Fresenius SE
One of our new buys during the first quarter of this calendar year, in all but the Worldwide High Dividend Yield Value Fund, was Fresenius SE (XTER:FRE, Financial), a global healthcare conglomerate based in Germany. Its various businesses provide dialysis services, generic injectable drugs, clinical nutrition and other intravenous products. It also owns private hospitals in Spain and Germany.
All of these businesses benefit from the secular demand growth of aging demographics and increasing per capita healthcare consumption. The company typically generates a low teens operating margin and earns a low double-digit return on equity (ROE) including goodwill. Its dividend yield as of May 11, 2021 was 2.3%. Fresenius has had substantial insider buying recently.
Fresenius' dialysis business is a separately listed company, Fresenius Medical Care, of which it owns 32%. Dialysis is a treatment for kidney failure that eliminates toxins, waste products and excess fluids by filtering blood for patients whose kidneys are unable to do so. As the world's largest provider of both kidney dialysis services and equipment, Fresenius is "vertically integrated," which is unique in the industry. While its business is global, 70% of Fresenius' revenue is derived from the U.S., where it competes in a duopoly with DaVita. Reimbursement and regulatory changes in the U.S. are a risk for the company. However, the company already loses money on its average Medicare patient in the U.S.
Overall, Fresenius Medical Care is a high return on tangible capital business that, in our view, should generate consistent low double-digit earnings growth, given the unfortunate trends in renal failure, especially in the U.S. The Coronavirus pandemic has driven increased mortality rates in people who undergo dialysis, which has adversely affected Fresenius Medical Care's patient population in the near term. Fresenius Medical Care has had recent material insider buying in its shares.
Kabi is Fresenius' generic injectable drug, clinical nutrition and intravenous products business. Generic injectable drugs likely account for slightly more than half of Kabi's segment profitability, and consist of supplying products like heparin, propofol and other similar items to hospitals and GPOs (group purchasing organizations), primarily in the U.S. The business benefits from economies of scale and reputational barriers to entry. Hospitals contract for these products on a bundled basis, which benefits large players like
Kabi that can supply a wide variety of them at a low cost. Injectable products are also subject to high regulatory and reputational scrutiny because they are injected into a patient's bloodstream and can therefore be quite harmful if they have defects. Kabi's clinical nutrition arm provides nutrition and foodstuffs that are administered either orally, by tube or by injection, primarily in hospital settings. It also benefits from similar scale and reputational barriers to entry as the generic injectables business. Kabi is a very profitable business that has typically earned a high teens operating margin and generated solid organic growth over time.
We bought Fresenius at 10x EV/EBITA on a look-through basis. Alternatively, it was at 70% of our estimated intrinsic value on a sum of the parts basis.
From Tweedy Browne (Trades, Portfolio)'s 2021 annual letter to shareholders.
