Fresenius Medical Care AG & Co KGaA
XETRA:FME
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Thank you, Jasmine. We would like to welcome all of you to the Fresenius Medical earnings call for the fiscal year 2017. As always, I'm forced to start out the call by mentioning our cautionary language that is in our safe harbor statement as well as in our presentation and in all the materials that we have distributed earlier today and last night. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings.This call is limited to 60 minutes. It turned out to be a good approach in our recent calls to limit the number of questions to two. I would like to thank you for the cooperation in the previous calls, and it will be great if you could continue with this approach also this time. With us today is Rice Powell, our CEO and Chairman of the management board. Rice will give you a business update and go through some of the highlights of the year. Also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and also explain the outlook in more detail.I will now hand over to Rice. The floor is yours.
Thank you, Dominik. Good morning, good afternoon, everyone, depending on where you are and what time zone you're in. Before I begin my prepared remarks on Slide 4, I would like to first [Audio Gap] employees for a great performance in 2017. It was a difficult year, as you all know, a number of hurricanes, natural disasters, earthquakes that we worked our way through. And I do appreciate all the effort that our employees put into taking care of patients and delivering good care as well as selling products and coordinating care around the world for our patients. My remarks will be brief today. You'll probably understand soon enough that I have a cold. I apologize in advance. I'll be blowing my nose and sneezing. I feel bad about that, but I can't help it. But also, as we've been out now with our information since late last night, there's clearly some questions people have on our guidance for 2018, and Mike's going to make sure that he walks you through that in a way that we can hopefully clear up some confusion that we've been hearing about over the course of the last couple of hours today.Now looking at Slide 4, my headline is the FMC growth story continues. We've had good underlying patient growth. We are now over 320,000 patients that we're treating in our own centers. We performed 48 million treatments, and that was done by 114,000 employees supporting our patients in more than 3,750 clinics. So the growth story does continue, as I said earlier. We feel that we've delivered on the targets that we had given you for the year with our 9% constant currency revenue growth and then the net income growth of 7% on an adjusted basis. We believe we've done exactly what we told you we were going to.If you would join me on Slide 5, and we take a look at our quality outcomes. Again, I think our headline there is that we continue to operate at a very high level and we are bringing good clinical outcomes to our patients. Looking at the key metrics that I focus on, our dose of dialysis, you can see that we're in a very high-performing area with stability from 1 quarter year-over-year to the next. Our hemoglobin's at 10 to 12 grams per deciliter, are in a very tight range, and we feel good using the current products that we have that we're using for our drug dosing, and we think this will continue in a tight band as we go through into the new year. And then lastly, I would comment on our hospital day. As you see, very consistent performance, a little improvement in EMEA, which is always a good thing, but we feel good about what we're trying to do to effect change in driving down hospital days, saving payers and health systems the expense of more than 10 days on average in the U.S., for instance, and the other regions as we've laid them out for you.If you would join me on Slide 6, and I'll talk about some of the highlights that we've seen. We continue to operate at the highest level with our quality, as I said earlier. We delivered on our targets as we promised you that we would have. Now we have some special items that impacted 2017, but I think if we put them in perspective, it's not as onerous as it may sound. The VA Agreement we told you about in the first quarter, how we were going to treat that over the course of 2017, and I think we've been very clear about that. We talked with you in Q3 about the natural disasters and the fact that we would be handling them in a certain way as a result of the expense that we have had in trying to take care of our patients and our employees during those difficult times. We talked off and on about tax reform throughout the year, not knowing if we would get it done, and to our surprise, it did get done. And obviously, you saw the ad hoc release that we put out at the very end of the year talking about the noncash contribution that we would see in 2017. And we'll talk more about the actual P&L impact, and we'll see that later in 2018 and beyond.The one surprise that has come to you has been where we are with this FCPA charge. And what I'd like to say is simply that we updated you throughout the past years. If you recall, we first highlighted in our SEC filings that we were notifying the U.S. government of some issues that we were working on, and this goes back to 2012. So we've kept you updated through our filings on that. Our recent discussions with the U.S. government have become more detailed and resolution-focused. Therefore, we thought it was the appropriate time for us to put a charge together, and this charge encompasses legal cost, potential fine or disgorgement as we can do to discuss things with the U.S. government, and then the potential impairment of certain assets, should it come to that. I know you'll probably have questions on this. There's not a lot more that I can say to you, but I want to just make sure we gave you as much color as we could on this new impact that you had not heard about prior to last night.We also told you back during our Capital Markets Day that we were going to be serious about looking at optimizing our portfolio, and obviously we've done that. Just to remind you, probably the biggest piece of this optimization is our acquisition of NxStage. We continue to be in the second request with the Federal Trade Commission. We're answering those questions, and we're moving down the process. And we still believe that we should have this closed in the back half of 2018. And obviously, we made the acquisition of Cura, which gave us now a foothold in the international market for Care Coordination. And then lastly, we had the divestment of Shiel in the very last days of 2017.We'll also talk today about the 21st consecutive dividend that we are proposing in the AGM. I have a slide on that, so I'll come back to that in a moment with a graph for you to take a look at. I only have one slide today relative to full year 2017. We believe the full year was a solid performance. As I said earlier, 9% constant currency revenue, 7% net income on the guidance basis. This leads to earnings per share of EUR 3.93. I'm pleased with the performance of our core business in dialysis service and products. Those of you that attended our Capital Markets Day commented back in June that we seemed extremely bullish on Care Coordination in those businesses in the back half of the year, and that bullishness proved to come true. So they had a great performance in Care Coordination. Top line growth of 33% year-on-year in constant currency, and it now sits at roughly 17%, Care Coordination at 17%, of our total book of revenue. We'll give you further color on where we believe revenue in 2018 for Care Coordination will be as well as margin, operating margins. I'll let Mike comment on that later in his presentation.Now if we move to Q4, next couple of slides. I would just simply say here that we think the underlying business does look good. We obviously had high comparables from Q4, in '16. It was a strong year. We've talked all year long about headwinds from foreign exchange, and that has proven to be the case in the fourth quarter as well. We've talked about Care Coordination and the higher revenue from the BPCI program that we've seen. And yes, there was some catch up from other quarters there. We feel very comfortable with what we're seeing in our ESCOs and the routineness of how we are recognizing revenue there as well. And we've talked a lot over the course of the year about the negative headwind we had with vascular access as a result of the cut in the [ side 11 ] reimbursement that we took back during 2017, and it certainly impacted the quarter -- for the fourth quarter.Now if you look at our organic growth across all the regions in the quarter, you can see that everyone did contribute to this solid performance. 8% growth at constant currency, and then you can see the relative contributions. I don't think I'll go through each of these. They're on the slide for you. I think my last comment on this slide would simply be the regional splits, if you will, have been consistent in the fourth quarter with what we've seen in the prior quarters in 2017.Turning to Slide 10, looking at our Health Care Services, we delivered strong 8% constant currency growth there in our service business, led by North America at 8% constant currency. I'll comment that our revenue per treatment in the fourth quarter was $352, down about 1% compared to the year-over-year quarter, within flat the sequential quarter to Q3 of 2017.We feel good about the growth that we've seen in EMEA, driven predominantly by patient growth and their performance, and Asia-Pacific had good organic growth of 5%. Also, the Cura acquisition, which now gives us Care Coordination revenue for the first time that's large enough to really recognize as a result of this acquisition, performed well for us in the fourth quarter, and you can see there at EUR 57 million. And last, but not least, the organic growth that was delivered by Latin America was very strong at 19%.I think maybe one of the best stories that we have coming out of fourth quarter 2017 is our products business, so let's take a minute and go through that. On our whole book of business, Health Care Products, you see that we had 8% constant currency growth for the entire book. Then stripping out and looking just at Dialysis Products growth, we were at above market rates of 7% constant currency. North America had a very, very strong performance in the fourth quarter at 9% constant currency. Remembering we were at 6% in Q3 and we were basically flat, almost at 0% in Q2, so we have seen a tremendous progression as we moved through the quarters of 2017. Our largest product business, which is Europe, Middle East and Africa, delivered 5% growth, predominantly sales of products for acute care as well as PD and our machines in hemodialysis. And Asia-Pacific was at 7% constant currency growth, with really an appropriate mix of products from dialyzers to hemo, other hemo ancillaries and PD products. And Latin America performed well again at a constant currency basis of 13% in the third quarter, up to 15% in the fourth quarter.My last slide is Slide 12. This will be the 21st consecutive dividend that we are proposing in our AGM of May 17. You can see that we are stepping up roughly about 10%. We're proposing EUR 1.06. We were at EUR 0.96 last year. And again, we believe that this proportional growth and step-up in the dividend fits with the way the year has unfolded for us in 2017. And the company, as you well know, is 21 years old and this is our 21st consecutive dividend, and we're quite pleased with that. Those are the conclusion of my remarks. I'm delighted I didn't have to sneeze in the midst of that. I will now turn it over to Mike. Mike, please.
Thanks, Rice, and hello, everybody. So I'm starting on Chart 14, which is for the full fiscal year revenue and net income reconciliation. Rice has already outlined our earnings were impacted by a few special items. In addition to what we discussed in the last quarters about the agreement with the VA and the natural disaster costs, which affected the third and the fourth quarter, we had additional fourth quarter effects, as Rice described, from a EUR 200 million charge related to the FCPA, and we benefited from the adjustment to deferred taxes associated with the U.S. tax reform. And those are laid out on the chart to prepare for the full P&L discussion.The -- I would just say while we're on this chart, you may want to keep this in mind when I talk about the outlook a little bit later in my presentation. We guided to net income on a constant currency basis which is the EUR 1,228,000,000 you see in the dark blue in the middle of the chart on the bottom half of the graph. The as-reported figure is essentially the EUR 1,228,000,000 less the currency effect, which gets you to EUR 1,280,000,000. And so as a consequence, the adjustments that I've just walked you through, VA, natural disasters, FCPA and tax reform, increased base period earnings by EUR 76 million.So turning to Chart 15, and we'll just start walking through the year. I'll focus on the right-hand side of the chart, which is the adjusted figures. Revenues, as Rice indicated, 9% at constant currency, in line with our guidance. Operating income increased EUR 84 million to EUR 2,493,000,000, 5% at constant currency and represented a 40 basis point decline in margin from 14.5% to 14.1%. Net interest expense decreased by EUR 12 million, 2% in constant currency. This was driven by the repayment of senior notes at higher interest rates in the back half of 2016 and in the third quarter of this year. Tax line, excluding the special items, the tax rate increased by 50 basis points from 30.5% to 31%. Our non-controlling interest was EUR 272 million, down in comparison to last year by EUR 4 million, an increase of about 1% in constant currency. Net income attributable to shareholders was up EUR 60 million, an increase of 7% at constant currency, which was in our guidance range. And the only reference I'll make to the left-hand side of the chart is net income as reported was up 14% on a constant currency basis, and reported earnings per share increased by 12% or EUR 0.43.Turning to Chart 16, and just provided for your convenience the same reconciliation for the fourth quarter, the high-level reference to the items that I'd already indicated in the full year chart.Continuing on Chart 17 and looking at the fourth quarter. Revenues increased by EUR 13 million or 8% constant currency. Operating income decreased by EUR 4 million. Or if you look at it on a constant currency basis, it was an increase of 6%. This represents a 10 basis point decline in the margins from 16.5% to 16.4%. As we always do, we'll come back later and talk about the margin performance in the fourth quarter shortly. Net interest expense decreased by EUR 10 million. This was influenced by favorable foreign currency translation effects, coupled with the replacement of higher interest-bearing securities, as I mentioned, for the full year. Tax rate in the fourth quarter was 32.3% compared to 30.5%. It's an increase of 180 basis points. It was driven by prior year and audit impacts as well as the effect of our non-controlling interests. Non-controlling interest was EUR 75 million. On a constant currency basis, it was stable year-over-year. And net income for the fourth quarter was virtually unchanged at EUR 362 million but represents a 6% increase on a constant currency basis. Once again, on the left-hand side of the chart, reported net income was up EUR 31 million, up 8% -- excuse me, up 16% on a constant currency basis, and the reported earnings per share, up 8% or EUR 0.09 for the quarter.So walking through the regional margin profiles, the -- I just commented a few minutes ago that when you look at the quarter, excluding natural disasters and the other special effects, margins declined 10 basis points to 16.4%. In the following charts, we look at the margin developments on a reported basis for the fourth quarter. So we're looking at a margin in Q4 of 2018 of 11.7% versus 16.5% for last year. That's a 480 basis point decline in the margins. But as you know, most of that was a consequence of the FCPA charge which hit our operating [indiscernible]. So that was recorded in corporate and had a 440 basis point impact on margin.When you look at the contribution, going around the world, associated with the fourth quarter margin effect, what you see is a decrease in the margins from Asia-Pacific of 40 basis points, 30 basis points for EMEA, 10 basis points for Latin America, offset -- partly offset by an increase in the margins from North America of 40 basis points as well as a favorable margin mix effect and an impact from foreign currency translation of negative 20 basis points.So now going through the regions. In North America, operating income was up EUR 20 million to EUR 608 million for the quarter and reflects an 11% increase on a constant currency basis. In total, margins increased from 18.4% to 19.2%. Again, excluding natural disaster cost and VA, it increased from 18.4% to 19.5%. Our dialysis business margins increased 180 basis points from 23% -- decreased, I'm sorry, by 180 basis points from 23% to 21.2%. This was due to higher bad debt expense, higher personnel expenses, the impact from lower -- the impact of lower revenues from commercial payers and higher costs from rent and insurance. This was partially offset by gains from sale-leaseback activities and a favorable effect on foreign currency translation.In Care Coordination, as Rice indicated, year-over-year margins increased quite a bit, is the best way to say that. This was driven by the impact from higher revenues, including the acceleration of earnings recognized from the BPCI initiative, combined with increases in volume from our hospital-related physician services, lower bad debt expense in fiscal 2017, the gain from the Shiel transaction and lower costs in our cardiovascular/endovascular business. This was partly offset by the impacts from revenues in our vascular service business, which we've reported on as a consequence of the reimbursement rate cut in fiscal '17, higher cost in our pharmacy -- and higher cost in our pharmacy services business.I'll come back and talk a little bit more about Care Coordination when I look at the outlook for 2018.So turning to the next chart and looking at EMEA. Operating income was down EUR 10 million or 8%. The margins decreased from 19% to 16.7%. And again, consistent with what I've reported over the course of the year, this was driven by investments in our cardiopulmonary products business, the Xenios business we acquired as well as foreign currency transaction losses. In addition, we did have some costs related to the change in the management board announced for the region in the fourth quarter and higher overhead costs associated with medical device regulations and new initiatives. We did have 1 less dialysis day in the quarter which also partly accounted for this decline.In Asia-Pacific, operating income was down $11 million or 8% on a constant currency basis. The operating margins decreased from 21.8% to 18.2%, primarily due to the cost related to building up our dialysis services and PD business in China, some unfavorable foreign currency transaction effects, a little bit of a mix effect with regard to newer acquisitions that are at lower margins than the overall margins in the region. And this was partly offset by favorable foreign currency translation effects in the quarter.As we already outlined in the second quarter, with the advent of Cura as a Care Coordination activity, we took the opportunity to include some legacy Care Coordination activities in the Asian countries, starting in the second quarter and we'll continue to include them in this category going forward. With that said, our Care Coordination generated EUR 57 million in revenues and EUR 11 million in earnings in the quarter with a margin of 19.8%. This was driven by strong margins in the Cura business.Latin America operating income decreased by EUR 3 million, with margins decreasing from 9.7% to 7.4%. This was driven, again, as we saw in Q2 and Q3, unfavorable foreign currency transaction effects, some unfavorability in our manufacturing costs, largely driven by inflationary costs and foreign exchange effects, partly offset by increased reimbursement rates that mitigate some of the inflationary cost increases.Turning to Chart 20 and touching on our cash flows. Looking at the right-hand side of the chart and talking about the fiscal year operating cash flows. This was positively influenced by the VA, as we've discussed over the course of the year, and also the impact in 2016 of a discretionary contribution we made to our pension plan in the United States of EUR 90 million as well as the timing of other working capital items and partly offset by higher income tax payments. This resulted in cash from operations of 12.3% for fiscal '17 compared to 11.7% in '16.In the fourth quarter on the left-hand side of the chart, operating cash flows were impacted by an effect associated with DSOs. Our DSOs between Q3 and Q4 and fiscal '17 remained unchanged. We had an improvement of 2 days in fiscal '16, so consequently, that's a negative effect when you look at the impact of operating cash flows quarter-over-quarter, year-over-year. Looking at CapEx, it decreased by approximately EUR 74 million and remains in the range of 5% of revenues. This resulted in strong free cash flows of just under EUR 1.4 billion throughout the year. Our net debt has decreased from EUR 7.4 billion at the end of '16 to EUR 6.5 billion at the end of '17. Leverage is at 2.1x EBITDA, a decrease from 2.3x at the end of 2016.Turning to Chart 21 and just commenting on our global efficiency program. We announced the Phase 2 of our global efficiency program at Capital Markets Day last year. The objectives, obviously, are to identify and realize further efficiency potential and enhance our overall competitiveness. In 2018, the program has been designed to achieve sustained cost improvements in the range of EUR 100 million to EUR 200 million by 2020. As I indicated in our CMD in June, the percentage figures in the first 3 columns are exit rates for sustained savings for each year. We are on track to achieve sustained savings of 10% for 2018. However, when you consider the investments we're making in '18 associated with the success of the program, I expect the net contribution to the earnings in '18 will be a breakeven as it relates to GEP II. Also, as a reminder, in June, you should consider the percentages in '18, '19 and '20, to relate to the EUR 100 million target, with the possibility of an upside into the range possibly happening by 2020. But I also had indicated that this could be something we can see once we move in the period beyond 2020 to get to the EUR 200 million.Turning to Chart 22 and looking at ROIC. You're seeing we continue to develop our return on invested capital along the lines that we committed to in the 2014 Capital Markets Day, with further improvement in 2017 to 8.6%, consistent with our overall goal of an improvement of roughly 100 basis points off the 2013 base, putting us in the range of 8.5% to 9% in 2020.So turning to my last slide and talking a little bit about the outlook for 2018. We're guiding to an increase in revenues of around 8% on a constant currency basis based on an adjusted 2017 revenue figure of EUR 17,298,000,000. The only adjustment we're reflecting in that number is the fact that the new accounting standard with regard to revenue recognition IFRS 15 has gone into effect January 1, 2018, so we thought it would be appropriate to show the adjusted base in terms of our top line. In a word, IFRS 15 only impacts us with regard to the classification of bad debt, so there's a reduction in revenues and there's a corresponding reduction in bad debt expense in the P&L. On the bottom line, we're guiding to an increase in net income of 13% to 15% on a constant currency basis, as we all know today, based on our reported 2017 net income figure of EUR 1,280,000,000. Honestly, we thought this would be the simplest and hopefully the best approach for '18 as we were starting [indiscernible] guidance. The targets include the recurring impacts from the U.S. tax reform, which we've ranged at EUR 140 million to EUR 160 million. The targets do not assume the consolidation of NxStage. As Rice explained earlier, we're still in the process of obtaining regulatory approval. We're confirming our midterm targets for 2020, excluding the recurring impact from U.S. tax reform in the years 2018 to 2020. But we have given an indication to you in terms of what we think the earnings impact of the tax reform would be for those years.So it's worth noting here, based on some of the comments that I've read this morning that for the 2018 earnings outlook, folks had some difficulty peeling back the pieces to reconcile the guidance in a way that they found satisfactory. So I'll make a few comments. The 4 adjustments we made in 2017, which we used to compare our actual performance in '17 against our guidance, represented a EUR 76 million positive impact on 2017's earnings. This is a 6% growth at constant currency when you look at 2018. And this was not captured in the 13% to 15% guidance we gave you because we based that off reported earnings. So now that you have that number, if you do the math, that would essentially take your 13% to 15%, plus the 6% from the increased base, up to an earnings increase of 19% to 21% if you were to compare '18 against what we were guiding to in '17. If you then take the midpoint of the U.S. tax reform guidance we provided, which is EUR 150 million, and back that off of the 19% to 21%, that would bring you to an expected constant currency growth rate in earnings of 7% to 9%, which is consistent with our midterm outlook and does not represent a slowdown as some have reported this morning.So with that, I will turn the call back to Dominik.
So thank you, Mike, and thank you Rice, [indiscernible], I think. A lot of the topics which were discussed earlier today are more clear now. Nevertheless, happy to open the Q&A for more insights now.
[Operator Instructions] The first question comes from the line of Thomas Jones of Berenberg.
The first one I wanted to ask about was the other issue which seemed to cause some concern this morning and that was around the organic growth rate in the U.S. -- or the North American Dialysis Care business. It was a relatively soft 1.4% in Q4 and has been sort of gradually trending down all year. Given the sort of commercial price renegotiations you made last year, one, we think the pricing should be fairly visible. So I would just kind of be interested to know what's behind the slowdown in that part of the business, and particularly what the outlook might be, whether this is just a kind of one-off reset down and we should be expecting a more normal growth rate in '18, or there's something else we should be considering. And then the second question, again, one for Rice, I'm afraid so. Just on the Patient Act and kind of what you're hearing in Washington and where you sit on that at the moment and what you think could potentially happen and when in 2018 would be helpful.
Thanks, Tom. Mike, you want to take #1, and I'll come back with Tom on the Patient Act update?
Sure, Tom, I think what you're referring to is more the treatment growth, correct?
No, it's the organic revenue growth in the North American Dialysis Care business.
Right, which does show some pricing influence over the course of the year and a little bit of softness in the treatment growth if you look at the quarterly figures we've been reporting out against. When we look at 2018, I think that we're expecting to see some improvement in the organic growth in the U.S. So what I would -- the way I would answer your question is when we think in terms of actual growth in 2018, the provider business or the service business, we think, would be in the range of 9% to 11%. But I have to caution everybody on the phone that what's happening beginning January of 2018 is calcimimetics are coming in to a reimbursement item for the services side of the business. So this is Sensipar and Parsabiv. So we would anticipate to see an improvement in revenues associated with the fact that those patients will be managed now out of the clinic based on the prescriptions that the physicians write associated with the therapy that they want to provide. So that will give a bit of an uplift in fiscal '18. The underlying treatment growth I think we would expect to be in the 3-plus range. And then overall, I would expect revenue per treatment, excluding the Parsabiv, to be flat to slightly down.
And could I just dig a little bit into more the pricing side? We know what the Medicare rates are for '18, and it's suggesting weakness on the commercial side. Is that a drop in like-for-like pricing? Or is it this a mix effect? And if the latter, what details could you share on that for us?
Yes, I think this is mostly -- we carefully managed through to the process in 2017. As we had told folks, we had a number of contracts coming up for renewal, and we guided fairly conservatively revenue per treatment in '17. You'll remember that I had said flat to maybe up 1%. And we started the year, we had a much higher revenue pretreatment level. So you saw over the course of '17 a little bit of a decline in revenue pretreatment. Now when we're looking at '18, we're seeing the carry-on effect associated with the new contracts that we put in place.
So while you are talking about flat to slightly down full-year-on-full-year, on a kind of absolute sequential basis, there should be a floor, or have I misinterpreted that?
Flat to slightly down is what I would say will happen to revenue per treatment exclusive -- excluding the calcimimetics.
Sure. But is that full year '18 versus full year '17. But if I'm thinking full year '18 versus the Q4 run rate, we're kind of should be at a bottom now. Is that correct?
I think that's fair, yes.
Yes, I think you're right, Tom. I'd look at it that way.
Perfect, and that's helpful. And then the Patient Act (sic) [Patient CARE Act]?
Yes. So Tom, I was in DC 2 weeks ago. We as well as DaVita are still working hard to try to educate people and push this forward. I think practically speaking, that this is probably not a bill that gets pushed through on its own. I think it's got to get attached to something else. So I think we've got some time here to figure out where they're going to try to attach this and what they're going to do with it. But we continue to find bipartisan support. We have a more in the House today that we have in the Senate, but it doesn't mean we'll get there. But I do think we've got to find the right vehicle to attach it to, to push it through. I don't -- as I said, I don't think it goes in standalone. I think there's too much going on that they would want to attach it to something else.
Hey Tom, just to come back to you, that 9% to 11% I gave you is worldwide services. North America would be a little bit less than that.
The next question comes from the line of Lisa Clive of Bernstein.
Two questions. First, just on the run rate EBIT for Care Coordination, based on what we saw in Q4, Shiel was in there. I think my best guess is that was something in -- the impact of that I mean, EBIT level was in the 20s. The BPCI catch-up payments maybe could have been north of EUR 10 million. Is it roughly right to think about that in terms of the one-time items in that EBIT figure? In which case, still, you had a margin of about 8%, which certainly has been a considerable improvement over the last year. Second question, could just give us an update on the California union ballot initiatives? Are you going to need to spend money on that this year? Is that in your guidance? And then lastly, there's been quite a bit of activity in China in the past 12 months, including the renal hospital you purchased and then actually building a dialysis clinic in December. And just correct me if I'm wrong, but I'm not aware that there's an increase in national reimbursement rates for dialysis. So is this generally that you're finding you can strike deals with local governments to build out facilities in a way that can be sustainable? And should we expect a lot more activity on this front in the next few years?
Hey, Lisa, it's Rice. I'll let Mike speak to the run rate and kind of where we're targeting Care Coordination operating margins for 2018, and I'll come back and pick up the ballot initiative in California and talk a little bit about China. Mike?
Yes, thanks. So Lisa, the -- there's a little bit going on in Care Coordination for fiscal '18, so I'll answer your margin question and your EBIT question in a minute. But let me stop -- let me start in terms of just top line on what's happening. Because I just mentioned calcimimetics moving into reimbursement as part of our services organization. Sensipar in '17 and prior years was actually a prescription over-the-counter that was filled in our pharmacy. So our pharmacy will see a reduction in revenues associated with that regulatory change. And we'll also see, as we've been talking now for a while, we've been waiting for the introduction in the market of the generics for Renvela. So we're anticipating the pharmacy's revenues will decline in fiscal '18. Overall, worldwide, when I think about the Care Coordination revenues, I would say I'd anticipate 2018 Care Coordination revenues globally will drop 4% to 6% on a constant currency basis. That effect will be accentuated a little bit in the U.S. because the pharmacy was a large piece of the total North American Care Coordination business. However, despite the fact that we're seeing that adjustment, we also had Shiel in the base period for fiscal '17. So the combined effect of the pharmacy and Shiel will result in that overall revenue decline. When you look at the earnings, however, because of good cost management and the overall strong performance of the remaining businesses in Care Coordination, I am anticipating that the margins in 2018 will be -- for North America in the 7% to 9% range. So actually, I give you a lot of credit in your model coming up with 8% because that's the midpoint of 7% to 9%. That'll be an improvement on '17 despite the fact that we did have some one-offs in '17. We got the catch-ups of both the ESCOs and the BPCI. And in '18, what I expect with such -- with programs that reimburse on a retrospective basis, you always have a little bit noise, but I think the kind of meaningful catch-ups that we've been reporting on for the last year or so won't recur. You'll have little cleanups from now and then, but I think it's basically core earnings from those 2 programs as we go into 2018.
We think of them as being current, Lisa, so...
Okay, can I just ask a follow-up question on that? Because you've had this big shift in reimbursement in vascular access, so I thought that, that business was going to tick up nicely into '18. And then also in ESCO, you massively expanded the program last year, and I had assumed you weren't getting paid on those patients yet. So I would assume that, that would mean that your U.S. Care Coordination revenue would be up rather nicely on the back of those 2 things.
Yes, I think that relative to the ESCOs, the thing I'm talking about with the ESCOs and the BPCI is the big catch-ups we had from the beginning of the program that got booked into fiscal '17. The underlying organic growth at the ESCOs, we do anticipate, will be up nicely. That's why I indicated that when you take out Shiel and you consider the change in the pharmacy, the rest of what's in Care Coordination, which includes vascular and includes these NCP is showing an improvement in revenues.
Yes, so Lisa, we're thinking we're going to be at about 40,000 patients in the ESCOs, just to give you a ballpark of that. And -- but I think Mike's right. I mean, there's some moving part here that we'll have the kind of sort through. We just don't have a good visibility on exactly how Parsabiv is going to play and how it's going to move. So we're not hedging this. It's just we're not sure because it's early on in the process of trying to sort of this out. And I don't if Mike said it or not, but this is the first Part D -- this is the first time we've seen something move out of oral into IV into the clinic. So we are -- we didn't get a lot of great guidance from CMS on this, so we're kind of feeling our way through that.
Okay, did you just say ESCO would get up to 40,000? I thought you were at 25,000 patients when you last gave us a number.
Yes. We were somewhere around 26,400, I think, and I just talked to William today, and we're right at about 40,000. Yes, so on the California ballot initiatives, we do think this is real. We're going to have to get ourselves prepared to do some work here. What I would tell you is that we've costed this out from the FMC standpoint. Obviously, as an industry, we're looking at it and everybody's thinking about what they're going to do. I'm not going to say it's directly in our guidance, but the way we scope it today, we think we've got enough firepower that we could deal with this. If that changes substantially, then we'll come back and let you know. But at this point, we think it's a manageable situation for us on the ballot initiative. And you're spot on as far as China. What we're seeing, particularly in the renal hospital and where we built the clinic, we are deep into the interior of China and we're finding that many of these provinces, if you will, or regions have some flexibility to do things differently than maybe what we've seen in Beijing and Shanghai and some of those areas. So we're taking advantage of when the regional health authorities come to us and they want to see if we can work with them, if we can partner in some way. We're taking advantage of those opportunities. But it's not a huge, huge risk, if you will, at this point.
Next question comes from the line of Hassan Al-Wakeel of Barclays.
I have one. Just in terms of the product business in the U.S., you talk about higher sales of machine and PD products. Do you believe that you're gaining share in this market? Or do you think that the market is just stronger?
Yes, Hassan, it's Rice. I would tell you, I think, it's general market strength. I mean, our shares in the hemo equipment side of the business are pretty consistent. In the PD side of the business, and I was looking at our commentary from third quarter, we had a situation late in '16 going early into '17 that Baxter had some supply issues. They couldn't get as much product out the door as they needed to. We were constrained. We couldn't help in that matter. So I think what we're seeing is now that everybody's kind of back and we've got capacity and the issues are behind each of us in terms of capacity, I think we're just seeing more people come into the program. And I would say that we feel good about this. As we survey patients, Hassan, we are still seeing younger people tell us they'd rather be at home. They'd like to be able to continue managing their lifestyle as they want to do it, not so much as it sometimes gets dictated, if you will, 5, 3 times a week in the clinic. So I think PD is growing. I do think there's some catch-up of demand that we couldn't satisfy a year ago.
And so just a follow-up to that. I mean, do you think that we should continue to expect similar run rates into next year?
I don't think PD will run as hot over the full course of this year as it did last year because I think we've probably caught up to some of that pent-up demand. I think we're still going to see growth. But if I go back to third quarter, I think we had 20% growth in the North American book of business on PD. I think it's similar to that in the fourth quarter. I'll have to check it. So I think it will slow down some, but we're clearly going to continue to see growth there.
Yes, I would just offer as a further commentary because I've given some indications for services globally and for Care Coordination globally. So I would say that when you look at our products business globally, we'd expect growth to be around the 6% area.
There are no further questions at this time. I hand back to Dominik Heger for closing comments.
So thank you, everyone, for participating. I know you had a busy time in the previous weeks with other topics, and I guess you're happy that 2 other companies are done now in the reporting cycle. So thank you for participating and hanging in with us, and looking forward to speak to you in Q1. Thank you.
Take care, folks. Thank you.
Thank you.