Fresenius Stays Strong in Tough Times

The health-care company's products are virtually immune to recession, and it has used the strong euro to acquire U.S. drugmaker APP Pharmaceuticals

by Jack Ewing

There's talk of an impending economic slowdown in Germany, but there was no sign of it on a recent sunny day in the affluent Frankfurt suburb of Bad Homburg, nestled at the foot of the forest-covered Taunus mountains. Particularly not at the headquarters of German health-care company Fresenius (FREG.DE), located in a tidy Bad Homburg office park.

Fresenius, whose separately listed Fresenius Medical Care (FMEG.DE) unit is a member of Frankfurt's blue-chip DAX Index, is an example of a company that is cruising through the current downturn relatively unscathed. In fact, Fresenius, best known for its kidney dialysis products and services, may even have benefited from some aspects of the current economic turmoil.

Though the strong euro has been a problem for many European companies that export to the U.S., Fresenius exploited the exchange rate to make a major acquisition. In July, the company's Fresenius Kabi unit agreed to buy U.S. drugmaker APP Pharmaceuticals (APPX) for $3.7 billion.

APP is a Good Fit

Fresenius didn't make the acquisition just because the euro is strong, CEO Ulf Mark Schneider says. Schaumberg (Ill.)-based APP makes generic drugs that are administered intravenously, fitting well with Kabi's business of providing intravenous therapies and nutrition. But Schneider adds, "For something we wanted to do for a long time, this was an opportune time to do it."

Fresenius' products and services are not the types of things people scrimp on during a downturn, since doing so can be fatal. Besides, many of its offerings are paid for by health plans. In addition to Fresenius Medical Care, which specializes in products and services for people suffering from kidney failure, and Fresenius Kabi, which specializes in food and drugs administered through a tube, Fresenius also operates hospitals in Germany, while its biotech division is developing new cancer therapies and drugs that help patients accept transplanted organs.

The product line has helped make Fresenius resistant if not completely immune to slower economic growth. The company is "an attractive investment in an uncertain economic environment," said Silke Stegemann, analyst at UniCredit Markets & Investment Banking (CRDI.MI), in a recent note to investors. She added, however, that the cost of APP and other acquisitions could limit gains by Fresenius shares.

Strong Euro Does Hurt

During the last year, Fresenius shares have held steady while most major indexes have declined. Fresenius preferred shares traded at 78.80 recently in Frankfurt, down 2% from a year earlier. The separately listed shares of Fresenius Medical Care, the world's largest provider of kidney dialysis products and services, traded recently at 52.70, almost unchanged from a year ago.

Fresenius has suffered some negative effects from the strong euro. Revenue generated in North America, 39% of the total, was hit by the dollar's 15% decline against the euro during the first half. So even though Fresenius' dollar-denominated sales rose 2%, they declined 13% when translated into euros. Sales to Latin America and Asia also felt the effects of a weaker U.S. dollar, since many currencies in those regions track the greenback.

Still, Fresenius' total profit and sales have withstood the slowdown so far. In the second quarter, the company reported operating profit of $605 million on sales of $4.3 billion, both little changed from a year earlier. "Long term, I'm not sure anyone is immune to the economy," CEO Schneider says. "Short term we're about as insulated as it gets."

Ewing is BusinessWeek's European regional editor.