Fresenius Aims To Take Home Dialysis To The NxStage

Includes: FMS, NXTM
by: EP Vantage

For a company associated with the less sexy side of healthcare Fresenius Medical Care (NYSE:FMS) still has the ability to surprise. Today the group announced a $2bn takeout of Nxstage Medical (NASDAQ:NXTM).

The move takes Fresenius further into the niche market of home hemodialysis (HHD), and looks to be a medium to long-term strategy to give Fresenius increased scale in what many believe to be one of the few remaining growth areas in dialysis.

Currently only around 10% of patients on hemodialysis receive their treatment at home, but analysts at Jefferies forecast that this could grow to up to 25% of the market - aided by changes in reimbursement and dialysis providers shifting their business models away the high fixed costs of dialysis clinics.

However, with the acquisition of Nxstage Fresenius will have to play a long game, given the current cost of HHD and some of the difficulties of getting patients to administer what is highly technical care without specialist supervision.

What could help Fresenius is that HHD patients tend to be younger, less sick and more likely to want the convenience and flexibility of treatment from home.

Changing times

There is also a strong financial incentive for Fresenius to shift more of its business from dialysis centers to HHD.

Dialysis is an unusual sector in the US in that almost all patients, not just seniors, are entitled to have their therapy paid for under Medicare. Unfortunately, the halcyon days of the industry came to an abrupt end in 2011 when Medicare moved from separately paying for all the elements in dialysis - use of the blood-filtration machines, drugs to treat the associated anemia, blood tests and other peripherals - to bundling the payment together.

This fixed-payment scheme effectively shifted the onus of finding cost savings from the Centers for Medicare and Medicaid Services (CMS) to service providers like Fresenius. Many dialysis companies are no longer able to maximize reimbursement in their clinics by increasing the use of erythropoietin, vitamin D and iron or other dialysis-related services, and have seen their growth slow or even flatline.

Speaking on a conference call today Bill Valle, Fresenius' chief executive, said that increasing a presence in HHD could result in the group building fewer dialysis clinics, which would in turn cut capital outlay and reduce staffing costs.

What's in the bundle?

Fresenius is primarily buying Nxstage for its System One machine, which last year had sales of $284m; it also has a loss-making services business. Fresenius's $30 a share offer for Nxstage represents a 30% premium to Nxstage stock before the deal was announced and will be the fifth-biggest in medtech this year, but there is still uncertainty around whether or not it will close.

Global sales ($m)
Segment EvaluateMedTech Device Classification - L3 2016 2018 2020 2022 CAGR
System One (home/chronic care) hemodialysis 209 265 359 460 +14%
System One

(critical care)

hemodialysis 75 93 116 141 +11%
In-centre hemodialysis 63 63 68 72 +2%
Asahi Dialyzer hemodialysis 12 13 17 20 +8%
Elimination of intersegment revenues Unclassified (8) (9) (15) (21) N/A
Services hemodialysis 15 23 36 48 +22%
Peritoneal dialysis Peritoneal dialysis - - 7 17 N/A
Total company revenues 366 448 587 737 +12%

Given its dominant position in the dialysis market Fresenius could fall foul of antitrust issues. At the moment it is unclear if the group will have to divest other parts of its business to satisfy anti-competition worries if these arise. As such, Fresenius says only that the deal will close at some point in 2018.

There is also the possibility that one of the group's rivals could recognize the business opportunity of extending HHD services and make a counterbid.

But for now it looks as if Fresenius is the company that has seized the opportunity to innovate again, following its acquisitions of Merk KGaA's biosimiliar operations and Akorn (Fresenius shows biotech how to get the deals done, April 25, 2017).

Fresenius will almost certainly use its muscle and market knowledge to grow the HHD market. And, as analysts at Bernstein point out, NxStage is more valuable in Fresenius' hands than on a standalone basis.