Fresenius Medical Care AG
XMUN:FME
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Fresenius Medical Care AG
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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining Fresenius Medical Care Earnings Call on the first quarter 2018. [Operator Instructions]And I would now like to turn the conference over to Dominik Heger, Head of Investor Relations. Please go ahead, sir.
Thank you, Emma. We would like to welcome all of you to the Fresenius Medical Care Earnings Call for the first quarter 2018. As always, I'm happy 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. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings.Given that there are 3 major earnings calls of German healthcare companies today, I assume it is in your interest to limit the call to 60 minutes. [Operator Instructions]Given the press releases we have issued over the last 2 weeks, I assume that there might be more questions than usual, and therefore, it would be fair to leave your colleagues also the opportunity to ask questions.With us today is Rice Powell, our CEO and Chairman of the management board. Rice will give you a business update, go through some of the highlights of the quarter and a brief wrap-up of our Care Coordination approach in order to preempt some of the potential questions. Also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours.
Thank you, Dominik. Good morning, good afternoon, everyone. We're delighted that you could be with us today. Mike and I are going to move through our prepared remarks very quickly in order to try and leave ample time for your questions. I know this is probably not as simple and straightforward a quarter-to-quarter as some others we've had, and we really want to make sure we give you every opportunity to get your questions answered.I'd like to begin my prepared remarks on Slide 4, which is the Q1 2018 on track for another record year. Just a couple of comments on this particular slide. I am very happy and pleased with our Highest Five-Star Quality Ratings award that we just received from CMS. This means that our Five-Star Quality Ratings for our four-star and five-star clinics, that combination was the highest in the industry. And so I'd like to give a nice warm congratulations and thank you to our caregivers in the United States for that achievement.Looking at our growth indicators, clinics up 4%, patients up 4% and our treatments up 3%. We routinely present this to you, so I won't make any further comment on it. But just to show you, we continue to see growth in those areas. And then lastly, I would just make a comment on our net income growth on track.I know, from what I've read this morning, you'll have some questions on how do you do that, when you've had your revenue come down? And Mike and I will take you through that, but rest assured that we are comfortable and confident that we're going to achieve our net income guidance over the course of this year.Turning to our quality outcomes for the clinical side of the business.I would say that we continue to see stable performance at a very high level. You can take any one of these particular or key clinical indicators and you can see where -- we are in a very stable position. A little bit of movement up or down, but nothing that really changes where we sit in our ability to drive high-performance, good clinical outcomes, no matter what the region. And I'm pleased, and I'm proud of that. So we continue to continue on in a very stable environment.Now looking to our highlights for the first quarter. I would say that when you look at what is on this slide, there is truly, in my mind, only one surprise that we've given you, and that is the Sound divestiture. And as we sit here today, it's 1.5-week old, but I know it was a surprise nonetheless. And we're going to spend some time talking about that in a couple of other slides here, and certainly, we'll entertain your questions that you have on that topic.I'm pleased that we've had a very strong start in the Health Care Products area, 6% constant currency growth. I'll detail that a little bit more, and we'll focus primarily on the Dialysis Products side of this, and I'll walk you through some ins and outs there to give you a better understanding of what I think is a consistently good performance now from one quarter to the next.We told you in February, that we were going to see a decline in our Care Coordination book of business, and we told you it was going to be in the pharmacy business. And it revolved around the fact that we had a branded drug going generic, and we were going to try to understand how best to manage calcimimetics, moving from Part D as in David to Part B as in Barry. And that is ongoing. It's not over yet, but we're going to walk you through some detail on that and try to give you a sense of comfort about how we're looking at that piece of the business. But again, it shouldn't be a surprise. Mike and I tried very hard to highlight that for you in the February Full Year 2017 Earnings Call.The VA agreement, I'm not going to say anything, we've talked about that enough. It does have an impact obviously, but we'll get to that. And then obviously, the divestiture of Sound, I'll talk more about that at a later date.So I would say that should be the wrap-up on my comments for the highlights for the first quarter. I'd like to now spend a little bit of time on organic growth for the first quarter.What you see is that in the international markets, every region had good growth and good contribution. Asia at 14% constant currency. Revenue growth, organic at 7%.You see EMEA, and you see Latin America as well, all of them doing very well. And obviously, we're going to spend some more time. When you look at North America, we've tried to lay out our material in such a way that you can see it, but a negative 5% constant currency growth and organic growth of only 1%. But again, just to give you a sense of how this is playing out, when you think about the IFRS 15 accounting change, that's about an $88 million -- a EUR 88 million impact, and you know that the VA agreement was about EUR 100 million. So just to give you a little bit of scale, and I think Mike is going to be in a place where he'll take you through that in some more detail should you have questions.Now looking at Health Care Services. I don't like putting a soft start into the year, as my header, but I have to call it as I see it, in particular, when it comes to what we've seen in North America. But again, I think you understand those circumstances and why we are seeing it the way we are.So we're seeing, let's highlight Care Coordination. 14% negative constant currency growth. Organic growth is down about 9%. And again, that sits within the pharmacy business and the impacts that I've mentioned, and then we'll talk some more about in detail.Looking at EMEA, Asia-Pacific and Latin America. Again, constant currency growth looks good in Health Care Services. And you can see the actual organic growth, particularly in Asia and Latin America, it looks strong, and then obviously, the acquisition we made in Australia with Cura for the International Care Coordination is continuing to work and progress nicely.And then our same-market growth at 2.3% for North America and around 2.4% for EMEA, and Asia-Pacific is up around 4.2%.We mention to you, for 2 quarters now, that we are still working through terminating acute contracts in the U.S. because the pricing didn't fit what we wanted it to fit. I guess you could argue, maybe we shouldn't have signed them in the first place, but we did. But we've turned them, and we're moving on. And we could have probably another quarter or 2 before we see that turn around, but it does have a significant contribution to the drag that we're seeing. But we still will tell you that we think we'll be back in the [ 3 ] territory before we exit the year, hopefully, halfway through the year, we'll begin to see that come back.Now looking at products. I'd like to, just for the moment, focus on the Dialysis Products side of the equation. You can see 7% constant currency growth. I will remind you that we were at 7% constant currency growth on the total book of business in the fourth quarter as well.Looking at North America, with this 1% constant currency growth increase. Of note, the renal pharmaceutical book of business in North America was up 38% in the quarter, and that's predominantly on the strength of Velphoro, our phosphate binder. We're seeing great progression with that product. Our PD book of business in the U.S. is up 18%. So we continue to see good growth. We were at [ 12% ] in the fourth quarter. So we continue to see our PD book of business in U.S. growing significantly. Now when we take a moment, and we think about, particularly, hemo equipment, the overall quarter for U.S. products, our North American products, in the fourth quarter was 9% constant currency, and a big contributor there beyond the PD was hemo equipment. Not unusual, those of you that have covered us for a number of years, you clearly know that when we see huge machine sales in the third and fourth quarter, as we did, it's not unusual to see that tail off in the first quarter. So I'm relaxed. It'll come back. There's a little bit of noise in there because of IFRS 15, but not much. It's really more about people aren't buying at the moment, but they'll come back around. As you know, we see that sort of pattern.So I feel very good about the [ start into ] the products business. And as you will remember, Mike had indicated to you, we thought for -- this year would be at about 6% growth in products, and well, we're there in the first quarter. So we feel good about that.Now I'd like to take a little bit of detour and talk some about strategy, and particularly, about Sound. In this first slide that I have here, you've seen this before it. Yes, it's a capital market slide. We've updated it a little bit. The message I'm trying to get across to you is we've made this journey, and we're still on it. From a fee-for-service world, now we've moved, in 2011, to a bundled payment. Now we are in our shared savings program, which fits under value-based care. And ultimately, we wanted to get to a capitative program, and that's why we're such big supporters of the Patient Act because it really gets us to the place that we think is a sweet spot for us and for the industry.Now a little bit of history. 2014, we became the majority shareholder in Sound. Why? Because, as we told you quite honestly and openly, we lost track of our dialysis patients. Many times when they were hospitalized, we didn't know which hospital they were in, we didn't know why they were there and we certainly didn't know when they were coming back. And we felt that was a weakness for us, a blind spot, if you will, as we move down this path of value-based care, moving from volume to value.Many of you'll ask, why did you have to be the majority shareholder in Sound? Couldn't you have just partnered and made a little less of an investment? We said, no, because we felt like, we should have control of the asset, we should be able to work, make changes, invest whatever we wanted to do without getting too tied up with a whole bunch of partners.And maybe that means, we don't play well with others. I don't think that's what it means, but you can infer that if you like.But sitting here today, now, having been able to have this business, get a much better understanding of the inpatient experience for our dialysis patients in the hospital, I'm glad we did what we did. We were able to turn this asset, divest it at a very nice profit, and yet we don't lose the knowledge of what we gained. What we learned with Sound and our ability to help manage more effectively and efficiently, patients moving through, dialysis patients moving through the hospital, we're not going to forget that. And we don't really think that we would have ever been in a position to develop the clinical interventions that we've been able to develop with our health care plan and in our clinic, had we not had the experience and understood where we perhaps weren't communicating as well at hospitals as we should.Now I say all of that keeping in mind that Sound did not have contracts or control of every one of the 4,600 acute care hospitals in the U.S. They had a nice book of business, but we were having to take this knowledge and use it with other hospitalist groups or other health systems that had their own hospitalist program, but we believed, and we feel that we came to a point that we had gotten the value that we needed, the understanding that we needed.We firmly believe that the period of time where we have been the largest value-based care provider in U.S. opened doors and gave us a chance to have some dialogue in Washington that we might not have had in other circumstances. So we feel good about this experience and where we're going.But please hear me. We are not changing our strategy. We are continuing to move down the path from volume to value. We see the culmination of that coming over the next couple of years, and I'll speak to that more in a moment, but we are continuing down the path that we set, albeit a little differently, without having Sound.Now if you move to the next slide. There are 8 businesses on this slide that make up Care Coordination, and now we've gone to 7. Sound will be leaving us. Okay?But the thing I just want to continue to highlight is that through these businesses, we are in a position to try to improve clinical outcomes while driving down or bending the cost curve. And Sound helped us do that. They helped us get to a component of that, which was hospitalization for dialysis patients, that was essential and important for us.Knowing full well that the majority of Sound's business was acute hospital episodes of a general nature and not just focused on dialysis. But we got value out of that relationship. They've helped us with that one component. But now it is time for us to move on.We have to look at the horizon. If we just stare at our feet, we're going to trip and fall. And what I mean by that is, we know the Patients Act will become a reality. We will move our health plan into capitative arrangements at some point. Don't know exactly when, but that's going to come. We have the Cures Act and Medicare Advantage coming in this -- January of 2021.Those are all sitting on the horizon, and we need to be operating ourselves and looking at that horizon, so we are in the very best place to act when that time comes.So what I'm saying to you is, we are not running away from Care Coordination. We're not taking a left turn on Care Coordination. In fact, we're running harder, but more focused, on that path from that -- from volume to value. And we think when we look out at the horizon at least through 2021, and Medicare Advantage coming into our world in a much bigger way and then where we go beyond that, we think our focus on trying to continue to find the right clinical interventions for dialysis patients, being able to bend that cost curve is what's going to be key and critical to our success. And we think it should have every ounce of focus that we can put on it. Not to say Sound was a distraction, it's not. But it was a focus requirement that we needed for a while, but I don't think it is critical to the mission, as critical today as where we're going.Hopefully, that helps. But let me say it again. Our strategy hasn't changed. Have we refined it? Sure. Tell me who doesn't refine their strategy. If they're going to be successful, they have to adjust and adapt. And that's all we've done here.In conclusion, a lot of stuff went on in Q1. A lot of big movements. Don't let that noise distract you from the underlying performance that we have given you in Q1. We are working our plan. We are confident that we're going to deliver the net income growth, we're going to continue with the core -- Care Coordination strategy. And yes, we have 2 things we have to do, and that all revolves around closing NxStage and closing Sound, and we'll get those things done. And that's the conclusion of my remarks. And I'll turn it over to Mike.
Thanks, Rice. Good morning, good afternoon, everyone. So I'll continue with Chart 14, and rather than a P&L, I'm just giving you a series of reconciliation charts to give you a sense as to how the quarter progressed.So on Chart 14, I'll go through revenues. And you see the 2017 and '18 reported revenues with the major elements in between. Rice already mentioned that we have the implementation of IFRS 15 this year, so what we've done is we've reflected EUR 139 million to adjust the base period to a -- on a consistent basis with IFRS 15. In addition, we've adjusted for the VA agreement, which you all are very familiar with. This gets you to a base of EUR 4.309 billion, and then you can easily see the 4% business growth that we had or EUR 185 million on a constant currency basis. That was made up of about 3% acquisition growth, 2% same-market growth and a little bit of leakage of around 1% for our sold or closed clinics around the world.Last, you can see the currency headwinds that we are seeing in 2018 with the EUR 518 million on the top line to get down to reported revenues of EUR 3.976 billion.So turning to Chart 15 and looking at net income.Here we're showing you 2 views. View at the top of the chart is the published approach to guidance that we gave you in February, which was net income would grow 13% to 15% on a constant currency basis, based off of 2017's reported earnings of EUR 1,280,000,000. And here on the bottom of the chart -- formalizes what we discussed in our last call. This considers the 2017 base earnings of EUR 1.204 billion. In this case, our reported earnings are adjusted for special items in both years that we don't think represent the underlying operational performance of the business.So for 2017, just as a reminder, those adjustments were the Veterans Administration agreement, which you see in the first quarter, and then later on in the year, as we report our subsequent quarters, you'll see the natural disasters, the FCPA charge and the effect of tax reform as special items in the base.It was clear in February that we needed both a reported guidance and what we have now been calling the more operational guidance to make sense out of what was happening in the business given all the variables that we saw in '17 that we anticipated with tax reform in 2018.So going back to the top of the chart. You can see the business growth of EUR 16 million to get to earnings growth on a constant currency basis of 5%. This growth rate is not surprising given what was in the base period for the quarter last year.Following on with currency at EUR 32 million and a EUR 13 million adjustment related to Sound's equity program.Just one comment on that equity program. This valuation adjustment was influenced in the quarter by the fact that Sound was being sold. So we've kept this adjustment outside of our operational results. When the sale closes, we will consider this charge and any other similar charges as part of the cost of the sale.On the bottom of the chart, we show the relevant Q1 adjustment to the base period, which is, as I mentioned, was the VA agreement. And then looking at the business growth for the quarter of EUR 22 million, this brings you to EUR 270 million (sic) [ EUR 271 million ] of net income or an 8% growth rate on a constant currency basis. And this is very much in line with the guidance that we provided -- the operational guidance we provided in this view of 7% to 9% growth for the year.What follows: our similar FX effects for the business, the Sound valuation adjustment and the net effect of tax reform in the first quarter of 2018.So turning to Chart 16 and looking at the underlying margins. So these are the global margins. In the first quarter, again, last year, we had the VA agreement, which had a very significant positive effect on the margins of about 190 basis points. This was partially offset by the effect from the implementation of IFRS 15. And so therefore, adjusting for both of these effects, the margins of Q1 2017 would be about 12.8%.And when you look at the operating margins for the first quarter of '18, reported was 12.5%, adjusting for the initial Sound valuation impact, it also shows a 12.8% on an adjusted basis. So we're looking at the operating performance of the business year-over-year being very stable, just under 13%.So turning to Chart 16, and now looking at the underlying operating margins -- excuse me, Chart 17 and looking at the underlying margins of the regions. The -- I would go through -- starting with North America. North America, the operating income was down on a reported basis EUR 164 million to EUR 362 million for Q1 2018, that's about a 21% decline on a constant currency basis.The total margins for North America decreased to 2.5 percentage points from 15.6% to 13.1%. Excluding IFRS 15 and the VA agreement and the Sound valuations, those 3 items, our margins decreased only 10 basis points from 13.6% to 13.5%.In our Dialysis business, the operating margins decreased by 4.2 percentage points from 19.6% to 15.4%. Again, excluding that IFRS adjustment and the VA agreement as well as the dilutive effects that we're seeing in calcimimetics in 2018, they are diluted because revenue is increasing, associated with the reimbursement from the government for calcimimetics on what effectively is a breakeven at the margin line. So that dilutive effect is worth another 60 basis points.So consequently, operationally, we're looking at about 110 basis point decline in fiscal '18 from 17.1% in the prior year to 16% in 2018. This decline was due to higher -- implicit pricing concessions. That is a new terminology under IFRS, essentially the result of having to bifurcate what we used to call bad debt into true bad debt associated with credit risk and bad debt that is associated with the portion of a payment that even at the time you're providing the service, you know there is a very low likelihood of collection. And this very often is a portion of the self-pay elements inherent in reimbursement schemes in North America.So shorthand, it's called implicit pricing concessions, and it pretty much relates to these self-pay elements.There was also, in the first quarter, on a comparative basis, lower revenue from commercial payers. We had a slight net cost associated with the calcimimetic program. We had increased property and other occupancy-related costs, higher costs for medical supplies, some increased rate costs. And those were partially offset by lower personnel expenses in the first quarter and a favorable effect associated with foreign currency translation.So I'll just comment on a revenue per treatment basis here for North America and, in particular, the Dialysis business. Adjusted for the VA agreement and the implementation of IFRS 15, revenue per treatment as we've reported to you increased by $6, from $342 per treatment to $348. The cost per treatment increased by $12, from $276 to $288. So if I put this in the context of our guidance, it's worth noting that for the year on revenue per treatment, we guided excluding calcimimetics that we would be flat to slightly down.We still believe this is the case. In the first quarter, you're seeing an increase of $6 including calcimimetics, the drug was worth about $11 per treatment in the first quarter.So adjusting for this, we're down about $5 per treatment in revenues.This was a combination of lower commercial rates, higher implicit pricing, as I mentioned a few minutes ago, and these were offset by a number of other inputs. As I indicated in February, we would start with a comparison against a very high base from the prior year and that this would mitigate over -- as the year progresses. So that is still the case as we look at the full year expectations for revenue per treatment.On the cost per treatment side, we also guided, excluding calcimimetics, to flat to up slightly in terms of cost. When you look at the quarter, we're tracking to this, we're up $12 in the quarter on cost, $11 of that due to calcimimetics, and that puts at about $1 increase in cost per treatment year-over-year.So moving to Care Coordination in North America. The reported margins improved from a loss of 10 basis points to a positive 2.6%. Adjusted for the implementation of IFRS 15, which had a de minimus effect on the margins, about a $50 million effect on revenues as Rice commented.And more importantly, the Sound valuation impact. The margin improvement -- the margin for '17 would be 5.1%, which is about a 5.2% improvement year-over-year.This was largely driven by a favorable impact from pharmacy services. In addition, we did see lower bad debt expense in Care Coordination. We had a benefit from a lower charge in the first quarter with regard to subsidiary share-based compensation. We saw increased earnings related to the ESCO's, as a consequence of the expansion of that program. And that was partially offset by lower earnings from BPCI, which not surprisingly was due to the fact that our initial quarter where we recognized revenues under the BPCI program was Q1 2017, and now we're recognizing revenues on a current basis for BPCI. So that was a slight negative, the earnings year-over-year. So 5.1% margin in Care Coordination for all the reasons I've indicated. We also continue to believe that our Care Coordination margins will achieve what I guided for back in February. So turning to Chart 18. Looking at the remaining regional performance, EMEA. Operating income down EUR 5 million or 5%, 4% on a constant currency. The margins 18.7% down to 17.1% driven principally by unfavorable foreign currency transaction effects. Some unfavorable impacts from manufacturing, which were partly offset by additional dialysis day in the region. Asia-Pacific, income was down about EUR 8 million, 4% at constant currency. The operating margins decreased 2.7 percentage points from 21.7% to 19% still incredibly robust margins in this region. The decrease was again, primarily, due to the impacts of foreign currency transaction losses as well as some delayed product sales, which we would anticipate, we would recover, partially offset by some favorable currency translation effects. Care Coordination operating margins in the Asia-Pacific region improved from 12.7% to 13.7%. This is clearly the result of the Cura acquisition and the good operating performance we're having in that business. Latin America. Operating income was flat. Margins increasing slightly from 8.1% to 8.3%. And that, not surprisingly, is largely related to currency translation, some inflation improvements and some improvements in revenues and some inflation effects on the cost side of the business.So turning to Chart 19, and looking at cash flows. Last year's operating cash flows were positively influenced by the VA agreement, of just under [ EUR 100 million ]. Also just as we did in the first quarter of last year, there is some seasonality in our invoicing, which impacts cash flows in the first quarter of 2018. If you adjusted these elements, the cash flows year-over-year would be 8% of revenues in Q1 '18 compared to the [ 6.3% ] in Q1 '17. Lastly, in addition, cash flows in 2017 were impacted by a delay in some tax payments that we've made in the U.S. So we had an unusual decline in Q1 '17 related to just our Q4 tax payments. All of these things influenced our DSOs. DSOs increased from 75 days at December '17 to 85 days at the end of the first quarter. This does not concern us as it is simply seasonality associated with invoicing. Keep in mind also the DSOs are impacted by the implementation of IFRS 15, with an effect of about 8 days in the quarter. Looking at Capex, nothing remarkable to comment on and the free cash flow is a derivative of what we just discussed. So turning to my last slide, the outlook. The -- just a couple of words with regards to '18. We already confirmed in our announcement that our guidance, with regard to our net income growth target, and we indicated that the adjustment to our revenue guidance was essentially due to reduction in dosing of calcimimetics drugs occurring a little bit faster in 2018 that we had anticipated. So as a consequence, our guidance now for revenues is 5% to 7% on a constant currency basis. Based on an adjusted 2017 revenues for the IFRS 15 implementation, as shown on the chart. The increase over reported 2017 net income is 13% to 15% on a constant currency basis, again confirming. And we've now added to this chart the increase on the more operational guidance of 7% to 9% over the adjusted 2017 earnings and this would be without tax reform in 2018 as well.The targets overall, including the 2020 targets, do not include the effects from next stage or the Sound Physicians divestiture. In addition, the 2020 midterm targets also exclude any impact from the U.S. tax reform for years '18 through '20. So that concludes my remarks, and I'll turn the call back to Dominik.
Thank you, Mike. And thank you, Rice for the presentation. I think we might have already preempted some of the most pressing questions I hope. Nevertheless, I'm happy to open the Q&A for more insights now.
[Operator Instructions] First question comes from the line of Tom Jones with Berenberg.
I had 2 for Rice, and a very quick one for Mike, if that's all right. Rice, my first question, Rice, is just trying to get a bit of better handle on what's going on with calcimimetics? And why the dosing is changing as rapidly as it is? I remember discussing with you and Ben back in the days when Part D was going to come into the bundle, there was some discussion about what you might be able to do with the dialysate bath sitting around with the phosphate binder therapy and a few other things. So I'm just trying to kind of understand. I get the pricing and the reimbursement aspects of it but I'm still a little bit lost as to why we're seeing so significant changes in the dosing of these calcimimetics? So that will be helpful clarification for us. And the second question for you. Now that if we look at it conceptually, the Sound and NxStage medical is effective an asset swap, the cash inflow and cash outflow are roughly the same. That's going to lead your balance sheet fairly undelevered, well down towards the bottom end of your comfort zone really. What -- now that you've perhaps got less opportunity to do -- into getting care stuff because you seemed to be focusing down more particularly on dialysis patients, that avenue may be a bit less attractive for you. How should we now be thinking about capital deployment? I'm sure there's opportunities elsewhere outside the North America that you continue to pursue. But your level of leverage and your EBITDA generation suggests that there's -- you have to spend an awful lot to keep your balance sheet running efficiently, unless you start doing things like more back to shareholders or buybacks et cetera, et cetera.
I can take those Tom, but do you want to go ahead and get your other question out in front of Mike or not?
Yes, no. Okay, just a quick one. Just for clarification, that EUR 48 million impact from U.S. tax reform that you've highlighted in your helpful reconciliation slide. Is that the entire benefit? Or is -- how much of that is just sort of temporary runoff related to deferred tax asset liability revaluations? And how much of it is the ongoing benefit from a sustainably lower tax rate because I was just trying to tease that out, but...
So Tom, on the calcimimetics. Let me see that how best to do this. What I would say is, as we have moved from an environment where physicians are prescribing and patients may or may not be taking their meds at home to where now in our clinic based, we are responsible for this product, we are much more sophisticated than we've ever been. And so we are looking at algorithms. We're looking at patients that have been on the drug, should they stay on the drug? What should the dosing regimen be the clinic? And it's moving quicker than we had imagined it would have. The idea that you and I and Ben talked way back when around, could you really do something effective by changing dialysate bath and some of those sorts of things. We're not going to jump into that right at the moment until we really kind of get a sense of where the medical community within our physician office, medical office, is going to kind of shake out on that. We don't want to start playing around with things and put more variables into the algorithms that they're running. And Ben is a lot better scientist in me. I'm not sure I can really push that until the docs are ready to sit and talk about it but I think that as you can imagine, it's just going to take some time when you've not been responsible for these and all of a sudden, you have to be spot on. You have to know what you are doing because we're dropping bills. We want to make sure we got this in the most rigorous way that we possibly can. So we're moving at this pretty quickly but I do personally think, it's going to be another quarter or 2 before we probably get settled on how we think exactly this is going to roll out. I think it could take some more time for that. And then with Sound and NXStage, I get your point. Yes, you could argue that those are going to be a swap, and we are delevered. But I would say it this way. We are looking to be and we are actually being more active in the acquisition arena. But it's small things. We're doing a lot of things in all of the regions, as you well know we buy and sell stuff all the time, and we're really looking at that. I think we're always relaxed about what we can do with that money. We certainly know we can give more back to shareholders in a couple of different ways. But we think we know where we want to go and what we want to do and if I told you any more than that, I'd probably have to hurt you, Tom, so I can't. But give us some time. I think you will find we're going to be judicious of what we do here.
And I will just follow-on comment -- to Rice's comment with regards to capital deployment. Keep in mind as we close these deals, Tom, in the short term, I would expect leverage to increase. We had indicated back in August that NXStage would bump up our leverage, if I remember correctly, 40 to 60 basis points. And when you think about NXStage, which is a public company, so you can look at their financials in the early period, as we get through the transaction costs and we synergize to get to an earnings level that we anticipate. Midterm, the leverage -- that will impact leverage whereas Sound's, we've reported the earnings that we're releasing with that transaction. So if you think about '18, you will see a higher level of leverage as we close out those 2 transaction and over time, we should delever as we normally do. So relative to your question on tax reform, the EUR 48 million is everything, Tom. So it's the ongoing cash effect as well as any additional items associated with repricing of deferreds. When you think about the first quarter, we did have some tax cost studies come in, work that was done in the quarter, that allowed us to take the additional rate benefit associated with those physicians. And there were also some corrections in the law associated with how you could treat depreciation in 2017. So if you look at it that way out of the EUR 48 million, I'd say there is maybe a mid-teens effect related to the adjustment of deferred taxes and the rest would be the ongoing cash tax benefit that we anticipate this year.
As you mentioned it, anything you could tell us on NxStage, and where you are with FTC at the moment?
Still talking. We are -- we're not disappointed on where we are. I mean obviously, I'd like to be done. But we are still within the range of conversation timing that we thought, Tom. But we are working and talking with these folks every week. But we're just continuing to push through.
Perfect. We'll wait until you say something more formalized...
And Tom, one thing I would say, we have already filed a Hart-Scott for Sound. We had told you, I think in our announcement, that we thought we've filed that about 5 days post the announcement of the deal and we did actually get that done.
Your next question comes from the line of Ian Douglas-Pennant of UBS.
Yes, it's Ian Douglas-Pennant at UBS. So first, if you could just sense check something for me. From the numbers you just gave, I calculate something like an EUR 82 million reduction in calcimimetics costs in Q1, which I guesstimate it's about 50% reduction in volume. So first, is that correct? And then can you also help me understand how Amgen sales seems to be increasing for Sensipar? That's obviously, something I'm missing in between both of those. And the second question is, are there any other drivers of the revenue gone downgrades versus your previous expectations, except Sensipar? Because I'm not sure if I fully understood all the adjustments and factors that you highlighted but my summary is margins are declining due to payer mix or reimbursement levels. Just wanted to check whether that's fair or not.
Yes, let me take those. It's Mike. So on Sensipar, on calcimimetics, I think what we indicated in February was we anticipated something on the order of $19 to $21 per treatment revenues associated with the drug. And I just indicated in Q1 we are about $11. So I think rough math, it's about a 50% level, somewhere in that range in terms of what we might have anticipated at that time. And that's reflecting itself in the change in the revenue guidance. The -- we had indicated that the majority of the revenue guidance related to calcimimetics, there is volatility in that. So moving from an approximate 8% to a 7% to 9%, that range gives us a little bit -- excuse me, 5% to 7%, that was 5% to 7%. That gives us a little bit more wiggle room there. Beyond that I would say, we're spending a lot of time on these 2 large deals from an acquisition point of view. We typically do a number of small deals, as the year progresses. And we guided to a little over $1 billion in terms of our normal deal activity. So I just gave us a little bit of room with regard to the fact that we've got so many people focused on these large deals that some of those smaller deals will still come but they might just come a little bit later.
And margin's down on the commercial...
And the margin down. I mean, I went through all the margin puts and takes. If you want to say margins principally [ do ], it's up to you. I was pretty clear, both in February and today that when you look at revenue per treatment and you look at the fact that we renegotiated all those contracts last year, we were starting out at a high in the first quarter of '17, and that's why I guided so conservatively last year that revenue would be pretty much flat or maybe down slightly. And we came in spot on for the year. And now as you are coming into Q1 of this year, you are going to see that seasonality effect flow-through. So I don't think there is anything new to talk about here. I think it's just the annualization of the base period on commercial rates.
And Ian, it's Rice. And I understand your question on just in general how Sensipar sale is going up at Amgen, and what I would tell you is, it is my opinion. But the side effect profile for Parsabiv is a little more worrisome than it is for Sensipar. So I actually think what maybe going on is these people are moving from D to B, we're seeing people still dosing Sensipar versus moving to Parsabiv because also in the administration of Parsabiv, that is to be done at the end of the treatment. And physicians and nurses don't like that because if they disconnected the bloodline and they're packed up, ready to go, you administer that drug and if people have a reaction because the calcium tends to come up, fairly significantly, they are kind of, what do we do now? Do we go have to hang another bag of saline? Do we have to do something else? Sensipar is easier in that regard. So I'm sure [ Andrew ] won't like anything that I'm saying to you, but I'm just giving to you some what I know we've talked about with our physicians on that. So it just be may be that people aren't making the move to Parsabiv, but they obviously are making move from D to B. But they can do with Sensipar as well. Hopefully that helps.
The next question comes from the line of Veronika Dubajova with Goldman Sachs.
I'll keep it to 2, please. My first one is on the North America same-store revenue growth. If I look at the business where it's now, we're 5 quarters in of 2% growth which I'd describe as a bit disappointing in the context of your historical track record here. I know you called out some specific factors last year, but I'm just curious to know why we haven't seen an acceleration in same-store growth in North America. And what can you do or is there anything that you can do to see an improvement? And then my second question is on the CVS announcement of entering the home market. Just would love to hear your thoughts and reactions and what that means for your business down the line?
Veronika, it's Rice. So when you look at same-store, yes, we have had a couple of quarters that I don't think we're pleased with at all. There are 3 components that we look at when we're looking at how we are growing is the acute side of the business, which we were down about 5% or 6% this quarter, so that drives are pretty big -- it's a pretty big drag, generally on what we're going to see for same-store. We continue to see good growth on the home side. I would tell you -- I can't say that I am -- I'm not happy where we are but I understand, I think people are working hard to try to see that improve. I think we are a lot more disciplined, we better be, about how we handle acute contracts because this is a little bit of black eye, and we're working our way through that we took some business we shouldn't have. And I think we got a smart group of folks that will figure that out. So it's going to take a little more time. And I know you'll ask me about it next quarter as well. I'm okay, with that. But we just have to work our way through it, is probably the best I can say. Also obviously, it has not been the easiest of times over last quarter -- through the last -- 2 quarters of last year working our way through the hurricane situation and mistreatments there. We have had some issues over this winter as well. We had a pretty horrendous New England piece of bad news, with 4 of these nor’easters up and down in the East Coast. That also has a hand in this. But let's stop making excuses and we're going to show you some improvement, as we go into these outer quarters. Now with CVS, we're going to do what we do. I'm delighted that they think that the market is robust enough that they want to jump in. I did think it was interesting yesterday when they were talking about markets where there is 75% home penetration, 50%. They are right. That 75%, I think, is in Costa Rica. I think there is a 50% home penetration in El Salvador. So there are pockets where there is not much else going on but the vast majority. As we've always told you, particularly when we talked around the NxStage deal, is that we see opportunities all over the place where they could be 20%, 25%. Australia is up around 27% or 28% now. So all I'm saying is, I'm not sure I'm going to focus on Costa Rica so much or El Salvador. We're going to keep on pushing into the markets where we're established. But they obviously think there is something good there. So we are happy to meet them in the marketplace and we'll compete. And we'll see how that goes. And we'll just kind of -- we'll see what develops. But I'm delighted that obviously, Baxter's bullish on the home market. We're bullish on the home market. PD is growing. NxStage has got a great product line. So I still think our timing was pretty darned good. And the fact that they want to come in with us and compete, we will welcome them into the fold and we'll see where it goes.
Rice, can I just ask a quick follow-up on the home market in NxStage. I understand that the MAC regions are considering reducing the number of payments they make for home hemo from 5 to 3. As far as I understand, that would be quite a big negative for NxStage, since you're doing short cycle every day. What's your thought on that? And does that change at all the economics that you see in the business? And I'll leave it at that, thank you.
Yes, what I would say is we have anticipated that could be coming about. If you take the big book of business that we have, we manage that at a 3x base. So we've never been really up on that curve of 5x if you will. You can do 4 times treatments or 4 treatments in a week, you need medical justification for that, and we do so if we needed. And there are some patients that do. But you can imagine that our modeling was based more often the way we operate versus what NxStage may have been doing, which fits what they were doing at that particular point in time. But the fact that 5 going down to 3 has been talked about for a while. We've sort of try to gear ourselves toward that and do our analysis based on that premise.
Next question comes from the line of Michael Jungling with Morgan Stanley.
I have 2 questions. Firstly, on EMEA. You mentioned that the margins declined sort of 160 basis points, sort of primarily because of foreign exchange. But foreign exchange was only down, let's say, 0.5%, yet had a meaningful impact on the margins. Can you explain how the maths and how does the science work behind such a large margin decrease on a very small change in FX? And that will help us I guess, also modeling it forward. And then [ some physicians ], I'm still a little bit confused because of the disposal because I remember when you first moved to Care Coordination, it was partly driven by diversifying away from reimbursement in the United States, which was challenging. And also this business offers, as part of your C&D slide from last year, very nice growth prospects, your margins were just about turning and moving to profitability. Why not keep this business for its own prospects? Good growth, margins are inflecting, and this diversification angle. I'm trying to understand what has changed? Why it is not a good business in its own right?
Michael, it's Rice. I'm going to -- are you ready to on his first question?
I'm ready to go on his first question. I thought you were going to give me a second. I was going to say we were working on the first. Michael, just -- your reference point I guess doesn't consider the weighting of the business. So the foreign exchange effect is transaction losses. That's typically what shows up in the margin versus translation. And what's driving it is we have a dollar-based business in a number of markets in the Middle East. And we also have a good size business in Russia. So those were the 2 big drivers to the associated currency losses in the quarter, if that's helpful.
Yes. And it's a fair question, Michael, on Sound. And I think it is a good business in its own right but when I think about where we're going to go in the future. And I think about what we need to focus on from a diversification standpoint, what's different now than back in 2013, '14, when we've talked about this, when we started this conversation, we didn't know that the ESCOs were really going to happen. We were kind of looking at equal opportunities, not knowing what was going to come to fruition and the reality is the ESCO's now come forward in a big way. We are up at 41,000 patients. We feel very comfortable with those results. And what we're getting done at the time we got into this, we didn't know that the Cures Act was going to come, and the exclusion on Medicare Advantage was going to get wiped away, if you will. So some things have changed that I think will give us some diversification. We are looking at Care Coordination internationally. We've made a step. It's working. So I think it's a matter of comfort and where we diversify and how we diversify. But also I can tell you just from what I would call the tension that we see in the organization, meaning when you're trying to do big deals like NxStage and this was Sound, you really have to get your people focused, you're really got to give them clear direction. And obviously to make Sound work for the long term. And for that it's really been his own right of business if that management team at Sound that's going to make that happen. And the interface that we had from that, I think we got the value that we needed. And hey, timing is everything. And so it was a great offer. We think it's great for Sound. We think Summit will do great with them that but we had to make a value judgment as to stay in or go. What we do and we just came down on the side, as I explained it to you, but I appreciate your perspective on that as well.
And the final question is on EMEA, again. You announced a couple of days ago some management changes. Is the performance in Europe also related to perhaps the execution not being quite right and therefore a change in leadership?
No. I'd say it's fair to make that alignment and ask the question. But what I will say is simply the incumbent, Dominik Wehner, for very good personal family health issues decided that he needed more time. And these jobs that we do kind of take all of our time. So it was really nothing performance related in that perspective. This is the guy that's doing the right thing for his family. I'll leave it at that. And we're excited for Katarzyna come in, and we think she will do great things but I'd just leave it at that at this point, out of respect for all the players involved.
Next question comes from line of Lisa Clive with Bernstein.
Two questions for me. Firstly, given the movement in California on the union ballot initiative, is it fair to assume that the industry is going to have to significantly outspend the 100 -- sorry, not that big of a number. The $15 million that SEIU has earmarked for this initiative? I'm modeling FMC on its own may spend EUR 20 million this year. But it's -- and then of course, DaVita will have to spend probably 2x that. But it's not clear to me that this level of spending or higher, if it needs to be is in your guidance yet. So if you could just address that, that would be helpful? And then second one about Asia-Pacific margins, how much of the impact there comes from increasing your investments in China per your comments in Q4 that, that market was opening up somewhat? I'm just trying to understand how that translates into incremental costs in the near term, but potentially also incremental revenues in the midterm?
Sure, Lisa. I'm going to take the ballot initiative and Mike will let you handle China. So look, I can't speak for DaVita or anybody else as to what they're doing. But as we've said before, we didn't put spending to fight this ballot initiative in our guidance. We've got money that we've budgeted for. And I think the way I'm going to say it is as we are implementing our plan, and we're doing it as we speak, we have a level of spending that we're going to undertake. If we find that it's got to be more than that or it's going to be a problem that we can't cover, we'll let you guys know that. At this point, we feel okay about that. There is a big -- a large degree of what I would say cooperation among the industry on this matter because it touches us all in a very big way. We don't necessarily share what we're spending per se. We're using some of the same resources. I don't want to get too much detailed into that because no sense to me targeting or leading with my chin relative to what I say. The guys in SEIU are going to take it and deal with it so we're going to be a little bit kind of quiet on that. But it's budgeted. It's not in the guidance. If it comes to a point where it's going to affect us, we'll let you know. But we're working. And we're going to fight this thing. I really don't want to go too much beyond that. A bit of good news. As I will tell you it looks to appear that the ballot initiative that would have gone on in Arizona is not going to go. That won't happen. At this point, it seems to be that that's not going to be pursued. But we still have Ohio, we have to work with, there could be a few others out there. But Lisa, we'll keep you apprised, but I'm not sure publicly it makes a lot of sense for me to say much more than that.
And on your second question, Lisa. I think we are investing, as we've said in China. I think I've commented for a few quarters about a mix effect associated with the fact that we've done some acquisitions in that country in particular, which have very nice margins, but they are just a little bit lower than the overall margins for the region. So I think it's a positive step forward as you say, investing in the market. In addition, we're investing in production in China. So if I were to think in terms of the midterm for that, I mean, typically, when you're building a brand-new production facility, you're obviously not going to get the same kind of cost efficiency that you have in your legacy large facilities in other parts of the world. But we've done this before. Back in the day, we did it in the United States, believe it or not. So from a midterm view, we may see some bumps in terms of the cost to produce, until we get the volumes commensurate with the plant size. But then over time, I think it will prove itself out to be a great investment in the country.
Yes, and we are making that investment in PD products, Lisa. And Mike's right. I mean, Mike and I were the characters that went through this in the U.S. back when we were in the products business when we started going to single-use. It takes time and volume to get over that initial cost hurdle. And -- but I think it's money well spent and we are also trying to stay ahead of what ultimately could come back from the Chinese government that you need to have a certain amount of your production in country if you're going to sell medical devices. And so we want to be ahead of that game as well.
Your next question comes from the line Edward Ridley-Day with Redburn.
First was just a follow-up, bigger picture on Care Coordination. Given, what you're saying, and Rice, I appreciate the additional color and your thinking on the strategy. But really with way we are looking at the drivers of that business at it stands now, particularly, of course, the ESCO business. And although you book the profits there, you ultimately do all the cost related to the ESCOs are in the dialysis business. Are you thinking potentially of folding that back in to dialysis services? As you sort of things a bigger picture about offering holistic services going forward? And wouldn't that frankly make more sense? That would be my first question. And secondly, if you just give us your views as it stands now on where you think you stand with the Medicare bundle update, of course, which you are going to get in a couple of months.
Sure, Ed. Well, I got to tell you for me to be talking about organizational moves with you, I'm going to have all kind of people in the U.S. listening to that. It's a great question. No. Not at this point. Not looking to do that. I still think quite honestly, when I look at a calendarization in my head over the next couple of years, I think if we were going to have that discussion and we were going to think about that, I think we would want to be in a place where we were in capitated arrangements. We were doing -- we were kind of fully, fully, fully integrated. And we've got a couple of different product lines there, Medicare Advantage. We've kind of really moved into the epitome or the ultimate of what we want. But we are not contemplating that now. We obviously, can do it. I understand from your perspective the way it's set up today, you don't get a necessarily great visibility of are the clinics really benefiting and we'll think about how we try to do that. We might can make that work. I really don't want to change an organization just because it makes the reporting better, we should be clever enough to give you good enough reporting that we don't have to do that and I think we can. As far as the reimbursement in -- I was in D.C. last week. We're talking to people and just kind of checking in and seeing what they're thinking and obviously, they're not telling us. But is -- you are well right. You know the process. You've been with us for a long time. So it will be last days of June, early days of July, that we'll get a draft proposal. But we do check in periodically to see what people are thinking. We still know that MedPAC has been very clear. They think a net reimbursement increase of about 1.4%, 1.5% makes sense. They started 2% growth and then they back out some in placement adjuster, CPI adjuster. So we're still hoping that's going to be the case. But we're a little bit away from -- 2 months from really finding that out.
The next question comes from the line of Gunnar Romer with Deutsche Bank.
Gunnar Romer, Deutsche Bank. Just 2 questions left. One on Care Coordination, if you can provide us with the organic growth number, excluding the calcimimetics effect. I'm still not sure what that would look like. So any color on the underlying performance here in Care Coordination would be very helpful. And then secondly, on the corporate cost, also technical question, I guess. It's quite a significant decline here in the first quarter. Can you explain what has driven that? And are you still sticking to your guidance on corporate cost for the year to be slightly up?
Gunnar, it's Mike Brosnan. So on Care Coordination relative to what we've guided to for growth, we actually, as you recall, guided that revenues would be down globally, 4% to 6%. So part of that Sensipar was being -- prescriptions were being filled out of the pharmacy. Part of that was also Renagel. But we didn't split out all those pieces. So I think the calcimimetics discussion is really about the core business, the dialysis service business. But overall for Care Coordination, because we sold Shiel, because we saw changes in the pharmacy, we had guided for revenues to be down 4% to 6%. And we're holding that guidance. We still think that's the case for the year. No changes there. Relative to the corporate costs, let's get a little bit more under our belts in terms of what the cost experience is going to be for fiscal '18. I would probably leave my guidance where it is for now and then revisit in the second quarter.
All right. And just a follow-up on the Care Coordination, the 4% to 6% down. Can you just help us understand what the organic growth would be underlying excluding the Shiel divestment? And maybe the calcimimetics impact?
Well, honestly, I don't think I'm prepared to do that on the call today. I mean, the calcimimetics impact would be organic. Shiel -- granted Shiel, you can argue we could adjust, but I just don't think we are ready to parse through that.
We'll take your -- we'll keep your question live. Let us think about it and figure out the right venue for that. But we're not going to -- we don't want to start calculating and running numbers right at the moment, so. But we'll leave your question on the docket and we'll come back to you, Gunnar.
Next question comes from the line of Hassan Al-Wakeel with Barclays.
I have a couple of please. So firstly on calcimimetics. What was the volume difference between those lost in the pharmacy business and those gained in the clinic? And how does this fare with your overall expectation, I guess, at the end of last year? Is the move from the pharmacy to service revenues overall revenue positive based on what happened in Q1? And just less than what was expected? And then also another one on calcimimetics. You mentioned the $11 revenue per treatment impact in Q1. Did you say that the cost per treatment impact was also $11. I believe that you expected $1 or $2 higher on the cost sides. And it'd just be very helpful to have your full year expectations for both revenue per treatment and cost per treatment both on an underlying basis, which I think you've mentioned as well as inclusive of calcimimetics.
Hassan, it's Mike Brosnan. We're doing pretty good today. I just had 1 person I had to disappoint with regard to my answer. Unfortunately on your first answer to parse through, Sensipar in the pharmacy versus calcimimetics and services, we deliberately at the start of the year, guided separately for services and Care Coordination. So we are not planning on parsing through every quarter the trade-off between one drug in our pharmacy and the calcimimetics program and services. That's why we are giving the service guidance in terms of revenue per treatment, which we've been pretty clear on. And we're giving the Care Coordination per revenues overall. So I'd demure on getting into year-over-year revenues associated with the drugs, keep in mind, in the pharmacy, we are also dealing with the IV parts of it. With regard to your $11 per treatment, you're correct. I'd said earlier in the call that $11 revenue per treatment, I said it was kind of a breakeven for the first quarter. We'll see how that progresses through the year, I'm not ready to say that we are not going to still have some friction as the year progresses. It's just the first quarter. We're just right out of the gate. Hassan, you did -- your question was a good one. What I would say and I think it was kind of intuitive to -- in the overall global guidance I gave with regards to revenues is, in February, I had guided on the provider side of the business globally to a growth rate of about 9% to 11%. Rice mentioned earlier the products guidance at 6% that stands. We just talked again about the Care Coordination guidance 4% to 6% down, that stands, but the services guidance that we provided at 9% to 11% as a consequence of the changes that we've talked about, the calcimimetics and to a lesser extent, a little slower ramp on acquisitions would affect the additional guidance that I gave on the provider business. So I would say now rather than 9% to 11% that's probably more in the range of 7% to 9%.
Okay. I think we have answered all questions. No further questions on the line. So thank you very much. [ I hope this conference call ] was helpful to everyone. Well, thank you very much. See you next quarter.
We appreciate your interest. Thanks, folks. Thank, ladies, thanks gentlemen.
Take care. Bye-bye.
Ladies and gentlemen, the conference has now conclude and you may disconnect your telephones. Thanks for joining and have a pleasant day.