Fresenius AG

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Fresenius AG

Else-Kröner-Strasse 1
D-61352 Bad Homburg
Germany
Telephone: (49) 6172 608-0
Fax: (49) 6172 608-2488
Web site: http://www.fresenius-ag.com

Public Company
Incorporated: 1912 as Dr. E. Fresenius KG
Employees: 63,638
Sales: EUR 7.5 billion ($7.9 billion)(2002)
Stock Exchanges: Frankfurt Dusseldorf Munich
Ticker Symbol: FRE
NAIC: 621492 Kidney Dialysis Centers; 325412 Pharmaceutical Preparation Manufacturing; 339112 Surgical and Medical Instrument Manufacturing; 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing; 622310 Specialty (Except Psychiatric and Substance Abuse) Hospitals

Fresenius AG is a global, diversified manufacturer of health care products and provider of health care services with headquarters in Bad Homburg, Germany. The company’s largest subsidiary, Fresenius Medical Care AG (FMC AG), in which Fresenius AG holds a majority stake in the voting capital, is the world’s largest provider of services for patients with chronic kidney failure and is listed on the New York Stock Exchange. Over 100,000 patients are treated in FMC AG’s more than 1,500 dialysis centers around the world. Another subsidiary, Fresenius Kabi, makes machines and special solutions used in infusion therapy as well as products for clinical nutrition with a leading position in China and South Korea and a strong foothold in Western Europe. The company’s third area of activity is project and facility management for hospitals, including staff recruitment and training, which is organized under the umbrella of Fresenius ProServe. Fresenius ProServe owns Wittgensteiner Kliniken AG, a chain of clinics with 4,600 employees and facilities in Germany, the Czech Republic, and Finland. Fresenius ProServe also builds and manages clinics in Malaysia and the Philippines. In addition, Fresenius makes medical technology for blood treatment. Fresenius AG generates about nine-tenths of all revenues outside of Germany, with FMC AG contributing 71 percent of total sales. North America is the most important market for the company, followed by Western Europe. Fresenius AG is also active in South America, Asia, and Eastern Europe. The not-for-profit Else Kröner Fresenius-Foundation owns a majority stake in the company.

Pharmacist Becomes Entrepreneur in 1912

The roots of Fresenius AG go back to the 18th century. At that time, the Fresenius family took over one of Frankfurt’s oldest pharmacies—the Hirsch Apotheke. Founded in 1462, the pharmacy was located on the Zeil, a busy market street in the city center of Frankfurt am Main. In 1911, pharmacist Dr. Eduard Fresenius became the new owner of the long-established store. Fresenius, however, was not only a skilled pharmacist but also an ambitious businessman. In his pharmacy, Dr. Fresenius had a small laboratory where he soon started experimenting with pills, salves, and solutions. Only one year after he had taken over the pharmacy, Fresenius established his own pharmaceutical company, Dr. E. Fresenius KG.

Right from the beginning, Fresenius paid close attention to the practical needs of doctors and patients and developed a sense for promising niche markets. The first product of the Fresenius manufacturing operation was a nasal ointment based on a recipe developed by an otolaryngologist—an ear, eye, nose, and throat doctor—which was called “Bormelin.” Dr. Fresenius began a fruitful cooperation with professors from Frankfurt University’s Medical School, which resulted in the development of pharmaceutical specialties such as injection solutions and serologic reagents.

In the 1920s, Dr. Fresenius took his business venture to new heights when he entered the pharmaceutical wholesale trade. Fresenius was among the first German firms to import insulin from England. Until the early 1930s, all three business branches—manufacturing, wholesale trade, and pharmacy—were organized under the umbrella of the Dr. Fresenius company. However, when the National Socialists came into power in 1933, new laws were passed that called for a clear separation of the pharmacy from the rest of the business. Consequently, Dr. Fresenius moved his manufacturing operation to Bad Homburg, a city North of Frankfurt, in 1934, where it was greatly expanded. At the height of the company’s success, Dr. Fresenius employed up to 400 people. However, the growing anti-Semitism of the Nazi regime took its toll. More and more of Dr. Fresenius’ partners from clinics and universities—leading doctors and scientists of Jewish origin—left the country. In 1939, Adolf Hitler led Germany into a devastating war which ended with the country in ruins in the spring of 1945. The Hirsch Apotheke was completely destroyed during the war. Company founder Dr. Eduard Fresenius died in 1946.

A New Beginning After World War II

In his will, the company founder had determined Else Fernau, a young woman who grew up in Dr. Fresenius’s house, as the heir of his enterprise. The inheritance was more of a challenge than a blessing to the 26-year-old. The Hirsch pharmacy lay in rubble. The manufacturing company was deeply in debt. The number of employees had dropped to a meager 30. Like the rest of the country, it was a new beginning for the company. While Else Fernau finished her studies in pharmacology, Fresenius resumed the production of the nasal ointment Bormelin. Another popular product during the postwar reconstruction years were “Terpinol” cough drops. The drops contained high levels of sugar and malt—therefore people bought them not only to cure their colds but also as a substitute for candy, which was still a rare commodity in Germany at the time. In 1951, Else Fernau took over the leadership of the company. Later she married legal expert Hans Kröner, and under their joint leadership Fresenius introduced a range of new products in the 1950s which laid the groundwork for a new period of growth. With the number of serious traffic accidents in Germany on the rise, leading to an increase in major surgeries, the demand for various injection solutions began to grow. Another new product area was that of special nutrition solutions for infusion therapy. The range of products in this niche market was expanded further in the 1960s and 1970s. In 1974, a new manufacturing facility for infusion solutions and medical disposables started operations in St. Wendel, a city in the Saar. Fresenius also started selling the equipment used in infusion therapy—at first from other manufacturers, then later produced by them—and added a number of products for artificial nutrition. Among them were special dietary products which were based on the food developed for astronauts and given through a tube into the stomach or intestines. Beginning in the 1970s, the company began to expand abroad, starting out with subsidiaries in France and Switzerland.

A turning point in the company’s history came in 1966, when Fresenius entered the new market of supplying equipment used in dialysis therapy on patients suffering from chronic kidney failure. At first the company traded dialysis machines and dialysers—artificial kidneys—made by other manufacturers from abroad, such as the American manufacturer Drake Willock. Dialysis machines were used to pump the blood through the dialyser, where the blood was then cleaned from toxic substances. Over the course of only a few years, Fresenius was able to gain a significant share in the German market. However, mechanical engineer Gerd Krick, the company’s new director of research and development, saw trading equipment from other manufacturers only as a first step. In the late 1970s, Fresenius developed their own dialysers and dialysis machines under Krick’s leadership. With an enormous input of energy and resources, Krick succeeded despite the strong resistance of many people inside the company who believed this path to be too risky. One of the new products, the “A2008” dialysis machine, was awarded a gold medal at the Leipzig Trade Fair. In 1978, the company opened a production line for capillary dialysers in St. Wendel. One year later, another production line at a new site in Schweinfurt started putting out the A2008. By the onset of the 1980s, Fresenius had achieved a leading position among dialysis technology manufacturers in Germany. In 1983, the company started making synthetic polysulfone fiber membranes, which over time became a standard component used in blood purification. By 1986, every other dialysis machine purchased in Germany was made by Fresenius.

A Decade of Management Changes and Reorganization: 1980s

In 1981, Dr. E. Fresenius KG was transformed into a joint stock company and renamed Fresenius Aktiengesellschaft—in short Fresenius AG. Hans Kröner became the company’s CEO, while Else Kröner left the executive management team and became the president of the board of directors. Else Kröner held 95 percent of the company’s shares and Hans Kröner the remaining 5 percent. Five years later, the company opened up somewhat to outside investors. In December 1986, Fresenius AG offered 15 million preferred shares without any voting rights on the Frankfurt Stock Exchange. When Else Kröner died in June 1988, Hans Kröner passed on an option to inherit the company which had been laid out in her will. Consequently, Else Kröner’s estate, including a majority of 66.99 percent of Fresenius common shares, were transferred into a not-for-profit foundation. According to Else Kröner’s will, the Else Kröner Fresenius-Foundation channels profits from Fresenius AG into medical research and other humanitarian projects.

Company Perspectives:

Only the combination of products and services makes it possible to offer optimal therapies. For us, therapy is the healthcare products we develop and manufacture. Therapy also means treatment in the hospital as well as at home if the patient needs medical assistance after being released. These are Fresenius’s areas of activity which we will expand in the future.

By 1990, Fresenius AG had grown into a large corporation. The number of people working for Fresenius AG had risen to 5,200. In that year, the company passed the DM1 billion sales mark for the first time. Two years later, Fresenius went through a major management change. When Hans Kröner retired in 1992, research and development director Gerd Krick became the company’s new CEO. By that time, there were 14 major companies in Europe competing in the dialysis segment, another five in the United States, and eight in Japan. In Krick’s view, consolidation was inevitable. A combination of pressures to cut health care cost, limited market volumes, and the constant drive for product innovation had made competition among these players fierce. His vision was to be among the four or so surviving companies in the global market for dialysis products. The new man at the top initiated a number of changes which resulted in a new corporate culture. Krick was mainly responsible for the company’s success in the market for dialysis products. Kröner had avoided any media attention to protect crucial information from competitors. Krick opened communication channels—within the company as well as with the media.

Finally, Krick initiated a reorganization of the whole company. However, instead of streamlining the existing organization, as various studies had suggested, the company was re-created from the ground up. First, the whole business was divided into 17 units—the new profit centers within the company. Second, 17 leaders were chosen to manage the 17 units, each an entrepreneur within an enterprise. Third, all of the 17 new leaders were free to reorganize their individual units according to their own ideas and preferences. From then on, the company’s executive management board issued only general guidelines and targets, leaving the execution to the respective “entrepreneur within the company.” The strategy paid off. In the following years, costs started growing slower than profits. In the business year 1993, profits almost doubled compared with the year before. They grew by 57.8 percent in the following year, reaching DM71 million in 1994.

A Global Player in the 1990s

Beginning with the change in management in 1992, Fresenius entered an era of expansive growth, which was mainly driven by a long series of acquisitions. In the spring of 1992, the company acquired the infusion and dialysis solutions division IDM from Knoll AG, a subsidiary of chemical giant BASF. The acquisition of the 956-employee and DM188-million-sales operation considerably strengthened Fresenius’s Pharmaceuticals division and resulted in a more than 20 percent jump in total revenues. After the first offering of common shares in July had brought in a fresh supply of capital, the company bought the dialysis business from American chemicals and pharmaceuticals manufacturer Abbott Laboratories in February 1993. One year later, Fresenius took the chance to venture into a new market when the company purchased the hospital construction and equipment business, Hospitalia, from the German Siemens group. These transactions and a number of smaller acquisitions resulted in another significant increase in sales, which roughly doubled from the DM1.1 billion right before the IDM acquisition to about DM2.2 billion at the end of 1995. In the same time period, the number of employees went up from roughly 5,700 before the IDM acquisition to 6,970 afterwards and passed the 9,000 mark by the end of the 1995 business year.

However, compared to the second half of the 1990s, this was just a warm-up exercise. When the American specialty chemicals manufacturer W.R. Grace & Co. put the dialysis division of their subsidiary National Medical Care Inc. (NMC) in Waltham, Massachusetts, up for sale, Fresenius was among the bidders. Major American competitor Baxter International Inc. offered $3.8 billion in cash—a figure that seemed way out of Fresenius’s league. On February 6, 1996, the company surprised the public, announcing that Fresenius was going to spin off their own dialysis division and merge it with its U.S. subsidiary Fresenius USA Inc. and NMC to create a new company, Fresenius Medical Care AG (FMC AG), under German law and with headquarters in Germany. The deal went through as planned. On October 1, 1996, the new company was listed at the New York Stock Exchange. The shares were traded as American Depository Shares (ADS). W.R. Grace and Fresenius USA Inc. together received 49.7 percent of FMC AG’s share capital, while Fresenius AG retained a majority stake of 50.3 percent and consolidated FMC as a subsidiary. Just before the share-swap was carried out, NMC paid $2.3 billion, a sum which included the company’s bank liabilities, to the parent company, which was financed through a loan by an American consortium of banks. The transaction instantly created the world’s largest vertically integrated enterprise in the dialysis market with 25,000 employees generating annual sales of about $3.2 billion. The two partners were a perfect match. Fresenius provided the products needed to treat some 43,000 patients in NMC’s roughly 600 dialysis centers across the United States. Before the deal, Fresenius AG had provided only one-third of NMC’s dialysis products purchases.

Key Dates:

1912:: Pharmacist Dr. Eduard Fresenius establishes his own pharmaceutical company.
1934:: The manufacturing operation is moved to Bad Homburg.
1951:: Else Fernau takes over the company after Dr. Fresenius’ death.
1966:: The company starts selling dialysis machines.
1974:: A new manufacturing facility for infusion solutions and medical disposables opens in St. Wendel.
1981:: Fresenius is transformed into a joint stock company.
1986:: First public offering of Fresenius shares in Frankfurt.
1988:: Else Kröner Fresenius-Foundation becomes majority shareholder.
1992:: The company is reorganized under new CEO Gerd Krick.
1996:: Fresenius merges its dialysis division with National Medical Care to form Fresenius Medical Care (FMC).
1998:: The company acquires the Kabi branch from Pharmacia & Upjohn AB.
2001:: Fresenius takes over major hospital operator Wittgensteiner Kliniken AG.
2003:: FMC AG’s CFO Ulf Schneider becomes the new CEO.

In 1994, Fresenius’ top management started working on another major deal. Four years later, the company acquired the international nutrition business, the so-called Kabi branch, from Pharmacia & Upjohn AB for an estimated DM700 to DM970 million. The manufacturer of infusion solutions was merged with the company’s pharmaceutical branch, which had just expanded its own production capacity by building a brand new, high-tech plant for turning out infusion solutions in nearby Friedberg. The new Fresenius Kabi AG, with annual sales of approximately DM1.6 billion and about 7,500 employees worldwide, became the market leader in Western Europe and was headquartered in Bad Homburg, Germany, as well as in Uppsala, Sweden. Kabi especially strengthened Fresenius’s position in the market for artificial nutrition infusion solutions, which at that time accounted for only 14 percent of the company’s sales. Through a couple of joint ventures with plants near Peking and Shanghai, Kabi also expanded Fresenius’s reach into China, one of the most promising markets for infusion solutions. In the mid-1980s, there were only 15,000 infusion bags consumed per year in China. By 1999, the country’s demand had gone up to six million annually—twice the amount consumed in Europe.

Finally, in 2001 Fresenius took over Wittgensteiner Kliniken AG, a chain of 28 clinics with 4,600 employees and facilities in Germany, the Czech Republic, and Finland. This transaction was a step towards the company’s strategic goal of becoming a leading international provider of project and facility management services for general hospitals, specialty clinics, and health care facilities.

Unexpected Challenges in the New Century

By the late 1990s, Fresenius had truly become a global player. In 1992, over half of the company’s revenues came from abroad. After the FMC transaction, that number had jumped to 87 percent, reaching almost 90 percent in 2001. However, the rush for world leadership in the areas of dialysis and infusion solutions involved intense competition that proved especially challenging for Fresenius. In 2001, the company was still struggling to integrate Kabi. For a number of years the division had been striving to cut cost and failed to meet the projected profit expectations. Kabi subsidiary ProReha, which had been acquired in 2000, failed to get out of the red and was finally sold off in 2002.

In addition, a number of legal problems in the United States was putting a strain on Fresenius’s resources. On one hand, FMC AG was not getting paid for certain laboratory and infusion therapy services provided to dialysis patients it claimed had life-threatening conditions. Two U.S. health insurers claimed that these services were not covered under their agreement with NMC. On the other hand, W.R. Grace was confronted with a swelling number of lawsuits for using asbestos in some of its fire protection products, a practice which the company had stopped in 1973. When the number of claims reached untenable proportions in 2000, the company filed for bankruptcy the following spring. As a consequence, the people who had sued W.R. Grace now threatened Fresenius AG with legal action, claiming that Fresenius AG had paid too little for NMC, which had resulted in lower capital assets for W.R. Grace, out of which the asbestos claims could be satisfied. The conflict was finally settled in November 2002 and cost Fresenius some $200 million.

The problems Fresenius was struggling with did not go unnoticed by the stock market. As a result, in May 2003 the share capital of Fresenius AG was worth less than the company’s shareholdings in FMC. However, Gerd Krick, who had handed the tiller over to FMC’s CFO Ulf Schneider at the company’s annual shareholder meeting in May 2003, believed that the Fresenius shares were undervalued and saw the company moving towards a brighter future. In his opinion, FMC was well positioned as the leader in a market with a solid long-term growth potential due to an ever-increasing world population, the rise of life expectancy, and the expanding health care budgets of the Asian “tiger economies.” Krick also saw promising opportunities for growth in the area of management services for hospitals. In Germany, the company was planning to establish regional networks of specialized clinics and nursing homes.

Principal Subsidiaries

Fresenius Medical Care AG (36.94%); Fresenius Kabi Deutschland GmbH; Wittgensteiner Kliniken Gruppe (93%); Pharmaplan Gruppe; VAMED Gruppe (Austria; 77%); Fresenius Kabi AB (Sweden); Fresenius Kabi Austria GmbH; Fresenius Kabi France S.A.S.; Fresenius Kabi Ltd. (United Kingdom); NPBI International B.V. (Netherlands); Sino-Swed Pharmaceutical Corporation Ltd. (China; 51%); Fresenius Kabi Compounding GmbH (Germany); Fresenius Kabi Italia S.p.A.; Fresenius Kabi Norge A.S. (Norway); Fresenius Kabi España S.A. (Spain); Grupo Fresenius México S.A. de C.V.; Calea Ltd. (Canada); Fresenius Kabi South Africa Ltd.; Beijing Fresenius Kabi Pharmaceutical Co., Ltd. (China; 65%); Calea France S.A.S.; Fresenius Vial S.A. (France); Fresenius HemoCare Italia S.r.l. (Italy); Fresenius Kabi N.V. (Belgium); Fresenius Kabi Clayton L.P. (United States); Hospitalia Care Gruppe (Germany; 93%); MC Medizintechnik GmbH; Fresenius HemoCare Deutschland GmbH; Fresenius Kabi Polzka Sp.Z.o.o. (Poland); Hospitalia Kliniken GmbH (Germany); Fresenius Kabi (Schweiz) AG (Switzerland); Fresenius Kabi India Private Ltd. (India); Fresenius Kabi Nederland B.V. (Netherlands); Fresenius Kabi Green Cross Ltd. (South Korea); Fresenius Kabi Brasil Ltda. (Brazil).