Fresenius Medical Care AG & Co. KGaA (FMS) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I am Brock [ph], your ChorusCall operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Call on the Third Quarter 2015. [Operator Instructions] I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Thank you very much, Brock [ph]. We would like to welcome all of you to the Fresenius Medical Care earnings call for the third quarter and nine months of 2015. As always, I would like to start out to call -- the call by mentioning our cautionary language that is in our Safe Harbor Statement as well as in our presentation, and in all the material that we've distributed today. For further details concerning risks and uncertainties, please refer to these filings, including our SEC filings. With us today again is Rice Powell, our CEO and Chairman, and Rice will give you a general business update and go through some of the highlights of the quarter and the nine months. We also have with us Mike Brosnan, our Chief Financial Officer, who will cover the financials. With this, Rice, as my intro, the floor is yours.

Thank you, Oliver. Welcome everyone. We're delighted to have you join us today. We appreciate your interest in Fresenius Medical Care and our third quarter results. I think my storyline today as I begin my prepared remarks on Slide Number 5, the storyline is simply great execution. It's been a very strong quarter for us. People worked their plans. They had good plans. And the results are there for you to see in the operational performance. I think the four key things I would mention for the quarter. North America. Outstanding performance. They had a huge contribution to the improvement in their own earnings as well as the overall global company earnings, and margin improvement is great as well. And we'll talk more about that as we move through the presentation today. Our international businesses were impacted in the third quarter as they were in the second quarter, with foreign currency. You know that, we've talked about it before. And also we had some one-time items that we had mentioned to you back in July, as Mike and I took you through the second quarter, we'd given you a heads-up on those items. But I think we have performed as we expected that we would given the headwinds with currency. Care coordination has continued with good growth. We're making progress in the integration activities, and we feel good about where we are at that point. And I would say to you, my last point, on Slide 5, is simply our outlook for 2015, we are confirming it. And Michael talked to you about as well, we're confirming the projections for 2016. We feel good at this point in time about where we are. Turning to Slide 6, looking at our revenue breakdown. I think we see good performance again in the quarter, 9% constant currency growth, slightly over $4.2 billion for the global enterprise. Organic growth of 6% for both North America and the international segments. 11% revenue growth in North America and 5% constant currency growth on our international book of business. And you can see on Slide 6 the breakdown of the individual international businesses, their constant currency contributions as well as their organic growth. I think if we take a moment and look at Slide 7, and just take a bit of a look at our infrastructure for the service business, nine months through the year, as I generally do, I'll give you the three key figures that are important to us: treatment growth up 5%; patient growth up 3%; and then the clinic base to support those treatments and patients up 2% at just above 3,400 clinics on a global basis. And again you can see 33 million treatments delivered around the world through nine months of the year. And you see our patient count just shy of 300,000. If we turn to Slide 8 and focus on our healthcare revenue, I think two things are worthy of noting here, at $3.4 billion in the quarter, constant currency growth at 10%, organic growth at 6%, and same-market growth at 5%. Obviously you know that the 5% same-market growth is a nice improvement for North America. Traditionally they'd been running around the 4% mark and now they've moved up, more similar to what we've seen internationally at 5%. And I would highlight for you, when you break down the constant currency growth, 6% is very good in international given these headwinds that we're facing, 12% is outstanding for North America. And then focusing on care coordination, $480 million in revenue in the quarter, 56% constant currency growth, and organic growth of 17%. Now, turning to Slide 9, and taking a moment to look at the external book of business with our products portfolio, $829 million in revenue in the quarter. You can see that we're driving 2% constant currency growth, and respectively, 3% in both North America and international. I think in order to give you a little perspective on this, let's take a look at FMC's performance as we look at it against our most probably comparable competitor which is Baxter. They announced yesterday in the third quarter they had 1% constant currency growth; we sit here today at 2%. And then looking at the nine months year-to-date figure, they were at 2% constant currency growth and we are at 7%. And those figures for the nine months are in our presentation, somewhere in the back there, you can look at that. But again, we're greater than three times their nine-month data. I would say to you, when we look at the products, we feel good about where we are. We see good growth in machines, dialyzers, good PD growth in North America, great growth on machines in Asia Pacific. A couple of tenders have not come to fruition yet in the EMEA region, but we have no reason to believe this performance is not rational for somewhat, I would say, of normalization given how high we'd been in the earlier quarters of the year. But we're comfortable with that performance as we sit here today. My last slide and my summary slide, I think three points. I've already made them but I'll make them again. Impressive performance in North America. If you've gone through the segment reporting, you've seen that, in the United States, revenue per treatment was up 1.4%, and the cost per treatment is down around 2.5%. So we've crossed the area that we needed to cross in order to show improvement in the dialysis services business in the United States. Our experience with Mircera is going quite well. At the end of Q2 I told you we had 42,000, 45,000 or so patients that had multiple doses of Mircera; as we closed out third quarter, we're now around 77,000 to 78,000 patients with multiple doses of Mircera. Patients are doing well, drug is safe, it's efficacious, clinicians are happy to administer the drug. So we continue to move forward and feel comfortable about the experience with Mircera. And again my last comment, on the international business, we've talked about the influence that the foreign exchange headwinds are having on us. We've talked about the divestitures that we had within the quarter. And we've basically said for you that normalized growth in the products business for Q3 we think makes sense given the outperformance that we saw in the first half of the year. And with that, I'll stop my comments at this point and gladly turn it over to Mike and let him continue on.

All right. Thank you, Rice. Moving to Chart 12 and just continuing with the discussion of the full P&L. Rice spoke in detail about the revenues so I'll move to the operating income. The operating income, as you can see, we're reporting both before and after the one-time items that we described in the Investor News we distributed this morning. So, operating income increased $24 million to $614 million in total, or roughly 4% over last year. When you adjust for one-timers, that's $31 million and about a 5% improvement. Margins year over year increased 20 basis points before and 30 basis points after considering the one-time adjustments. And I'll talk in more detail about the performance of the operating segments in a few minutes. Net interest expense increased $1 million, very slight. That is the result of higher borrowed balances at lower rates. And taxes, you can see, doesn't show much impact year over year, a 10-basis-point change at 32.8%. But as I indicated in the second quarter, I'd anticipate my effective tax rate for the year to be at the low end of the range I provided of 32% to 33%. The rate you're looking at in the third quarter is influenced by the fact that the divestiture in Venezuela was not -- the loss was not tax deductible, so that bumped up the rate in Q3 of 2015. Non-controlling interest, the major portion, as you know, of non-controlling interest is in North America. International regions combined have only about $3 million of a $284 million line item. And the non-controlling interest is tracking generally to the development of operating earnings in North America. As a consequence, net income at $262 million is down slightly on adjusted. And when you look at the effect of the one-time adjustments, you can see a 2% increase in net income for the quarter at $284 million. So, moving to the next chart, Chart 13, and looking at the performance of the segments. The year-over-year margin adjusted for one-timers, as I said, increased by 30 basis points. If you look at the weighted contributions of the various regions towards that, you can see that North America contributed 130 basis points to that improvement. And the international segments in total were down, contributing negative 70 basis points, with about 50 basis points coming from Asia Pacific, 10 basis points from EMEA, and 10 basis points from Latin America. Corporate costs reduced margins overall by 30 basis points. In North America, operating margins were up $102 million, to $515 million. Margins increased, when you measure it against North America alone, 190 basis points from 15.2% to 17.1%. And the margins were influenced by the dialysis business, obviously, with a strong margin increase and strong growth in our care coordination business at comparatively lower margins. Our delivered EBIT was up $77 million or 22%. The dialysis business operating margins improved 260 basis points, from 15.6% [ph] to 19.1%. This was largely due to lower costs for healthcare supplies, a favorable impact from commercial, partially offset by higher personnel costs and increased consulting costs and legal costs due to the GranuFlo litigation and the FDA remediation. Our delivered EBIT was up $68 million or roughly 20% in the dialysis business. Care coordination earnings were up $16 million or 91%. Year-over-year margins increased from 5.6% to 6.8% in the quarter due to the favorable impact from our cardiovascular and endovascular specialty services, pharmacy services, as well as the hospitalists and the intensivist services we provide. This was partly offset by a non-favorable impact from the non-dialysis laboratory services business and the lower margins in the urgent care business. Our delivered EBIT was up $9 million or 69% year over year. So, moving to the international segments, I'll talk about all three which we've been reporting since the first quarter and we still provide the summary information for your convenience in the Investor News. As Rice indicated, and before I enter into it, discussion about each of the individual regions, the margins were affected in all three regions by the impact of foreign currency developments. We had a similar experience in the second quarter, which we discussed in detail at that time. But the foreign currency -- foreign exchange has continued to be -- show some volatility. Obviously when you look year over year, we're affected by the stronger dollar that developed really at the beginning of this year, in comparison to the euro, and the devaluation of the renminbi. But we're also seeing increased volatility in some of the secondary currencies. EMEA was down $29 million or 19%. The unfavorable currency effect explains -- more than explains this decrease and overshadows the operating performance. Margins decreased from 19.2% to 18.5%, or 70 basis points. The unfavorable FX effect was partly offset by lower project costs and a favorable impact from manufacturing, which was delivering savings related to materials and efficiency improvements. Our delivered EBIT in EMEA reflects a similar growth rate to operating earnings. Asia Pacific was down $22 million or 25%. Here also the unfavorable currency effect was higher than the decrease in operating earnings. The margin was also impacted by increased costs associated with further developing our sales models in the region. A slightly adverse impact from manufacturing due to lower volumes. And this was partly offset by the positive effects of our acquisition that we accomplished midyear last year, and favorable revenue rate developments in some of the countries in Asia. Latin America, excluding the divestiture of the dialysis services business in Venezuela decreased by $10 million to -- and this was largely a consequence of the inflation in the region, an unfavorable impact associated with manufacturing, and the effects that I mentioned a few minutes ago. Corporate costs, we -- excluding the effect that we had in 2014 associated with the closure of a small manufacturing facility, we had an increase in corporate spending of $10 million or about 30 basis points. This increase was largely due to legal and compliance costs. Turning to my next chart, 14, and talking a little bit about our cash flows. You can see a small bullet point at the top of the page. Our days sales outstanding had been stable at 71 days worldwide. The -- when you look at our operating cash flows, we're continuing to show strong performance at $1.4 billion in operating cash flows, roughly 11.4% of revenues on a year-to-date nine-month basis. Our debt levels are consistent with our guidance and coming in at 2.9 times. And there's no change in our credit ratings, as you can see on the bottom right-hand side of the page. Turning to Chart 15 and looking at our outlook. As Rice indicated, we are confirming the outlook for 2015, with a revenue increase of 5% to 7% in current currencies or 10% to 12% constant currency, an increase in net income -- excuse me. And the increase in net income with a range of zero to 5%. For clarity, the sale of the European marketing rights for some of our renal pharmaceuticals to the four Fresenius Medical Care renal partnership is being recognized as those rights are transferred at the country level. Therefore, we do anticipate additional gains in line with what we said in the second quarter, showing up in the fourth quarter of this year. As a reminder, we had indicated in the second quarter that we had two one-time effects. One being the divestiture of Venezuela, which was accomplished in Q3, and you see the loss associated with that. And the other being the sale of the marketing rights. You can see that we realized some of those gains in Q3, but we expect to realize the balance consistent with my guidance in Q4. We're also confirming our projections for 2016, as you could see on the page. Revenue growth of 7% to 10% constant currency and growth in net income [ph] of 15% to 20%. And with that, I'll turn the call back to you, Oliver.

Great. Thank you, Mike and Rice. And I think, Brock [ph], we're now ready for the Q&A session.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Alex Kleban of Barclays. Please go ahead.

Yeah, hi. Thanks for taking the questions. I guess I'll ask three. First one is, could you give us more color on the U.S. cost per treatment bridge from last year into this year in terms of absolute numbers for increases in wages and operating costs versus the favorability on pharma and suppliers? Second would be, can we get a steer on the, what do you call, on the associate income coming into the P&L, that you're going to expect from Vifor at the end of this year and into next year, just to understand where the split is on the Mircera between what's getting bought through Vifor and what's going straight into the P&L? And then last is just to ask about how things concluded in your mind with the dialogue with EMS around the draft proposal, and if you have a better sense now of worst-case scenarios or if the draft were to go ahead unchanged and become final, what kind of impact would you be thinking about? And what kind of favorability do you get from your [inaudible] based on the initial proposal. Thanks.

Thanks, Alex. It's Mike. I'll take the first two. In terms of the cost per treatment bridge, as we've said on the actual year over year, we've said pretty consistently this year that we anticipated obviously some effects with regard to our ESA strategy, and that we also were dealing with a year where there was no increase from CMS with regard to Medicare patients, so we were -- we had to mitigate the costs of increased -- the increased payroll costs year over year. So the story in Q3 is consistent with that, particularly when you look year over year. We're seeing both of those effects in the numbers. In terms of providing any additional granularity and looking at numbers going forward, it's been a number of years now that we haven't provided detailed guidance on revenue cost per treatment, so we're going to continue in that vein. Your second question with regard to parsing out Vifor versus what of the pharma will show up in North America. Same answer really. We haven't really provided that level of granularity in terms of guidance, so we would let the numbers speak for themselves, and obviously both elements of the pharma strategy are included in our guidance for 2015 and the projection for 2016. Rice?

Yeah, Alex, it's Rice, on the draft proposal from CMS coming out here we assume probably any day now. What I would say is we are expecting it to be in general as it was proposed. We've not heard or seen anything in the halls of D.C. that would tell us it's going to be radically different. So we think if it comes through generally as proposed, we should be okay. As I said back in Q2, we were a little surprised at the amount of attention the case mix adjusters were getting. We put that in our commentary back to CMS, but we'll see what they come back with. But if it comes generally as advertised, I think we'll be fine.

Okay, that's good. Thanks. I'll get back in the queue.

Your next question comes from Veronika Dubajova of Goldman Sachs. Please go ahead.

Good afternoon and thank you for taking my questions. I also have three. The first one is just on the North America same-store treatment growth that was very impressive this quarter. I guess, Rice, just would love to get your thoughts as to how sustainable you think that is going forward. You know, are there some benefits of some contracting work maybe that we shouldn't be extrapolating? Just kind of your general thoughts on that, that would be great. My second question is on care coordination, and not to be nitpicky, but the growth rate was only 17% in this quarter versus 30% at first half. I guess, presumably this is just as you're normalizing the business a little bit. But to the extent that you can talk about how we should be thinking about that growth rate for the rest of the year and then at medium term that would be fantastic. And last one, for Mike on GranuFlo, any update on the litigation there and when we might have further visibility into pace of settlement and any provision you may have to take? Thanks very much.

Yeah, Veronika, hi, it's Rice. So I'm going to do one in three. I'll let Mike handle two. But yeah, when you look at same-store treatment growth, we're pleased with that. I think generally you're asking me if it's sustainable. I would say that we're generating that performance from a really good door-to-door blocking and tackling and trying to make sure that we're being as aggressive as we can be in the way we approach this. I think that we're in a good place. I think there's a bandwidth there, I'm not going to be too specific on that. But we've worked hard to take it from three to five. I think if we're in that four to five range, it would make sense for me. But at this point, I think that's probably the way I would leave it with you. And I think on care coordination and the 17% growth, Mike, I'll let you handle that one, and then I'll come back around on the GranuFlo litigation.

Yeah, yeah. Veronika, I'd say most of this is just the seasonality in some of those businesses. But I would remind you that the organic growth is the legacy care coordination businesses, so it has nothing to do with the businesses that we acquired during calendar year 2014. So you're looking at the vascular business, you're looking at the pharmacy and you're looking at the non-dialysis laboratory business. I commented in the care coordination overall remarks that we are seeing some softness in the laboratory business this fiscal year, so I think that's probably accounting for a good portion of the drop in the organic growth that you're referring to.

Yeah. And on the GranuFlo situation, what I would tell you is, as we talked the last time in Q2, we had anticipated and we're planning for a trial in St. Louis in September for some of the cases that did not get swept in to the multi-litigation and multi-district litigation. Those cases did not happen. Plaintiffs decided to not bring those trials forward in September as they had been scheduled. So they have been pushed out in time and we'll see where that goes. So, probably the next most important bullet point for us to think about is we are scheduled for trial in suburban Boston, in Waltham to be exact, November 30th. That is Judge Kirpalani's court. These are few of the cases that did not get put into Downtown Boston and to Judge Woodlock's court. So we're in a place now where November 30 we start the suburban trial. I can't even begin to tell you how long that can go. We're scheduled for the largest portion of the multi-district litigation in Judge Woodlock's court in Downtown Boston, and that is planned to start sometime in the early days of January.

That's great. And can I just quickly ask, as follow-up on the care coordination, Mike, maybe, can you give us a sense of the businesses that you have acquired, how fast are those going organically? I mean it's not organic growth for you, but if you can just give us a sense, that would be quite helpful as we think about modeling care coordination going forward. And then I'll jump back into the queue. Thank you.

Let us think about that for a bit. We'll come back to you, Veronika.

We're going to look it up, Veronika. We got data sitting in front of us. Give us and we'll come back to you on that one, okay?

Thanks.

Sure.

Your next question comes from Ian Douglas-Pennant of UBS. Please go ahead.

Thanks for having me on. I wonder whether you could just say a few words on the alternative payment model for dialysis [CET] that recently started a trial program. Also on your care coordination acquisitions, and we've seen much -- or many fewer and smaller-scale acquisitions this year versus last year. Could you just update us on why that is and whether you expect that rate of acquisitions to pick up again either this year or next year? Thanks very much.

Okay. So, Ian, it's Rice. Let me just make sure on the alternative dialysis payment, you're talking about Escos [ph]?

Yes, exactly. Yeah.

Okay. Yeah, with the Escos [ph], what update I can give you is that we did finally get the program started in October 1st, so it's a fourth quarter program. We were -- we offered to participating, we're accepted in six sites: Chicago, Charlotte, North Carolina and Columbia, South Carolina, I believe it was Dallas, Texas, or Philadelphia, and San Diego. So that's where we sit today. Keeping in mind, the way that program is structured, there is a 90-day window that we have the ability to decide whether we stay in all of those locations or not. And there's not much more I can tell you than that. We're in the midst right now of beginning the programs. So we're looking to see where that is. We have very little data at this point. And then can you just repeat your second question? I had a little trouble, you cut out a little bit on me. I know it's care coordination related but I couldn't get all of it, Ian, if you don't mind please.

Sure. Sorry. If you don't mind, one follow-up on the Esco [ph] question. What changed there? Because I mean, you didn't seem happy with the original plan as proposed. What's changed to make you willing to move forward with that trial? And then the question on care coordination was around the rate of acquisitions. We've seen that rate of acquisitions slow down materially in 2015 versus 2014. Why is that? And should we expect that to pick up this year or next year?

Great. Thank you. Well, you know, let's say, participating in the Escos [ph] doesn't mean I'm personally happy about it. So I would say it this way. We still think there are some issues with the construct of the way it was set up. However, we do think if the government is going to go forward with that flawed scenario, if you will, that we should participate so we can really test and understand if our concerns are real or not. So we're doing this on a small basis here to see how we get started. But I still do think and I believe the team in the U.S. feels that there's just some structural issues in the way it's set up. But we're going to try to do our best, we're going to participate, we'll see where we go over the next 90 days or so, and then make some decisions about whether we're in with all six locations or not. I think on care coordination and the rate of acquisition, I would say to you that, yes, it's quiet at this point, because we're working feverishly to integrate what we did. Let's keep in mind that we spent over a billion dollars acquiring these assets. We need to make sure that we've got them integrated and they're functioning where we want them to. So we continue to look. We'll continue to be opportunistic. But I think you also have to appreciate that we're also looking not just in the U.S., we're looking globally, and we also look at acquisitions in the core business as well. So, just because we're not doing something today doesn't mean we're not looking, and we'll have to kind of go from there. And Mike, you want to comment on that?

Yeah. I was just going to add to your remarks, Rice, and say that the other thing we do pay close attention to is valuations and carefully look at how much we're paying for the assets that we're considering. And as you know, we moved very quickly in 2014 after our Capital Markets Day to make what we feel were great additions to the portfolio, and with the way valuations in the healthcare services have taken off this year, that's also something we factor in, in terms of when we would consider doing larger deals.

Great. Thanks very much. I want to ask about star ratings as well, but I'll jump back in the queue for that. Thanks.

Sure.

The next question comes from Gary Liebermann of Wells Fargo. Please go ahead.

Good morning. Thanks for taking my question. Two questions Just to clarify, the 78,000 patients on Mircera, that's all in the U.S. or is that internationally?

Gary, it's Rice. No, that's all international -- in the U.S., sorry. That is just U.S. only.

Okay. And so, with 180,000 patients total, where do you think the upper limit is to the number of patients that you think you can get on Mircera and over what timeframe?

Well, let me give you just some large ballpark numbers. Keep in mind that, of our 180,000 patients, there's a certain subset of those patients that do not take epo at all, because they really are in a fortunate situation where they don't need the help with their hemoglobins, and so you have to back that out, and then from there you have to kind of look at where do we go beyond that point. I would tell you, we still have room with where we are today, rather than being too specific, there's still room to be made. We still have patients on the Amgen products both Aranesp and epo. We'll see how that rolls out over time as well. But as you and I have talked before, we're just continuing down the path, we'll continue with more patients. But I do think folks have to keep in mind that there are some number of patients in the industry that do not require any type of ESA, be it ours, Mircera, Amgen's, whomever.

That's helpful. And then, to an earlier question, just in terms of the way that it's running through the P&L, I appreciate that you don't want to give too much detail, but is it -- the way it's running through the P&L now, is that the way that it's going to stay, or are there any changes that we should expect to see where it gets booked [ph]?

Yeah. No, I mean the way we're reporting today is the way we will go forward. We're not doing anything differently. We're working through the JV as we had told you guys. So this is going to continue as it is today. There shouldn't be a change there.

Okay. And then last question, separate topic. We've seen a lot of activity in the U.S. sort of in the broader care markets, sort of with the acquisition of IPC or the expected acquisition of IPC, and AmSurg's hostile bid for TeamHealth. So, can you comment on any impact that might have on your broader plans or anything that you've seen in the market maybe because of that?

Yeah. No, I don't think so. I mean when we consider the IPC team combination, we were competing individually against IPC, so we don't see that coming together as necessarily anything that's going to change our strategy or make us react or conduct our business any differently. As you know, our history is we take all competition seriously. But we don't see it being something that's going to make us radically change what we believe our strategic plan should be and how we want to approach this and our care coordination activities.

Okay, great. Thanks very much.

Sure.

I'll take the break just to address Veronika's last question.

Okay.

And I think that, you know, because I appreciate your doing a certain amount of modeling on care coordination in the aggregate, I think something in the mid-teens is probably a reasonable expectation for organic growth, as you -- as all of this business season lies [ph] into the organic calculation.

Your next question comes from Tom Jones of Berenberg. Please go ahead.

Good afternoon. I had a couple of questions. The first was on your kind of insurance type business. There was a pretty substantial jump in medical months and the management of medical costs under management through the end of Q2 and the end of Q3. It's a pity your business doesn't really seem to get a lot of attention, but it's growing furiously. So, some further color on what you're doing there and why and how you think that might development would be interesting. And then secondly, I just wanted to pick up on something Mike said. You said the Asia Pac margin was hit by some additional spending you're doing, developing sales models in the Asia Pac region. Is there anything you can add or elaborate on in that context?

Sure, Tom. Hey, it's Rice. Mike, go ahead if you want to pick up Asia Pac, on the comments you had there, then I can come back around on the medical months.

Yeah. Just nothing extraordinary, but it's one of the, you know, it's not the largest region, so we just continue to look at investments in the sales force and investments in our distributor network in that part of the world to make sure we're being effective in all the countries with maximizing our sales opportunities.

I see. Perfect.

Tom, hi, it's Rice. I think really what we're looking at here under the medical months under management and the huge growth is just, as we're continuing to build that business and with the year-over-year comparisons, we're just getting huge numbers. But what I would tell you is we are still working on licenses. We know where we want to be, we're moving forward. I think you and I had a conversation about this in Q2 where you had asked me where were we focusing particularly in the CSNEP [ph] area. And let me come back and tell you that we are in Arizona, we're in North Carolina and California, particularly Southern California. We're at somewhere around 900 gross patients, and I say gross only because there will be some drop-outs, so I think you really have to consider somewhere 700, between 900, because there'll be some drop-outs. So we are moving forward with that. We know where we would like to go with licenses in the next year. I'll leave that on the table for the moment. But I think we're really just working the plan, trying to get ourselves set up to be ready to go in an effective manner.

Perfect. And then one follow-up question if I may. On the Shio [ph] business, on the non-dialysis lab business, I mean you bought this back in 2013 I think, and basically stopped talking about it after a quarter, and now you're talking quite negatively about it. What are your kind of thoughts about that business? Is it something that it's kind of one perhaps -- we should be perhaps thinking about you exiting this business or is that a little bit aggressive at this stage?

No, Tom. Let's be clear. Mike's the one that said something about Shio [ph], not me. No, no. I'm kidding. So, a couple of things. And you're right, we did this acquisition at the very end of 2013. But at the time we kind of laid this out, allow me to refresh it. If you remember when we did this, we really thought it was a way for us to leverage the dialysis lab asset that sits in New Jersey. And across the Hudson River sits the Shio [ph] lab business in the Navy yard in Brooklyn. We've now got -- and that was to be a three-year plan, because we had basically expand and redo the New Jersey location of FMC, that's coming to a close, we're now ready to start moving out of the location in Brooklyn and move those testers and that equipment into a bigger space and see some leverage on those assets. So that is still within the scope of timing that we gave you. We're pretty much on track, but it was kind of a long road, if you will, before we really are going to see some improvement there by leveraging that asset. And then secondly, the other thing, on the sales line, two things have really impacted us. One is we had a large payor that came in and drove a fairly significant rate reduction for us that we had to deal with, and so that's hurt us on the sales line. And we've seen a little bit of the sales model shifting from traditionally what has been door-to-door position office, hospital selling, to now, because of ACOs and people grouping together in health systems and the consolidation coming in that New York to Philadelphia corner [ph] right there, it's a little bit different sale. It's a bigger system sale than kind of the door-to-door. And we're taking some time to understand that. We probably could be doing a better job there. But it's kind of a combination of things. But clearly within the realm of what we had expected in terms of the operating details on getting two facilities into one building, Tom.

Sure. And just from your comment about people kind of group up and shifting from mom-and-pop to more organized customers, should we be thinking about some ongoing sustained price pressure in this business or is that not the right way to think about it?

No -- well, I think two things. I think we always expect some price pressure from the larger people coming together. You know, kind of as a sales guy, as I used to be, you know, you're out, you're dealing with customers, and they have different pricing among themselves. And then when they come together and they merge, they kind of look and see who had better pricing, and you have to answer for that. So there's a little bit of that pressure that's going to go on. So I think it's very rational to consider there'd be some pressure there. But we should be able to work our way through that.

Okay, that's perfect. Thanks.

Our next question comes from Michael Jungling of Morgan Stanley. Please go ahead.

Thank you very much. I have three questions. Firstly, on the U.S. dialysis treatment. I'm sort of more interested in the sequential decrease from Q2 to Q3. Can you sort of provide some indications why it's fallen $14? And is there scope for this to fall further in the fourth quarter? Question number two is on Mircera. Do you have access to enough Mircera if you were to move very quickly in 2016 to virtually all of your patients being on Mircera? Is there enough supply for you to be able to do that potentially? And question number three is on Japan. Can you update please on your activities there and the prospects over the next 12 months? Thank you.

Sure, Michael. Mike, you want to take one, and I'll pick up two and three?

Sure. The -- yeah, Mike, I'll -- sequential quarter, not surprisingly, the change does reflect pharma, including Mircera. It also has in it the effect of one more dialysis day and some of the other operating efficiencies we've been working for some time now in terms of cost containment and GDP. Relative to our ramp in cost per treatment, I'm going to come back to what I said at the beginning of the call. We haven't guided at that level for probably four years. I think the important thing is we're getting very good execution, as Rice commented when we started the call, and we provided two years' guidance to help people bridge 2015 and 2016 and the bigger picture associated with our 20/20 plan. So our expectations in terms of pharma as well as our other revenue and cost considerations are in the guidance for 2015 and the projection for 2016. And I confirmed those earlier, so.

Yeah. Michael, on the supply with Mircera, let me try to say it this way. When we began the process of looking at the drug and moving patients to the drug, we had x capacity to be able to do that. And we knew that we weren't going to get it exactly right, because we were really doing dose studies, trying to figure out exactly what the dose is going to be and how is the supply going to play out. What I would say for you is we find this to be a very efficient drug. We are seeing that the supply is going to be more than we had initially thought, just as we moved through in those patients and seen what the responses are. I can't really get into and I'm not going to get into the exact volumes and do we have enough, do we not. I've got some confidentiality things I have to maintain there. But what I would say to you is we went into this with one assumption of what supply would be. We're now seeing that that supply is going to be a little better than we thought because we're more efficient with the dose, but let me kind of leave it at that at the moment. I don't want to get myself in trouble with my partners. And then relative to Japan, I would say there has been no change, meaning that, as we talked about the draft proposal for foreign ownership of facilities, we've, to my knowledge, not seen that come forward, it's not up for a vote yet. But the book of business that we've had now for a while in Japan is running well, and we're maintaining that at this point.

Okay, thank you. And Mike, in terms of the sequential decrease in cost per treatment, I mean, Mircera, the increase in patients happened also in Q1 and in Q2, and the improvement in the cost per treatment was $2, and now we've got $14. So, something happened sort of in the third quarter which is a huge step-up. And given that you sort of indicated to us you've gone from maybe 40,000 patients to 70,000 patients, all these changes seem to be kind of similar between Q1 and Q2 and Q2 to Q3. So I'm still a little bit confused as to why there is such a large great benefit in cost per treatment in the third quarter.

Yeah. No, I understand, and I think Rice, as he reported out, particularly I think you're focused on the patient count that he reported in Q1, Q2 and now in Q3. And what he was indicating was the number of patients that had had at least one treatment with more than a single dose. And if you think about those things ramp in a patient population over time, if you're at 45,000 patients at the end of the second quarter, then obviously you're going to get most of the benefit associated with that once they'd been on the treatment for the full quarter.

Michael, it's Rice. Certainly draw whatever assumptions you would like, but as Mike said earlier, there are other pharmaceutical efficiency things that we're working on, there are other drugs that we administer that we're making good progress with, and then just generally the efficiency program is bearing fruit as well. So it is a multi-faceted endeavor. That's why I chose to say execution was the keyword here, because the guys and ladies in the U.S. are doing a great job at that multipronged execution.

It's very helpful. Thank you.

Our next question comes from Kevin Ellich of Piper Jaffray. Please go ahead.

Good morning. Thanks for taking the question. I have a couple for you guys. I guess starting off with care coordination which has been the topic of conversation this morning. Rice, we've seen some of these other healthcare service companies talking about staffing issues and also wage inflation. Just wondering if you guys are seeing any of that with your hospitalist business or any other parts of care coordination and your dialysis business. And then I've got a follow-up after that.

Sure, Kevin. So I would say two things. First, let me take it reverse order. Wage inflation is alive and well. We see that, we deal with it, you well know that in our dialysis business, and we do see that in care coordination as well. But I think we're managing it as effectively as we can. On the staffing issues, what I would say, it was really -- or it has not been much of an issue in legacy Sound. They've had their own locums recruiting group, they've done a very good job in being able to recruit and manage that. In the Cogent book of business that we acquired, they outsourced their staffing, their locums business, and yes, temporary employment, we all know that you pay a premium for those people. But as we've integrated Cogent and been able to start to bring that in-house, we'll be able to control that. I know that was an issue on the IPC call the other day. And it makes sense to me, we saw that at Cogent as well. Hasn't been as big an issue with Psalm [ph] because they just have a different structure and a different approach.

Sure. What about any of the hospital contracts that either Sound or Cogent have taken? Have you had any problems or disruptions with those hospital contacts?

What I would tell you, from my perspective, no. I've not heard or seen. I'm probably at a level that wouldn't know all the details, so, hopefully you'll be in New York on November 18th and you can ask that question again. But I'm not hearing anything, Mike's shaking his head as well, that would tell us we've had a real issue there. But fair game, when we get the right guys in the room in New York.

That'll be great. And then just, you know, you talked about the 180,000 patients that you have and there's a subset that don't need epo or ESAs. Is that just the PD population or could you help us understand that a little bit better, maybe quantify it, Rice? And then lastly, one for Mike, on the guidance. It looks like your acquisition guidance, and I might have missed this in your prepared remarks, but now it's $300 million on acquisitions for 2015, I think last quarter it was $400 million. So what's changed from now and from last quarter?

Yes. So, look, let's talk about the 180,000 patients. What I would say, Kevin, is, no. It is not just PD or home patients. There are patients that are hemodialysis in center that do not require ESAs. We all have them, meaning we have them, DaVita would have them, U.S. Renal would have some. It's just the way people's bodies react and the way it goes. I'd like to refrain from giving you direct numbers on that. But it is -- it's a fact that that does occur. And you will have some home patients who don't need it as well, but I just don't want you to think it's just the PD book of business. So it does exist. It's not hundreds, it's thousands, and I'll kind of leave it at that. And let me pass it over to Mike on the guidance for acquisition spend.

Yeah, Kevin, thanks. And I had intended to mention that when I went through the outlook but just it slipped my mind at the time. Nothing in particular. As Rice indicated, we always have a very active pipeline of deals that we're looking at. It's mostly just the clock ticking for calendar year 2015, because you have our nine-month spend with regard to acquisitions. We're sitting here at the end of October. And when we look at what it takes to literally close a deal, so it shows up in the spending figures, we thought 300 was the more appropriate number than 400 for this year. So it's just because we're getting towards the end of the year, we thought this would be good [ph].

Got it. More of a timing. That's helpful. Thank you.

Exactly. Yeah.

I think we have time for about one more question. We have some other commitments. But I think one more question or two more questions will be [inaudible].

Thank you. The next question is from Frank Morgan of RBC Capital Markets. Please go ahead.

Good morning. I was hoping you could elaborate a little bit more on the VPC app [ph] program, in terms of the update there and the dollars of potential billings that you have under that program. And then I know last quarter you mentioned that you were waiting to get some data back from CMS. Just update on that as well. Thanks.

Hey, Frank, it's Rice. Yeah, happy to give you what I know is to be the update. Relative to data flow, data is flowing. It's still slow. It's a little better than it was when we spoke a quarter ago. I think the better way to say it, because we've kind of asked the question differently of our team there is, when are we going to have a better idea of cost and what's it look like? And they are telling me Q1. And that seems rational to me. I think you guys heard something similar to that yesterday with the IPC call, or a couple of days ago. And then in terms of what is the range of that. I'll get shot, because I'm never going to get this right. But I would tell you that it's probably big enough that you and I could drive a truck through. It could be $400 million, it could be a billion. We don't know enough yet when we're sitting here without understanding our cost and having to wait to Q1 to really get a handle on that and try to make some projections. It's a pretty wide range. So I'm going to ask you to defer and ask us that question, maybe in New York you may get the same answer from the guys then, it may be that we need another quarter or we need to get into first quarter, to try to give you a better range with that. But it's a range. We've put a pretty wide stake in the ground, and I just don't know enough to tell you which way to tilt that range at this point.

Okay. That's fair. Thanks.

This concludes today's question-and-answer period. Please proceed with closing comments.

Great. Thank you very much everybody. Thanks for listening today to the call, and looking forward to talk to you soon. Thank you.

Bye-bye, guys, ladies.

Bye-bye. Thank you.

Ladies and gentlemen, the conference has now concluded. You may all disconnect your telephone. Thank you for joining, and have a pleasant day.