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Morningstar | Fresenius SE Sees Mixed 3Q as Kabi Performance Partially Offsets Medical Care and Helios Weak

We plan to make a few adjustments to our model for narrow-moat Fresenius SE, but we don’t anticipate a major change to our fair value estimate. Although the company is facing a surprising number of challenges in its Medical Care and Helios segments, the Kabi division continues to post better-than-expected results, largely from the ongoing drug shortage environment in the U.S. that keeps overall performance mostly on track with our forecasts. As previously noted during Medical Care’s preliminary announcement on Oct. 16, management anticipates year-end results near the low end of its outlook of between 5% and 8% constant-currency growth.

While we still have concerns about the sustainability of Kabi’s growth and profitability, this segment should continue to help offset near-term pressure in the Medical Care and Helios divisions. With 3% organic growth and an adjusted operating margin of 15.2%, Medical Care faced a number of various headwinds, including negative commercial mix and facility certification delays as well as weakness in product and coordinated care operations. Please see our separate note on Fresenius Medical Care for more detailed thoughts on the quarter. Meanwhile, Helios witnessed only 2% organic growth and a 90-basis-point decline in operating margin as this segment struggles with a number of interrelated issues from reimbursement pressure, depressed patient volume, and staffing shortages in the German market related in part to anticipated regulatory changes. As a positive, the Spanish operations within Helios continue to report solid results.

The Kabi division saw 8% organic growth with a slight operating margin decline from ongoing investments in the biosimilars pipeline. Fresenius continues to see the U.S. injectable drug market as a key source of strength, driving 8% organic growth in global IV product sales. Nutritional products also posted another quarter of resilient 12% organic growth. We still expect competition to eventually accelerate in the U.S. injectables market, however, which should make recent gains in this division hard to sustain. We currently place low odds that Akorn’s appeal to overturn the recent ruling to terminate the acquisition agreement between the two companies will succeed, but the appeals process should reach a decision in the first quarter of 2019.