Stakes in kidneys

The battle over one of medicine’s fastest-growing and least loved markets

Apr 15th 2010 | BERLIN | From The Economist print edition

DIALYSIS—the use of machinery to make up for malfunctioning kidneys—is among medicine’s least loved treatments, both to endure and to administer. Patients have to be hooked to machines for hours at a time every few days. Those providing care often find it difficult, too: as many as a fifth of their patients die each year, many of them after choosing to stop their treatment. But it is also a fast-growing and lucrative market, and one that provides valuable lessons about making health care affordable.

Dialysis is dominated by an oligopoly. Fresenius Medical Care, the dialysis business of Germany’s Fresenius, makes more than half of the dialysis machines sold in the world, followed by Gambro, a Swedish firm. Ulf Mark Schneider, the chief executive of Fresenius, attributes his company’s success to the fact that it plays to traditional German strengths. “A dialysis machine has the same number of parts as a car,” he says. “Making one brings together electronics and mechanical engineering, which Germany is good at.”

The real money, however, is in running dialysis clinics and administering drugs, which account for 80% of the cost of dialysis. The two biggest operators of dialysis clinics are Fresenius and DaVita, which bought Gambro’s American clinics in 2004. Each of them runs almost a third of America’s dialysis clinics.

Some 2m people receive regular dialysis to clean their blood of impurities that build up as a result of kidney failure. About a quarter of them are in America, which has one of the highest rates of dialysis in the world. This is less because Americans are especially unhealthy (although high rates of obesity and diabetes do play a role) and more because American health policy is to provide dialysis to anyone who needs it, regardless of their ability to pay or their chances of surviving much more than a few months. It is also the world’s most lucrative dialysis market, with the government spending $24 billion a year, or $71,000 a year per patient, on dialysis, and private insurers paying yet more.

But the number of patients is growing fast all over the place (see chart), as is the cost of treatment. In Britain around 3% of health spending is devoted to treating kidney failure, a proportion that has increased by about 50% in recent years. Globally, the number of patients on dialysis is likely to double over the coming decade. Most of them will be in developing countries, where numbers are growing by 10% or more a year. Worsening diets are playing a part but so are rising incomes, as a result of which health systems treat people who would previously have been left to die.

With spending rising rapidly, attention is now focused on to trying to control costs. Fresenius’s experience offers two lessons. First, combining the manufacture of machines with the running of clinics has helped it dominate both markets. “The thing that other people in the industry admire about Fresenius is this one-stop shopping model,” says Stephan Danner of Roland Berger, a consulting firm. By the same token, Gambro is the preferred supplier for DaVita’s clinics. Second, Fresenius is ruthless about spending. Mr Schneider, who often flies economy on business trips, is outspoken in his criticism of the pharmaceutical industry’s “corptocracies”, which have high overheads that need to be supported by profit margins of as much as 80% on expensive blockbuster drugs.

Fresenius stands to become a big beneficiary as America’s health-care reforms take on some of the more bloated parts of the business. At present American dialysis clinics are paid on a “cost-plus” basis for the drugs they use. That, naturally, has encouraged them to use lots of expensive ones, which now account for almost a quarter of the total cost of treatment. Analysts at Bernstein, a research firm, note that American clinics used to favour an injected drug costing $4,100 a year over an identical oral one which was introduced to the market at a cost of $450 a year. After languishing unused, the oral drug now costs more than the injected one. “There is negative price elasticity here: the higher the price, the more competitive the product,” Bernstein’s analysts observe.

The reforms will introduce a “bundled price”, whereby clinics receive a set rate for providing treatment. Analysts expect drug costs to fall by at least 10% soon after the change, as clinics use fewer or cheaper drugs. A huge share of the savings will go straight to Fresenius’s bottom line.

nalozbena ideja?

Wesco - Charlie Munger

March 29, 2010

PROFILE

Charlie Munger Wiki Entry

SHAREHOLDER LETTERS

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Here’s the Story on Berkshire’s Munger – WSJ, May 2009

The Munger Network of Mental Models – by Rich Rockwood

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The Psychology of Human Misjudgement – Speech at Harvard Law School

Art of Stock Picking – Speech by Charlie Munger, via vinvesting.com

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WHEN Robert Shiller produced his data in the 1990s showing that the cyclically-adjusted price-earnings ratio of US equities was ridiculously high, his logic was pooh-poohed. But the decade of the noughties was one of the worst ever for stockmarket returns.

Buy high, earn low is the rule. And the Shiller p/e is still high, in the top quintile of all the numbers (going back to 1880). According to Dylan Grice of Societe Generale, the subsequent 10-year returns to investors who bought equities in the top quintile were just 1.7% a year; buying when valuations were in the bottom quintile returned 11% annually.