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Fresenius Turns Defense to Offense

The German medical-supplies company has shown solid growth, with its shares up 41% this year. Weakness of the euro and strength in emerging markets helps.

Its stock has held up well in the recent market rout. Although it has traded steadily at about 60 euros ($67.16) over the past month, it’s up more than 37% since the start of the year. By comparison, the Stoxx Europe 600 index is down almost 2% since Sept. 1, shrinking its year-to-date gains to a meagre 1.4%.

Fresenius (ticker: FRE.Germany) is Germany’s largest medical-supplies provider. Its four business units include Fresenius Medical Care, a market-leading supplier of dialysis products and services; Fresenius Kabi in the U.S.; Germany’s Fresenius Helios, a hospital group; and health-care manager Fresenius Vamed. The company has a market value of more than €32 billion, and it joined the Stoxx Europe 50 index on Sept. 21.

Strong earnings this year, especially in North America, have led it to raise its profit guidance twice in the past two quarters. The company has been helped by the euro’s relative weakness against other major currencies since the European Central Bank launched its quantitative-easing program. First-half sales rose 25% in real terms but 13% in constant currencies.

Fresenius Kabi has been a solid earnings driver for the company this year. It produces medicines and technologies for infusion, transfusion, and clinical nutrition, providing care mainly for critically and chronically ill patients. Its product portfolio includes a range of intravenous generic drugs and infusion therapies.

At the end of July, the company said it expects net profit this year to be from 18% to 21% higher than the €1.09 billion it reported in 2014. Fresenius’ earlier forecast was for 13% to 16% growth, which was itself the product of a guidance upgrade at the end of the previous quarter.

Fresenius said in August that it was two years ahead of schedule with its midterm profit target. The company had aimed for net profit of €1.4 billion to €1.5 billion by 2017, but said it would hit that range this year.

In spite of those positive factors, Kevin Kelly, chief investment officer of New York–based Recon Capital Partners, says the stock continues to be largely overlooked by investors. (Fresenius stock is held by the DAX ETF that Kelly manages.) He calls Fresenius his top pick for the second half, mainly because of its dominant global presence in markets that are growing and noncyclical. Kelly reckons the stock has more upside on top of the hefty gains it has made so far this year.

“One key thesis is that it is positioned to benefit from the aging population and higher incidence of chronic diseases, as the world population aged 60 and over more than doubles by 2050 to more than two billion,” he says, citing statistics from the Organization for Economic Cooperation and Development.

The company’s presence in emerging markets makes it well placed to profit from increasing health-care coverage in those countries. Some 17% of its annual sales and net income are generated in Africa, Latin America, and the Asia-Pacific. “Fresenius’ specialization in project-development building, hospital infrastructure, and providing hospital services can only grow in developing nations,” he says.

Kelly points out that since the financial crisis in 2008, Fresenius’ earnings before interest, taxes, depreciation, and amortization have notched up at a compounded annual growth rate of 11%. The company has raised its dividend for each of the past 23 years and said recently that its 2015 payout would be up 20% on the previous year.

“It’s also strategically positioned to benefit from the major health-care trends of increasing spending in emerging markets and continuing growth of generics, which should particularly benefit its intravenous-drug sales,” Kelly says.

MARKET VOLATILITY HAS HIGHLIGHTED the defensive nature of health-care stocks, where earnings are less susceptible to fluctuations of consumer sentiment. At the same time, Fresenius doesn’t suffer the drawbacks of other health-care businesses. Some pharmaceutical companies, for example, are facing pressure from shrinking state budgets, ballooning research-and-development costs, and stiff competition from generic-drug makers.

Morgan Stanley analyst Michael K. Jungling has Fresenius at Overweight with a €64 price target. He says that rolling three-month sales growth at Fresenius Kabi was 19% in August, compared with 17% in July and June. In August alone, sales growth rose to 27% from 20% in July. He estimates Fresenius’ price/earnings ratio will be 24.5 this year, slipping to 22.3 in 2016, and 19.7 the year after.

The company reports earnings on Oct. 29, and Kelly expects it to reiterate its current outlook. “We’ll be looking for it to maintain guidance which, during a period when a lot of companies will be reducing theirs, will be a positive move,” he says. Fresenius stock closed on Friday at €58.27.

The billionaire hedge fund manager Kenneth Griffin is known as an aggressive trader who waits for prices to fall before buying. But when it comes to personal real estate, Mr. Griffin appears to be less price-sensitive.

Over the last two years, Mr. Griffin, the chief executive of the investment firm Citadel, has gone on a multicity real estate shopping spree. He has spent nearly $300 million and set new price records in three cities, according to people familiar with his buying. They requested anonymity because they were not authorized to talk about the deals.

The buying binge includes the purchase last year of two full floors of the Waldorf Astoria hotel in Chicago, the city where Citadel is based and where Mr. Griffin, 46, has his main residence. He paid $13.3 million for the 37th floor and $16 million for the 46th floor, totaling just under $30 million. If combined, the deal would be the most expensive real estate purchase in Chicago.

In New York this year, Mr. Griffin agreed to purchase three full floors — totaling over 18,000 square feet — at 220 Central Park South, the condo tower under construction in Midtown. According to people familiar with the deal, the purchase includes a main residence as well as several other apartments that could be used for staff or guests. Mr. Griffin paid around $200 million for the space — a price that brokers say is a record in New York.

People familiar with the deal say Mr. Griffin doesn’t plan to live in his new space at 220 Central Park South, since he recently renovated another apartment in Manhattan. They say it was purchased as more of an investment.

Still, the apartment would be a short walk to his potential new offices. Citadel is in talks to lease over 200,000 square feet of space in a new office tower at 425 Park Avenue. Citadel is based in Chicago but is expanding in New York, and is considering going public.

According to terms being discussed, Citadel would pay $300 a square foot annually for some of the new space — which is believed to be highest rate ever paid for commercial space in New York.

Mr. Griffin is also making waves in Miami. According to people familiar with the deal, Mr. Griffin closed last month on the penthouse of Faena House in Miami Beach for $60 million — a record for Miami and $10 million over the original asking price. Faena House, a luxury condo tower on Collins Avenue, has an in-house spa, a fitness center, a private club, a concierge service and a round-the-clock doorman.

The penthouse is more than 12,500 square feet and has a media room, great room and dressing room, as well as a 70-foot-long infinity pool on its 9,900-square-foot terrace. The unit went into contract more than a year ago, when the building was still under construction, but just closed in September.

Mr. Griffin already owns homes in Aspen, Colo., and Hawaii.

Why is Mr. Griffin spending so much on real estate?

He declined to comment. Yet his spending coincides with another major expense — his divorce. In 2014, Mr. Griffin filed for divorce from his wife of 11 years, Anne Dias Griffin, who has been seeking a larger share of his multibillion-dollar fortune as well as custody of their children. The divorce trial is scheduled for Monday, although a settlement is possible before then.

In court filings, Ms. Dias Griffin said that in 2014, Mr. Griffin earned an average of $100 million a month, or $68.5 million after taxes. Mr. Griffin didn’t deny the claim.

So while his new real estate portfolio may sound expensive, the $290 million total still represents only about four months’ work.

Sir, The tinder was there, is Martin Shkreli the spark? (Person in the News, FT Weekend, September 26.) The recent hike of Daraprim from $13.50 to $750 a pill after the supplier was purchased by a former hedge fund manager has highlighted the issue of pricing across the entire pharmaceutical industry.

Whether it is from someone running for the presidency of the US, an enraged academic or an aggrieved activist — each in their own way now call for government intervention in the pricing of pharmaceuticals. It makes no difference that this product does not even register an asterisk on global sales. Daraprim now serves as the harbinger of an industry that profits too greatly from irrational drug pricing. Yet, there is nothing in their grievances to suggest how high prices in the US subsidise low prices for patients in the EU; nothing to suggest that France directly regulates prices at launch and the subsequent rate of price increases; nothing to suggest that Germany, the Netherlands and Denmark operate reference pricing systems of reimbursement and thereby exert strong pressure on prices charged by manufacturers; nothing to suggest that the UK operates a system of profit regulation that constrains prices to yield no more than a target overall rate of return on capital; nothing to suggest that many governments — Denmark, the UK, and France, subsidise the R&D components of their pharmaceutical and vaccine industries; and there is nothing to suggest that the industry catapulted India into a rarefied environment as the pharmacy to the developing world by allowing it unfettered and free use of its intellectual property without legal challenge, wherein it provides Aids therapies to 80 per cent of the 15m people now under treatment.

Still, with all this regulation in the EU, their governments expend 20 per cent of their health budget on drugs; while it consistently remains under 10% in the US. Facts often do not temper greed. There is everything to suggest that this one previously unknown hedge fund manager can provide the spark that activists have so long sought to ignite a pyre of price regulation by the US government.

Jeremiah Norris

Director, Center for Science in Public Policy

Washington DC, US

Here's a preview of what to expect over the next week.

After policymakers at the Federal Reserve voted to keep the central bank's key interest rate at a record low last month, investors will parse through the minutes of the Federal Open Market Committee's September meeting which are released on Wednesday.

Officials added a new line to their statement highlighting that headwinds from recent "global economic and financial developments," and any further insights on how they evaluate the global backdrop will be scrutinised by investors.

But the Fed isn't the only central bank on the calendar.

On Thursday, there are decisions from central banks in Japan and the UK.

Economists expect the Bank of Japan to maintain the size of its current stimulus measures unchanged, though governor Haruhiko Kuroda will likely be pressed on the recent signs of deflation re-emerging at a press conference.

The Bank of England is also expected to leave its key rate unchanged at a record low of 0.5 per cent. Economists at Barclays said:

We believe the tone of the Monetary Policy Committee could sound hawkish to some, as the MPC will want to lean against recent market expectations of it pushing back the date of the first hike into 2017.

Aluminium maker Alcoa unofficially kicks off third-quarter US earnings season on Thursday.

Earnings at S&P 500 companies are expected to have dropped 4.8 per cent from a year ago, while revenues are forecast to have dropped 1 per cent, according to S&P Capital IQ.

The International Monetary Fund and the World Bank hold their annual meetings in Lima, Peru next week.

IMF director Christine Lagarde and World Bank president Jim Yong Kim will hold press conferences on Thursday. The IMF publishes its World Economic Outlook on Tuesday.

This year's Nobel Prize winners will be announced. The prize for physiology and medicine is awarded on Monday, followed by the prizes for physics and chemistry on Tuesday and Wednesday.

The peace prize will be awarded on Friday. The prize for economics will be announced the following week.