Shareholders' new empowerment...

...will not sponge up the operating challenges! We positively value Fresenius’ plans to change FMC’s legal structure and FMC’s ambition to provide more transparent reporting, as well as the higher cost-cutting ambitions. The basic issue of unknown future patient growth can not be solved. Additionally, it remains to be seen how ‘successful’ the change in FMC’s operating model will be and what the profitability line looks like. We hope the restructuring success can be easily tracked.

St Nicholas’ last dance

Basically, Dr Clara Kriwet’s tenure as FMC’s CEO was 50% longer than that of the former UK PM Liz Truss. However, her sudden departure does raise some more general questions, which also touch on the work of the real Supervisory Board headed by Mr Sen (CEO of Fresenius). Since it has been clearly stated that differences about the strategy were the reason for the quick change, one might legitimately question the quality of the Supervisory Board’s work.

Worry lines might become deeper

FMC’s troubled US business is facing increasing difficulties which will make finding a solution more expensive. In general, the struggle to recruit nurses, i.e. medical staff, will intensify in the coming quarters.

No monument needed …

… for the former CEO. We are still shaking our heads about Mr Powel’s negligence during his tenure, to which we might add the very limited information provided by the company on internal issues and the external challenges. The latter come from the pandemic, but their effects have not been well flagged or properly managed. Despite its strong business model, we get the impression that FMC is not a well managed company.

Turn of an era?

This was the earliest opportunity to exorcise Mr Powell’s ghost. Silverback left the stage, things remained difficult and the mid-term targets were put on the bloc. This was fairly logical and put Mrs Giza, co-CEO, CFO and CTO, in a very strong position by putting her co-created FME25 programme off the table and clearing the way for the currently on-boarding Mrs Carla Kriwet. We value this step as a first measure to rebuilding confidence.

A slightly infected start to 2022

A mix of negatives weighed on FMC’s profitability. The re-occurrence of the pandemic proved costly as the number of isolation clinics had to be re-ramped and the labour shortage resulted in higher wages. In addition, excess deaths increased despite high vaccination rates. Higher input costs were added to the mix making it a perfect storm. Consensus was slightly beaten at the top-line (+1.2%), whereas the EBIT line came in slightly above (+1.8%) street expectations.

A vaccination beneficiary

At last, the quite high (partial) vaccination rate among FMC’s vulnerable patients (>80%) and the Omicron variant’s mild effects have led to a reduction in excess mortality. The financial impact on the FME25 programme remained at unexpected low levels. Nevertheless, 2022 is earmarked as seeing some continuation of the challenges (effects from excess mortality, staff shortages). Our estimates were beaten by +4.2% (consensus: +0.6%) at the top-line and by +6.4% at the EBIT level (consensus: -1

FMC wants to break free …

… but has to wait until 22 February 2022. In other words, uncertainty remains for the next 111 days before getting more details about FRE25, the transformation programme. Despite Fresenius CEO’s more friendly words about FMC’s management, we still believe not everything has been resolved in the meantime. Q3 figures broadly meet consensus (top line: -1%; EBIT: matched; net profit: +3.0%), but the pick-up in excess mortality and the consumables raise some concern regarding profitability.

The baffling loss of profitability

The pandemic seems to have revealed all the oddities in FMC’s business model, which usually benefits from the continued inflow of new patients. Here we highlight that managerial skills could be improved here and there. And the same is true for communication and reporting. The quite strong loss in profitability could not be fully explained by the lack of government compensation for higher costs. FMC missed consensus at the EBIT level by €-11m, which does not look too meaningful to us.

Coronavirus impact will last a bit longer

FMC’s management had spread a lot of confidence that there were signs that the worst should soon be over (see Latest of 06/05/2021), when it comes to excess mortality. Mr Powell was cited by a newspaper that the negative effect from the pandemic is now expected to last until mid-2022. FMC has not given a profit warning, but we see an increasing likelihood of one. A perfect time for this would be the presentation of the efficiency programme in autumn 2021.

Additional decoupling

We see a certain decoupling, of which the one related to the COVID-19 cases of FMC patients to the global trend is very positive in our view. The reduction of transparency (Care Coordination is not reported separately), which makes it even more difficult to track reimbursement trends, seems to indicate some disconnection between investors’ and management’s ambitions. The reported figures were better than feared, but met consensus.

The pandemic as the acid test

FMC is currently undergoing an unexpected Litmus test. Management has taken the opportunity to dig deeper into its business, striving for more resilient profitability, which seems to foil our strong view on FMC’s business model. We are still struggling with management’s performance as this have been done on a regular basis. In our view, FMC’s equity story has not really changed, but we are not that excited by the current financials nor the guidance.

Sadly something went wrong...

Expressing our deepest sympathy to those who have lost friends and relations, the pandemic has appeared in its deadly form. FMC appeared to have the right concept to cover pandemic-related challenges, still providing >105,000 treatments per day in the first nine months. But what went wrong since then? Basically, nothing. Or rather, the pandemic took its toll. Having been quiet for two days, management gave a short presentation. In short, 2021 might become a ‘year of lost growth’.

What a happy day

FMC is expected to benefit from the rejection of a ballot measure in California. Additionally, CMS will increase the reimbursement for Medicare patients undergoing dialysis more stronger than expected.

Stumbling in the crisis?

Despite our strong belief in FMC’s robust business model and its ambition to help people with severe illnesses, we have the increasing impression that the company could be better run. Difficult to prove this but there seems to be a lot of talk and not much in the way of results. The disclosure is not always that good (e.g. p12 – Q3 presentation). Q3 did not meet our expectations, but beat the street.

Reassurance on RCF funding and FCF in Q1

VLG has issued a reassuring statement regarding its RCF/funding. Liquidity is sufficient and stable, and no impact or risk to the business is expected to arise from events at Silicon Valley Bank, one of the lenders under its RCF. The Board is confident of being able to refinance that portion of the RCF either at or before renewal in Jun24. In addition, VLG reports a strong start to the year, including good cash generation following the strong final quarter of FY22.

Hybridan Small Cap Feast - 06 Mar 23

6 March 2023 @HybridanLLP Status of this Note and Disclaimer This document has been issued to you by Hybridan LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This document has no regard for the specific investment objective

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21 March 2023 @HybridanLLP Status of this Note and Disclaimer This document has been issued to you by Hybridan LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This document has no regard for the specific investment objectiv

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14 March 2023 @HybridanLLP Status of this Note and Disclaimer This document has been issued to you by Hybridan LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This document has no regard for the specific investment objectiv

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