result of our intensified collection efforts.

Combined, our worldwide DSOs remain unchanged compared to Q1. In respect to cash flow generated in Q2, we achieved a one-day benefit, as DSOs increased by one day in the comparable quarter of last year, while they remain stable this year.

For the first six months of 2009, DSOs decreased by two days, while we saw an increase of four days in the comparable period last year, accordingly, a net favorable swing of six days. We believe this is a very positive development despite the difficult worldwide economic environment.

On slide 21, we show our cash flow development in Q2. With 282 million of cash generated from operations, we're back at our target of at least 10% of revenue as operating cash flow. We do continue to expect to achieve this level also for the full year.

Drivers of the cash from operations in Q2 as compared to Q2 of last year were higher earnings and lower increases in receivables, inventories and other working capital items. Capital spending was also lower. Compared to last year it was 139 million spent for the maintenance of existing clinics, de novos as well as the maintenance and expansion of production capacities primarily in North America, Europe and Asia.

As a result of these developments free cash flow was 143 million in Q2. Our acquisition spending net of divestitures was a positive five million and reflected the acquisition of Dialysis clinics, mainly in North America and the payment of pharma licenses offset by the repayment of a short-term loan provided to our parent Fresenius SE. All this provided a free cash flow after acquisitions of 148 million.

Slide 22 shows our cash flow for the first six months of 2009. We achieved cash from operations of 437 million, which due to the slow start in Q1, represents 8% of revenue. As mentioned, we expect to catch up and achieve for the full year the target of at least 10% of cash from operations in percent of revenue.

Drivers of the cash from operations during the first six months, as compared to the same period in 2008 were higher earnings and lower increases in receivables, partially offset by increased inventory and increases in other working capital items.

Capital expenditures were lower compared to last year, with 249 million spent for maintenance, de novo clinics and expansion of production capacities, primarily in North America, Europe and Asia. As a result of these developments, free cash flow was 188 million in the first six months.

Our acquisition spending net of divestitures was 31 million, and reflected mainly the purchase of dialysis clinics in both North America and the international segment, as well as payments for licenses, offset by the repayment of the loan from Fresenius SE. The free cash flow after acquisitions was 157 million in the first six months, confirming our ability to generate solid cash flow, despite the still-difficult economic environment.

On now to slide 23 and taking a look at how our debt and the debt to EBITDA ratio has developed. On the left hand side of the chart, you see that our debt level increased by 230 million to 5.97 billion by the end of Q2 as compared to year-end 2008.

This is primarily a result of the dividend payment that we made in the second quarter, but also a reclassification of an inter company liability into financial debt.

Coupled with a slightly increased EBITDA of 2.15 billion, our debt to EBITDA ratio increased, not unexpectedly, from 2.69 at year-end to 2.78 at the end of June. With the free cash flow generation that we expect in the second half, we do expect, however, to achieve our guidance of below 2.7 by the end of the year

On to page 24, taking a look at all of our guidance metrics, we've seen that the challenges that we face, especially related to cost increases and currency volatility, especially affected our earnings development in the first six months.

Despite these factors, our underlying business remains very strong and we thus confirm our guidance of more than 11.1 billion in revenue, net income attributable to FME between 850 and 890 million or an increase of 4% to 9% and our leverage ratio to remain or to go below 2.7 by the end of the year.

Capital expenditures are estimated between 550 and 650 million and acquisitions between 200 and 300 million. That brings me to the end of my presentation and Ben and I will be happy to answer any questions that you may have.

Oliver Maier

Thank you, Ben, thank you, Larry for the presentation, for the update and for the details on the numbers. Katie, I think we can now open up the call for questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. (Operator Instructions). We'll now take our first question from Tom Jones from JPMorgan.

Tom Jones - JPMorgan

Good afternoon, gentlemen. Thank you for taking my questions. I just have three. Just on the US revenue per treatment number, I was wondering if you could give us a bit more color on the moving parts that, I mean, is there any tidbits we can't really model and that's your payor mix and the managed care pricing growth.

By my math, unless you suffered some fairly significant jump in payor mix, your managed care pricing growth was up in the high single digits, which is quite an impressive performance.

So maybe you could just shed some color on that? Then secondly, on the Renal Pharma guidance, you talked about 300 million for 2009. I was wondering if you could just give us how that breaks down between the US and ex-US sales?

Then lastly just on acquisitions, sticking with your guidance for the full year of 200 to $300 million, yet you've only spent a net number of 31 million in the first half of the year. Just give some color as to where you might be thinking about putting that money to work? In the product business, the dialysis side, internationally, US, I know obviously you can't provide specifics as regard to acquisitions, but maybe just which is the way you'd love to see that money put to work?

Ben Lipps

Thanks, Tom. This is Ben. I'll take the first two and Larry can handle the last one. As far as the payor mix, I can't give you the exact number on the commercial mix, but we've not seen a decrease, and we continue to see a slight increase. So, basically you're looking at strictly pricing on that, plus the Medicare increase. Larry, you want to -

Lawrence Rosen

Yes. Those are the three parts of the we talked about. We had an increase in drug utilization and...

Ben Lipps

That's about 10%.

Lawrence Rosen

...good trend on the commercial payor pricing.

Ben Lipps

The commercial mix is basically growing slightly, but we're watching it carefully and it continues to be solid, and then grow slightly. As far as the pharma, it's about 60% of that revenue will be in the US and about 40% outside the US

Lawrence Rosen

Okay. On acquisitions, your third question, the first half was lower than what the second half is expected to be. I think we're looking at a number of opportunities really all over the world. We're seeing what seem like attractive opportunities.

We're in the evaluation stage on some, and the negotiation phase on others. I think you'll see that the number will definitely pick up in the second half. Exactly how much, we don't know, but we feel like we're going to come within our guidance of 200 to 300 million.

Tom Jones - JPMorgan

Yeah, would you say that's more weighted towards the services side or towards the product side?

Ben Lipps

Yeah, clearly the services side.

Tom Jones - JPMorgan

Okay.

Ben Lipps

About 50-50, US versus international would be a rough guess today.

Tom Jones - JPMorgan

That's quite a few clinics. Just back on the managed care pricing, I mean, would you be prepared to put a number on it or at least a range of numbers in terms of where you are up year-over-year?

Ben Lipps

Oh, I don't think we do that, Tom, as much as I'd like to, but again, I think we try to reach somewhere as a percent of whatever premiums are going up and clearly I think if you follow the industry you know that healthcare costs continue to increase, so we're clearly not at the high end of that.

Operator

Thank you. We will now take our next question from Kevin Ellich from RBC Capital Markets. Please go ahead. Your line is now open.

Kevin Ellich - RBC Capital Markets

Good morning, gentlemen. Thanks for taking my questions. Ben, I guess the first question is, could you provide us an update on the demo with Medicare and I guess how that's going and the possibilities of actually getting the comprehension bundle implemented at some point?

Ben Lipps

Okay. I can certainly update you. Basically, we've decided to expand it this year because, again, we see very good outcomes for the patients and we've allowed it to expand about 28%. We're absolutely sure that this provides best patient care. Of course, it doesn't have the same margin as dialysis, because you get a bunch of other costs, but we have some savings of about 11%.

Now, we would assume that if the accountable care concept passes and we can essentially participate in that as a pilot, as an industry, we would be interested and we'd be working with all of our colleagues around the industry to see if we could include them in the pilot in some fashion. So anyhow we are very comfortable that it provides better patient care.

The question is, when will it happen. I think, we've got the smaller bundle, the ESRD bundle that we are going to struggle with in 2011. So quite frankly, we would keep the program going, and it probably would be a couple or three years later where we would expand it in a major way.

Kevin Ellich - RBC Capital Markets

Got it. Then you just said you think you'll struggle with the ESRD bundle in 2011. I guess why do you think you will struggle with the bundle?

Ben Lipps

Yeah. When I say struggle it's probably not that word, but anytime you make a change like that, you'll end up with a proposal and then we'll all have to evaluate and it will go back and forth. Remember there's a 2% haircut there.

Kevin Ellich - RBC Capital Markets

Yeah.

Ben Lipps

So we will need to make that up. So struggle is probably a little strong on the negative side, but it's just another project that has to be implemented in 2011 and it's a major step. So laying on top of that a major comprehensive care would be too much. A couple, three years later we would be looking at it.

Kevin Ellich - RBC Capital Markets

Got it. Then just a couple of the moving parts questions. In the prepared remarks, you guys talked about higher personnel costs. I guess, given what's going on with the job market in the US, I was thinking it would go the other way. What's really driving the higher personnel cost?

Ben Lipps

Yeah. Let me take that. I remember I mentioned that last fall, we had a high inflationary period last year and essentially we got some of these costs embedded. I said it would it would take us about six months to work them out.

Really they are in two fashions, one of them would be agency nurses. We're growing; we need those. The other is the employee healthcare programs. Basically, they have not, they've still continued to increase in costs. Again, in the back half of the year we said we would be making some progress and I think we will. Larry, did you want to add something else to that?

Lawrence Rosen

No, I mean the only thing I have maybe on the nursing side is that we're expecting in the second half of this year, the first graduating class from our FMC Institute of Dialysis Nursing, and we expect that that is going to provide some relief on agency cost for nursing over the next quarters and years.

Ben Lipps

That's a good point.

Kevin Ellich - RBC Capital Markets

Just one last question on the pricing. US commercial pricing came in at 5%, is that kind of a good run rate to think about?

Ben Lipps

I'm sorry. Kevin, could you repeat that? Please repeat as you broke a minute. Repeat the question if you could, Kevin?

Kevin Ellich - RBC Capital Markets

I'm sorry. Do you think the 5% US pricing growth is a good run rate to look at going forward?

Ben Lipps

No, stay with our guidance. We'd said 2% average year-over-year, and these come in waves, so stay to 2 to 3%, as I say, I think we'll come closer to 3% average, year-over-year.

Operator

Thank you. We'll now take our next question from Gary Lieberman from Wells Fargo. Please go ahead. Your line is now open.

Gary Lieberman - Wells Fargo

Thanks. Good morning. I guess just staying and following up on the personnel cost line, it sounds like you guys expect to make some progress on that front in the second half. Will that be primarily by bringing agency nurses down, or there are other costs that you're thinking of taking out of it?

Ben Lipps

Well, what we see, and again I think even second quarter you can start to see the trend a little bit. The pressure in this area is diminishing a little bit, because a lot of nurses are coming back into the field, and essentially, we think that we'll be hiring more actually than using agencies. So, that's kind of what we've got planned. Okay?

Gary Lieberman - Wells Fargo

Is that something that you guys lost focus of, because it would seem like from what most of the hospitals have said, most of them are sort of at all-time lows in terms of the amount of agency nurses that they're using. So I guess it's just a little bit surprising to hear you guys saying that you're seeing pressure on that front.

Ben Lipps

Well, I think this was the pressure from last year. The difference probably between us and the hospitals is actually, we've seen our treatments go up significantly. You'll notice that we've opened a number of new de novos.

Our growth rate now is the highest it has been. So I think that's probably the differentiation between us and the hospitals is that we've seen procedures and we're at the highest level of same market growth in the last four years. So we didn't want to compromise that at this point in time.

Lawrence Rosen

Some of the trends that we're seeing on agency costs and also on employee healthcare costs have started already in the second half of last year.

Ben Lipps

Go ahead, Gary.

Gary Lieberman - Wells Fargo

No. Just on the de novo front where would you expect that to be down to at the end of the third quarter?

Ben Lipps

As far as the certification?

Gary Lieberman - Wells Fargo

Yeah. Exactly, the 50 that are awaiting for a certification?

Ben Lipps

It's a little difficult. I think probably somewhere by the end of the year, we hope to be in the 30 to 35.

Gary Lieberman - Wells Fargo

Okay. Great. Thanks a lot.

Operator

Thank you. We'll now take our next question from Lisa Bedell from Sanford Bernstein. Please go ahead. Your line is now open.

Lisa Bedell - Sanford Bernstein

Hi. Turning to Heparin's supply cost, could you just walk through what you're doing to try and contain that and I mean you did mention you think in the second half of the year you'll have a better time managing costs, but could you just walk through that a bit more?

Ben Lipps

Yes. I think all of us during the last year had looked at conventional ways to minimize the use of Heparin and we focused on it. The next step would be basically some sort of therapy change and I think we put out a press release in, when was it Oliver?

Last month, where we actually are looking at a different formulation of concentrate and with that we will be supplying citric acid instead of the normal acetic acid. What it does is, it is essentially from our studies and it's been offered now for almost four years in the acute field. It looks like it will mitigate some of the need for Heparin, because it anti-coagulates right at the surface of the membrane.

So those programs are underway as trials, if they turn out to match our early data, we'll get some relief there.

Lisa Bedell - Sanford Bernstein

Okay. Thanks.

Operator

Thank you. We'll now take our next question from Leslie Iltgen from Bankhaus Lampe. Please go ahead. Your line is now open.

Leslie Iltgen - Bankhaus Lampe

Thank you very much. I've a couple of questions, if I may. The first one is an easy one. Just wanted to know what the tax rate will be, full year? Second question refers to the topic we just had concerning citric acid. I was doing some own calculations and just wanted to know, or perhaps you can just confirm, how much you think you can save by substituting Heparin by using citric acid, is 50% realistic or not?

Thirdly, I would like to know from where you expect margin improvement in H2 to come from mainly? Last, not least, any chance that bundling may also be introduced elsewhere besides Portugal and Europe? Thank you very much.

Ben Lipps

Thank you, Leslie. Okay. Leslie, I'll take it. Yeah, there was a couple of papers out in very small study showing about a 55% savings. However, we think it may be more in the 25 to 40% range. That's the reason we're doing a study with a number of our customers to really get that pinned down here in the next few months. As far as the tax rate, Larry, that's your area.

Lawrence Rosen

Yeah, tax rate, we're expecting approximately an effective tax rate of 34% for the full year.

Leslie Iltgen - Bankhaus Lampe

Okay. Great.

Ben Lipps

Okay. As far as bundling in other countries, I don't have anything on the radar screen right now. We're very pleased so far with our progress in Portugal. I think it needs to be published next year. So I think we're really viewing late 2010 before we see it move to another country.

Lawrence Rosen

Okay. On margin improvement, and I think in the second half, some of the things that were creating a headwind in the first half, they actually gave us some tailwind. I refer here especially to currencies, where we had some negative transaction effects in Q1 and Q2 and we may see some neutral or slightly positive effects, especially as we go through the year, the comparison gets better and better, we think.

There were also some other effects. For example, on the PhosLo, there were some inventory adjustments, which caused the level of sales to be even lower than the actual number of prescriptions. We expect that to level out over the year. Certainly we don't expect the high level of legal charges that we had in Q2 for the rest of the year. So I think there are some reasons to be optimistic that the margin has some upward bias in the second half.

Leslie Iltgen - Bankhaus Lampe

Just one follow-up, if I may. You also mentioned higher pharma costs, and you also mentioned the increased Heparin cost. Are there any other issues referring to the pharma costs you think are worth mentioning here?

Lawrence Rosen

No. I mean, there's always the typical lag effect that you have on Medicare reimbursement between the ASP plus six adjustments and the costs, and it's always a one to two quarter lag. We still got some lag effect in Q2, ASP plus six has gone up again in Q3 and that seems to be in line for the first time in Q3, first in a few quarters with cost increases or price increases that we've had on the product.

Leslie Iltgen - Bankhaus Lampe

Perfect. Thank you very much.

Operator

Thank you. We'll now take our next question from Rodolphe Besserve from Société Générale. Please go ahead. Your line is now open.

Rodolphe Besserve - Société Générale

Hi. Good afternoon. First question on services at international. Could please elaborate a bit more on the deterioration in growth in the price per treatment and could you indicate some specific regions where you've seen your mix going at much slower pace versus before? Would you say it's more Europe or emerging countries or do you see the trend for the rest of the year and after 2009?

Ben Lipps

Okay. Thank you. Actually, we were really proud of the 2% growth in constant currency we were able to accomplish in international. In fact, that was our target, and so honestly, we're really pleased that we could do that. Now there is certainly a couple of countries that if they come through we'll exceed that; one of them is Turkey.

Basically we're pleased with this. So we're on track and in this environment that says a lot for basically what we provide in quality. So at this point, I can't really say that, other than Turkey, that we've got any real issues that we're not going to be able to resolve.

Rodolphe Besserve - Société Générale

Okay. Also sort of a naïve question, but could you please give me a sort of specific explanation for the pretty good same-store growth rate in the US on the quarter, since I need to go back to 2005 to see such a figure, so what's actually behind this?

Ben Lipps

I think when we did the merger with RCG, there were almost a year and half where, due to the FTC, we could not actually expand our de novos, okay. So we've been building de novos pretty much at a 5% rate versus the 3%.

So I think what you're seeing is that basically the quality that we're providing and essentially now we've kind of caught up on the de novos that we're back and the markets growing at 3.5 is our assessment or it's somewhere between three and four. So we're growing at the market. We were below the market before that and we're quite pleased and our target is to grow at the market.

Rodolphe Besserve - Société Générale

Okay. Thank you. Now I'll ask you a last question on where you are actually in your chase of a successor to Larry and I think it is at the end of this month, if I remember right?

Ben Lipps

Larry, I should answer that right?

Lawrence Rosen

Probably a good idea.

Ben Lipps

Good idea. Well, we're clearly in the process in looking for a successor, but we've not announced one. Again, we're being fairly deliberate about it, because we need very good qualifications, expertise and this is a company where we all work together almost daily. So you have to fit in personality wise too.

Basically we're in the process. We'll have nothing to announce now, except, I want to indicate that Larry has built a good team. We have excellent financial teams in corporate here and in each of the regions, North America, Europe, in Latin America and Asia-Pacific. So we don't see there would be any slip, but we want to take our time and get the right person.

At this point that's the process where we are. So we're continuing with it, but we have nothing to report at this point.

Rodolphe Besserve - Société Générale

Thank you so much.

Lawrence Rosen

Thanks.

Ben Lipps

We'll let you know as soon as we announce it. There won't be a slip, although we would miss him.

Operator

Thank you. We'll now take our next question from Ed Ridley-Day from Barclays Capital. Please go ahead. Your line is now open.

Ben Lipps

Hi, Ed.

Ed Ridley-Day - Barclays Capital

Hi, there. Thanks for taking my questions. Just a few follow-ups on the margin discussion for Larry. Just on the final question on the personnel costs. In terms of your graduating classes from the Philippines, can you give us an idea of the numbers, the absolute numbers of nurses you feel you can bring in, say in the second half or on a per period? That would be pretty helpful.

Just a follow-up on your comments on the IT system, has that now been fully put in place or are you still expecting a little bit longer to achieve that? Finally, just on PhosLo, in terms of follow-on products for PhosLo, I know you're working on some. Could you give us an idea about when we might hear progress on that program?

Lawrence Rosen

Okay. So I'll take the first two. First on personnel, the Philippines, we started off kind of in a ramp-up phase with the first class of 100 and that's what we're expecting to graduate in the second half of this year. We do expect to and are growing it up to 500, and now that will have a really meaningful effect on us in 2010-11 period.

I think it would be going too far to say that the 100 is going to have a huge effect and reverse the upward trend in nursing costs. It will have some effect, but it's when we get into the three to 500 number of nurses that we're making available to our clinics, that's going to really have a great effect. In terms of the IT system, some parts of the system are completed, some parts are still being worked on and are expected to be completed in the first part of 2010.

Ben Lipps

With respect to the PhosLo, we filed the NDA for the next generation PhosLo and we would expect some time in first or second quarter 2010.

Ed Ridley-Day - Barclays Capital

Great. Thanks very much.

Ben Lipps

Thank you, Ed.

Operator

Thank you. We'll now take our next question from Michael Jüngling from Bank of America. Please go ahead. Your line is now open.

Michael Jüngling - Bank of America/Merrill Lynch

Great. Thank you for taking my questions. I have three questions. First on international, I wanted to follow up on the revenue per treatment in constant currency. You mentioned before, Ben, that up 2% is what you are hoping for, but it'd be the lowest number that we've seen since 2006 and a sharp falloff from Q1.

Can you provide a bit more details in what countries outside of Turkey, we've suddenly seen a lesser ability perhaps to raise price?

Secondly, a question on corporate EBIT, it is quite higher than I expected and I just want to confirm what is in there that is driving that, is it the legal expenses or is it something else?

Then thirdly, on minorities, clearly as you expand outside the US the minorities are growing up, it is quite difficult to model and therefore it'd be quite useful to get a sense of what we should be modeling for second half 2009 and perhaps also a general comment about the minorities trend over time? Thank you.

Ben Lipps

Okay. I will take the revenue per treatment. Again, remember in this environment our target this year was 2% constant currency growth and yes that I think we were mainly in the four to 5% in the past, but again, we're also finding that there is a situation where our cost will come down in this area.

Now, we have received reimbursement in nine countries Spain, Czechoslovakia, Slovakia, Czech Republic, Poland, Romania, South Africa, Argentina and Chile. Now, we also have essentially a couple that we're working on in Turkey. Then there is none of them that are really other than Turkey are behind in terms of what we expected, that's the only one. The rest of them are two to three-year cycles.

The 2% is less than the past, but it clearly is within what we expect at this point in time, with the economic climate being what it is with these governments okay. All these are usually government payors.

Lawrence Rosen

Okay. Let me take the other couple of questions. Corporate EBIT, our corporate expense, what's driving that? It's primarily legal expense and it's also doing more long-term research projects at the corporate level as opposed to in the regions. The primary factor was increased legal expense.

In terms of the minorities, the non-controlling interest, I think we're probably up where we are to stay. I think 18 million is pretty indicative of where we're going to be for the coming couple of quarters. That would be our best guess at this point.

Operator

Thank you very much. We'll now take our next question from Holger Blum from Deutsche Bank. Please go ahead. Your line is now open.

Holger Blum - Deutsche Bank

Yeah. Hi. Holger Blum, Deutsche Bank.

Ben Lipps

Hi, Holger.

Holger Blum - Deutsche Bank

Just two questions, one, could you help us in quantifying a bit more the impact of PhosLo, the magnitude, may be in terms of top line and EBIT you have lost since the patent expiry? Second question on cost per treatment. Clearly great performance on the revenue per treatment in the quarter, but the costs were overall, what, up by $15 in North America. So when do can we expect that gap to widen again, and what could be the main drivers?

You're sticking to the 2% mid-term inflation on the cost line and what could we expect for the remainder of the year and next year in terms of gap between revenue and cost per treatment? Thanks.

Oliver Maier

Thanks, Holger.

Ben Lipps

I'll take the cost per treatment. Go ahead, why don't you take the first one?

Lawrence Rosen

Yeah, Holger, I think it would be unwise from a competitive standpoint to quantify too much of the profitability for individual products in the Renal Pharma area since we only have a few major products. Now if we say something about one, then we would implying kind of exactly where the profitability is on others.

So, I don't think we want to say really more specifically than what we've said already. On cost per treatment, our original guidance was 2% as it was on revenues. Given all of the developments, we would see that also in the two to 3% range as we do now with revenues, but as I talked about before, some of the factors that we had in the first half we may see relaxing in the second half, leading to slight upward bias in margins.

Operator

Thank you. We'll now take our next question from Martin Whitbread from Morgan Stanley. Please go ahead. Your line is now open.

Martin Whitbread - Morgan Stanley

Good morning. Thanks for taking my questions. Three or four questions, if I may. Perhaps a simple question to start with which is, can you tell me why the patient growth is going ahead of treatment growth in Central and North America, and you reported 4% growth in patients versus 3% growth in treatments and can we read anything into the modality of these patients?

Ben Lipps

No. What happens is this, we're accelerating the growth. You don't have them for the whole quarter and you're not able to compare the treatment, so it depends on when you (inaudible) or are included or when the patients join you or the patients join you primarily. So it's not directly to modality or anything, okay.

Martin Whitbread - Morgan Stanley

Okay, fine. Then if we consider the 2% haircut of the bundle price, what kind of proportion can you make up from manufacturing efficiencies, et cetera, and I want to specifically exclude any changes in utilization, labor effects, mortality et cetera, can you elaborate on that?

Ben Lipps

At this point I really can't, because we really haven't studied that carefully. We did say that we had an opportunity to make it up, but again it's a little far out in time and we really have to wait to see the quality standards and sort of what's the whole package before. Once that's all known we'll be glad to share with you next year. We're still a year away from it.

Martin Whitbread - Morgan Stanley

Understood. Okay. Final question is can you give us an update on your wearable kidney and more specifically do you have any views on your competitors' technology? I think, (inaudible) have stated that they hope to file a device in the first quarter of 2010?

Ben Lipps

Okay. I guess I am not familiar with that date. I think what I've said last year is we in 2010 will be in advanced clinical or advanced trials with either in vitro or in the some form of clinical trials. We're pretty much on schedule. We've had a lot other things to deal with this quarter. I don't have a briefing right now exactly where we are, but it's pretty much on schedule for some time in 2010, to be in clinical or the last of what we call validation trails in vitro.

Martin Whitbread - Morgan Stanley

Okay. I am going to presume some of your increases in corporate costs are relating to some of the developments there.

Ben Lipps

Yes. Actually there in the entire blending the sorbents into our systems, and developing the new equipment, which will come out in 2010 with sorbent. So, it looks like a very attractive area for us, and we're putting whatever efforts required to get products out in 2010, not necessarily the wearable.

Martin Whitbread - Morgan Stanley

Fine. Can I just ask one final question seeing as I'm here, can you just remind me, I don't know if you've said this, what are the main sources of your higher legal expenses are? That's it. Thanks very much.

Ben Lipps

Larry, why don't you?

Lawrence Rosen

Yeah, the primary sources are legal expenses and to a lesser extent longer-term research projects just like the one we just discussed.

Martin Whitbread - Morgan Stanley

Can you elaborate what the source of the higher legal expenses is? Is it ongoing costs relating to conditions of coverage? Is it relating to potential acquisitions? Is it relating to unusual patent issues et cetera? Can you give any color?

Ben Lipps

Larry, you want to handle that or you want me to?

Lawrence Rosen

Sure. The increased legal expenses are primarily in the area of patents and patent litigation, and also the tax area. We've seen this quarter, one of the fruits of that intense firework in the tax area, in the one-time benefit there, the non-recurring benefit that we saw in the tax line this quarter. So, certainly our intensified efforts are paying off in both of these areas.

Martin Whitbread - Morgan Stanley

Okay. That's great. Many thanks.

Ben Lipps

Thank you, Martin.

Operator

Thank you. We'll now take our next question from Andreas Dirnagl from Stephens. Please go ahead. Your line is now open.

Andreas Dirnagl - Stephens

Yeah, good morning. It's Andreas Dirnagl from Stephens.

Ben Lipps

Hi, Andreas.

Andreas Dirnagl - Stephens

A couple of questions. Larry, can you just remind me, for the increase in Heparin cost, clearly there's a year-over-year increase. Was there a significant increase sequentially?

Lawrence Rosen

Not in Q2, but, of course, there's been an announced price increase for Q3.

Andreas Dirnagl - Stephens

Correct. Okay. Then also, Ben, on just the whole issue of certifying your de novo, can you just clarify, is it a Medicare certification issue that's holding it up or is it state certification or both?

Ben Lipps

Well, many times Medicare will ask the state to do the certification for them, so it's Medicare certification, but they will sometime farm it to the states. Again, there've been a lack of certifiers in the state at the state level. So, I think we got a lot of traction as an industry on that, because we're not the only ones that have clinics that aren't being certified. It's difficult for the patients, because they're waiting for them to open, and they're basically traveling quite a distance. So, I think that one you'll see some real progress on that in the next six months.

Andreas Dirnagl - Stephens

Well, and then the question in terms of the patients, since essentially you have this clinic set up and ready to go, and as you said, the patients are just waiting, is there any expectation that when those clinics are finally certified, that they're probably going to ramp up on a slightly more accelerated schedule than you might normally see because of this waiting period?

Ben Lipps

Probably, if we were able to convince them to come to some alternate shift at the current clinic. So, the answer is, yes, you're right. If you have to wait a year, it gets a little discouraging, so you look for other options, okay?

Andreas Dirnagl - Stephens

Sure.

Ben Lipps

Yeah, we'll see them ramp up, and clearly we won't have to carry them with virtually no patients to treat, okay, which is the problem.

Andreas Dirnagl - Stephens

Then on the quality indicators that you provided with the new one where you break out the hemoglobin 10 to 12 and then 10 to 13, maybe a couple of quick questions there. If I am reading it correctly, then you basically got about 14% of your patient population that falls outside of that 10 to 13 range. Can you either give us the numbers in terms of what's above and what's below or at least give us kind of a bigger than breadbox, are the majority of those below 10? Hello?

Ben Lipps

Hello. Yeah, the majority are below 10, but just remember, we have heart stop at 13. Those above 13 get pretty basically are just transient. So, the issues are really below 10. That's where the focus of the physicians are.

Andreas Dirnagl - Stephens

Then finally just, sort of a question on the ESRD bundle. You clearly are aware that, out in the market there has been a lot of, sort of expectation that the bundle might be coming out soon. I was wondering if you could just make a comment. Are you expecting any particular timeframe?

If so or even if not, are you also expecting that there is going to be sort of a specific number that we're going to be able to look at or is it going to be more of a conceptual bundle for the first go-around?

Ben Lipps

Well, it's hard for me to totally know that answer, but what I am being told is that, we would expect a proposed rule sometime in the next couple months to come out, and then that would be reviewed and probably comment, and we would work with, basically with CMS. Now, if it comes out as a number unless you really look at the risk adjusters, the outlier payments, and the quality initiatives, there is no way to really put your arms around it.

So, I think we're dealing with a few months before we really know what we're dealing with here, okay, even though the proposed rule may start, it may come out in the next month or so. I wouldn't put a whole lot of credit on anything until we've had discussions for the next few months, except, there clearly is an indication. It should be neutral except for the 2% haircut. So I think it'll end up in an honest base, but it'll take a lot of work.

Andreas Dirnagl - Stephens

Okay. Great. Thank you very much.

Operator

Thank you. We'll now take our next question from Martin Wales from UBS. Please go ahead. Your line is now open.

Martin Wales - UBS

Good morning. Good afternoon.

Ben Lipps

Hi, Martin.

Martin Wales - UBS

Hi. Firstly, in terms of the corporate expenses, was the amount of money you are spending on lobbying in the United States having a meaningful impact on that at all? I am guessing it's more than you spent previously and where do you see that spend going?

Ben Lipps

Go ahead. Yeah. Clearly, we've increased it this year as almost anyone in healthcare has. That is publicly provided basically on a quarter-to-quarter basis. That's not the main driver. The main driver is legal and corporate research.

Legal is, as Larry said, we really are, in some of these suits now for almost six years, and some of the patent suits, and we feel that we're getting very close to resolving them, hopefully, positively in our favor. It takes a real consorted effort and the team's doing that.

Martin Wales - UBS

Okay. Thank you. A couple of quick questions on the drug side. What venomous does this next-generation PhosLo actually bring? Are you hoping to get that approved in the first of half next year.

Ben Lipps

One of the things that we're looking at is clearly it'll have patent protection, and clearly also, one of the problems in this whole area right now, but again, we're working with our monitoring program, our PKM, is the amount of fluid that you take basically to essentially swallow the pills or provide the pills. So, we're looking at something that would be more effective with respect to removing PhosLo with less fluid intake.

Martin Wales - UBS

Would you have an interest in non-calcium based phosphate values as they come off patent?

Ben Lipps

Well, we certainly looked at that but, again, there's a certain non-consensus in the industry, and probably in the minority not the majority. As we look at our modeling, there still may be a room for a non-calcium, but honestly our modeling has worked very well. We've been able to hold the calcium balance now that we understand where it's coming from. So, it's a little early to say, but I probably would be saying that there might be 10 or 15% up to 30%, that it might be advantageous. So, we're clearly looking at that too, okay?

Martin Wales - UBS

Then a final quick question. Just give me a sense of the split between the IV Irons in the US Will you cite as something you can benefit to revenues on ex US or you don't make any comment?

Ben Lipps

Yeah, Larry had answered that before in one -

Lawrence Rosen

I think we would prefer, now, as we get into multiple products in the Renal Pharma business, not to single out specific products just as we don't do for specific traditional products like dialyzers and machines. So, we're going to stay away from that and just report the total Renal Pharma revenues.

Martin Wales - UBS

Okay. Thank you very much.

Ben Lipps

Thank you, Martin.

Operator

Thank you. We'll now take our next question from Scott Bardo from Credit Suisse. Please go ahead. Your line is now open.

Scott Bardo - Credit Suisse

Thank you. Got several questions if possible. Firstly, can you comment on your scope for SCO acquisitions in the US? Do you think you've reached a relative peak in your market share, or do you think there's an ability to further expand their PhosLo?

Ben Lipps

Okay.

Scott Bardo - Credit Suisse

That's the first question, sorry.

Ben Lipps

Go ahead.

Scott Bardo - Credit Suisse

Second question, does you guidance incorporate EPO stabilization orders and incorporate year-on-year volume increase for EPO? Just sturdily on bundling, I just wonder if you can comment when we get the proposal through. If home dialysis is reimbursed at similar rates to in-center hemodialysis would this signal any steps for you to make aggressive expansion into the home market that we haven't actually seen too much so far?

Ben Lipps

Okay. I think I'll take these, Larry. Right now as you have noticed in the first half, we've had a very low acquisition program. Again part of where is the whole thing going to settle out around the world in terms of bundling and in the terms of various activities.

Quite frankly we feel that at this point in time we want to work with all of our customers and try to keep everybody as profitable and successful as they can and if we had an acquisition program that was to purchase more clinics in the US in a major way that would be at cost purposes. So we're expecting a stable situation in terms of acquisitions in the US It'd be onesie, twosie type things but no major acquisitions.

As far as guidance, yes, we entered the year believing that in February that our EPO utilization as prescribed by the physicians would be pretty stable this year and I think we're seeing that. So that's what's in the program.

As far as bundling in home what we find is the nocturnal clinic dialysis is very attractive from the standpoint that most of our patients are 60 plus years of age and really they find that coming to a clinic being taken care of dialyzed and in a sense they're having the day free the next day this seems to work.

So we're looking at those as well as of course we're developing the sorbent system for the variable for the home. So whatever is the right therapy we should have the technology for it in 2011, 2012.

Scott Bardo - Credit Suisse

Thanks. Just one follow-up on some strategies on bundling. If for instance the bundle is expanded to include Part D drugs, would it be your anticipation to include your follow-on PhosLo drug over the generic drug and the ability that you have to do that? Just secondly clearly as a focus on US service margin, I just wondered if you could comment on where you are in a point of time the European service margin and where you think the long-term sustainability is for Europe in services?

Ben Lipps

Okay. Let me take the first question. Again, I think we believe that including the binders in the dialysis facility payment bundle might provide an opportunity for better coordination patient care.

We realize also that really there is a large number of the members of the kidney care communities that have concerns rightfully so about managing this responsibility making sure that drugs are reimbursed properly and included, when they are included in the bundle which is clearly we think Congress and CMS has the obligations to provide adequate reimbursement for both the current drugs that are going into bundle and services.

So I think at this point in time we feel that it might be and is in probably all of our communities' interest to not go rapidly in this area but implement on a slow path and make sure that we minimize any risk to patient care since we have the first bundle to do. Then essentially would be able to not be able put this in.

So the answer is yes, I think there is an opportunity, but we agree with the community that we have to be very careful with how we proceed here to make sure that it's done right, and it's probably the best to slow it down at this point and get the other bundle right. Now as far as the service margin basically in International, you got to kind of look at it.

When you look at a country, you look at the entire products and service, they are all blended together. Certainly the guys in international have done a great job of keeping their margins between 16.5 and 17.5 overall margin, and I think that's the way you want to look at the international business, it's country-by-country global margins that include both products, Renal Pharma and services.

Lawrence Rosen

I think for competitive reasons, we've traditionally not broken out product margins and service margins, and prefer to continue with that, but I think, the margin areas that Ben indicated are indicative for international and the US respectively.

Scott Bardo - Credit Suisse

That's all, it seems.

Ben Lipps

Thanks, Scott.

Operator

Thank you. We'll now take our next question from Hans Boström from Goldman Sachs. Please go ahead. Your line is now open.

Hans Boström - Goldman Sachs

Yes, good afternoon. I had two questions. First of all, with regards to your mention of the public plan on slide 13, is it your opinion that dialysis will (inaudible) any opportunity to employees to shift to this plan for already insured patients, or is there any visibility on that? Secondly, I think I missed any guidance you might have given on the interest line, which was very low, continued to be very low in Q2.

Should we expect this level of expense to continue for the year, for the remaining quarters? What is your mix of variable versus fixed rates at the moment? Thank you.

Lawrence Rosen

Okay, on interest, we expect to continue to be in the low fives, but I think a good reasonable forecast for the second half is in the 5.25 to 5.5% range which is pretty much consistent with where we were in the first half.

Ben Lipps

As far as again, my view or our view on the evolving public plan, it appears that there is beginning to be a coalescence of consensus around a cooperative plan that would not have the providers the reimbursement set as a function of Medicare. In other words it would be essentially negotiated with this plan that would cover the uninsured.

Again, dialysis patients are all insured. So, it may have little relevance to us but it appears that the trend is moving in that direction. Again, it's anyone's guess I think when all the Congress comes back from vacation where it will end, but it looks like, Hans, it's moving in an area that would be even less of a concern for dialysis, okay.

Hans Boström - Goldman Sachs

What would be the rationale to kind of open the lock to dialysis I wonder given that it is what you say already all the patients are insured.

Ben Lipps

Yeah. We actually don't find any consensus for that because clearly no one wants to shift from the private to the government terms of expenses that the program is very expensive in itself. I think that many of the patients have paid into their insurance for a number of years and they feel discriminated already that they only get 30 months of coverage.

So I really don't see any pressures for it from the patients' standpoint and from the government standpoint. So again, that's sort of where we see it today.

Hans Boström - Goldman Sachs

Okay. Thank you.

Ben Lipps

I think we have time for about two more questions. I think we have one follow-up from Tom actually.

Operator

Thank you. Our next question is from Tom Jones from JPMorgan. Please go ahead. Your line is now open.

Tom Jones - JPMorgan

Thanks for taking these two quick follow-ups. Just one for Larry on margins. Just wondering if you would be happy to quantify what the basis point headwind that you faced in Q2 was from transactional currency exposure. In terms of basis points, what we should be thinking of for Q3 and Q4? Then questions for Ben and Larry, I was just wondering how we should think about the profitability of nocturnal dialysis.

Given that they spend a lot longer in the dialysis clinic, having various moving parts for this, but should we be thinking of these as relatively to low acuity patients who would otherwise be home dialyzing, you just haven't have it in the clinic and therefore have maybe a sort of lower labor utilization costs or are these maybe traditionally really sick patients that just choose to do it at night and therefore would need the higher nursing attendance and the higher labor cost to go with this.

So, some color on how we should think about the margins of that business would be helpful.

Ben Lipps

Okay, I'll take that one first, Larry and then you can cover that. Essentially this is just at this point in time, like I said, a therapy clinical trial for us. We've got I think almost 1,100 patients. It's costing us more than actually performing the dialysis during the day.

However, we do have the facilities sitting there in the evening with basically no revenue coming in. So, it's pretty much a wash right now, it's usually the patients are those that are active and wanting essentially use the time during the day for other activities. So they tend to be more on the active and stable patients rather than unstable, clearly not unstable.

So, at this point it's sort of a wash but our program is costing us some money just because we had to step up and set it up. Okay?

Tom Jones - JPMorgan

Perfect.

Lawrence Rosen

Okay, let me take the question on the transactional losses on currency. In Q2, and putting it in perspective of the whole 100 basis point EBIT margin decline, that accounted for high single digit to low double digit basis points for that particular item.

Tom Jones - JPMorgan

How should we think about it, assuming currency rates stay where they are to Q3 and Q4 because it begins to assume not much of a tail wind by the backend of the year if I'm right.

Lawrence Rosen

Yeah, I mean that's one of the things that we're optimistic about for the second half is that it should be a much more favorable comparison than what we had in the first half.

Tom Jones - JPMorgan

Perfect.

Ben Lipps

Thank you, Tom.

Operator

Thank you. We'll now take our final question from Mr. Jack Scannell of Sanford Bernstein. Please go ahead. Your line is now open.

Jack Scannell - Sanford Bernstein

Thanks very much. Just one question really. When you started discussing your disease management demo, you talked about implementing it in terms of a Medicare Advantage Special Needs Plan. Now, Medicare Advantage is I guess out of political favor.

You're now talking about it in terms of an Accountable Care Organization. Does this mean that if there is some delay in healthcare reform, and it gets pushed out till perhaps 2011, you're going to find it very hard to find the commercial vehicle to implement this?

Ben Lipps

Well, I don't think so, because there seems to be more and more of an interest in a Medicare Advantage at parity with Medicare rates, which is essentially what we've been trying to do but I think it's still very open. They extended it for another year and we are still assuming we could have both vehicles, although we much prefer the Accountable Care model, but right now, we're saying probably one or the other will be available, we're covering both best at this point.

Jack Scannell - Sanford Bernstein

Okay. Thanks very much.

Oliver Maier

Thank you, Jack.

Oliver Maier

Okay, I think that was the last question. So I think that just closing the call, thank you Ben, thank you Larry for asking all the questions especially since it was more than overtime. So thank you very much everybody actually for participating in today's conference and looking forward seeing you guys for the Q3 disclosure in November, November 3 is Q3. So thank you very much for participating. I think there is one more comment from Ben, yeah.

Ben Lipps

Yeah, again thank you very much for all of the interest. Again I think we're looking forward to November and talk with you in November. Great. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect your lines.

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Source: Fresenius Medical Care AG & Co. KGaA Q2 2009 Earnings Call Transcript
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