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Romanian Dialysis Market - Competition over 150 millions EUR

Case Study Content

Development of the dialysis market after the initiation of PPP unrolled on two very different layers. The first (and the most visible one) consists of services provision. The second one, placed in the background (and possibly out of the focus of those interested in the study of this particular segment of healthcare industry) deals with the producers of equipment used in dialysis.
In this context, being the market leader may turn out to be much more than the company with highest market share.

Introduction


In Romania, the beginning of the privatization process of dialysis took place between 2003 and 2005, with the help of the World Bank and the advisory arm of the International Finance Corporation. At the time, the public system was highly inefficient due to the fact that dialysis services were performed in hospitals as opposed to the more efficient method of treatment in out-patient clinics. This usually meant that patients were on a backlog, which led to a large degree of mortality among those suffering from end stage renal disease (ESRD) and needing dialysis or a kidney transplant.

 

As part of the restructuring plan, the process was and continues to be structured as a PPP (public-private partnership) between the state and the private providers. The IFC’s advisory arm was therefore critical in establishing the procedural frameworks by which the public sector would be able to efficiently transfer part of its dialysis operations to the private partners.
 

In part, it was this initial phase which could shed the most light on the current state of the market. Subsequent to the national tenders organized contracts were initially granted to 4 large international players represented by local companies:
1. Fresenius Medical Care,
2. Baxter Pharmaceuticals through International Healthcare Systems (HIS / Sofmedica) ,
3. B.Braun through Avitum
4. Gambro Healthcare through Nefromed Dialysis Centers (which has recently rebranded itself as Diaverum)
 

Back in 2005, the private market started with 8 private centers (2 for each of the initial providers) and has now reached 71, some of them still functioning inside hospitals.
 

Over time, additional private players appeared, some operating only one clinic and some more. Eventually, Baxter took a backseat and remained as only a partner to International Healthcare Systems (IHS) while Gambro/ Diaverum operated through a partnership with local Renamed.
 

In terms of value, significant changes also occurred. Thus, immediately after the 2004 national tender was concluded, 2005 National Program for Dialysis provided that 6,600 patients are to be treated at an average overall cost per year of 27,272 RON (approx. 7,525 EUR ) while in 2011, 9500 patients are to be treated at an average annual cost of 65,983 RON (approx 15,525 EUR ). Overall, the public budget allocated to dialysis increased from 180 million RON (approx 49.6 million EUR) to 627.5 million RON (approx 147.6 million EUR).

 

Recent moves of the market players indicate an an overall market trend towards a high degree of concentration, with most of the small players suffering from poor performance and liable to be acquired by the larger ones.

This issue which deserves special attention especially since the market leader, Fresenius, is in the process of having its acquisition of 2 smaller players, Nefromed and Renamed, approved by the Romanian Competition Council.
When finishing their mandate, the IFC/ World Bank left the private market in the hands of 4 big international players (acting through their local partners), while providing the healthcare authorities with a framework that would ensure that each player would grow at a relatively similar pace, thereby leading to a competitive and mature market. 

 


Nature of the market

Unlike other segments of the healthcare market, where opportunities for growth may spring from other sources as well, dialysis market is strictly sized by public authorities. Indeed, the National Health Programs regulatory framework indicates both the maximum number of patients and the available funds for treating them, all of these being split by type of dialysis procedure undergone. However, although the costs may remain fixed, the number of treated patients may slightly vary.


Under the circumstances, the main driver of growth on the private dialysis sector is the number of patients coming into treatment and reimbursements coming from the state through the National Health Insurance House (NHIH).
In terms of growth limitation factors, in this field, doctors are probably one of the scarcest resources: the nephrologists are the dialysis provider’s key way of acquiring new patients. Needless to say, a company’s relationship with the nephrologists in a city/ area is a critical factor in its success in that zone. Because the law (through the framework agreement and its associated norms) requires that a doctor is associated with each clinic in order for it to have a working permit, dialysis providers can be expected to seek to earn the favor of as many of these doctors as possible. Out of convenience, doctors will probably seek to maintain a relationship with the same provider and will continue to direct their patients to them.


With a country-wide presence, Fresenius can be expected to have early access to medical personnel, thereby having a distinct advantage over those competitors who would also seek to expand into certain areas. Even organic growth, which is quite feasible given Romania’s low prevalence, will be slowed by the lack of doctors.

 

Types of services


According to the National Health Programs, the State pays out four types of dialysis service: haemodialysis, which can be either conventional (HD) or intermittent (else know and haemodiafiltration,), and peritoneal dialysis, which may be either continuous (PD) or automatic (APD) .Providing each of the afore listed services requires distinct equipment and consumables and determines the investment profile of the market players.
HD, which is carried out in the clinic through dialyzers (machines which filter blood), and therefore under the supervision of medical personnel, is currently the dominant form of treatment. Its drawbacks are also evident: the patient has to be transported to the clinic and back an average of 3 times a week (studies show that increasing this number will lead to better quality of life) where he will spend several hours undergoing treatment. This drastically reduces the chances that a patient can be a fully functional member of society. In contrast, PD patients use their peritoneal cavity as a membrane for filtering liquids in the body. They must first undergo surgery in order to have a small tube attached through which the dialyzer liquid (dyalisate) is introduced and eliminated.


Naturally then, HD is perceived as the safer solution. There is a risk of infection with PD because off the tube which is a permanent accessory, at least until a kidney replacement can be found. Also, doctors prefer to keep the patients near for constant monitoring. PD patients only need to come in on a monthly basis for a check-up; everything else is done at home. On its face, this would present an interesting contradiction: the government wants to stimulate PD, which is cheaper (and therefore a lighter strain on the budget) but at the same time PD is perceived as more risky. This however, is highly debatable: a study conducted by the “Journal of the American Medical Association” found that in the US “patients actually survive better on PD, have a better quality of life, and the procedure is cheaper”. However, the issue is slightly more complicated. Abroad, patients are generally better educated as to what dialysis really is, whereas in Romania people, especially in rural areas used to perceive dialysis as something that happens for a short while before death. Quite possible then that some might prefer HD simply because of the fact that it is done in a safe environment, and in the presence of a doctor.
 

Some might perceive the dangers of PD as being the wrong ones: death occur because of technical problems (such as poor tube installation or trauma in that area), not infections per se, though it would be hard to tell that to the patient. Also, it must be allowed for the fact that in a country with a lower standard of living as well as a lower level of education, like Romania, there is generally a higher probability that complications might occur with PD. However, it is very conceivable that these might be avoided in the largest part through education, both of the staff and of the medical personnel.
 

 

Market Value and Cash Flows

At the end of 2010 there were a total of 8691 patients according to the most credible estimates, most of them treated through haemodialysis (HD).  Around 2579 new patients were introduced into the program on HD and 168 on peritoneal dialysis (PD). However, the total number of treated patients rose from 8424 to 9060 (7.5%), showing that the increase in overall treatment capacity was lower, but in line with estimated growth rates.
For the current year, the National Health Programs cover a total of over 9,500 patients, as detailed in Figure1.
 
Although it receives all of its revenues from the government, through NHIH reimbursements, dialysis is positioned a lot more safely when it comes to the availability of cash flows than other healthcare sectors, such as pharmaceuticals, which suffer from long lags in receiving payment and therefore a liquidity shortage. Payment for dialysis providers is done 60 days after the provider in question submits the patient contracts to the NHIH, and even though he maintains contracts with the County Health Insurance Houses as well, funds are received mainly through the NHIH. (need to review this process here). As a result, dialysis is a lot safer than other healthcare sectors, with relatively predictable cash flows. This is due to the obvious fact that if a provider goes out of business in an area and there is not sufficient capacity anywhere nearby to take its patients in, there is a high probability that many of those people will die.
 

Reimbursement schemes are set up by the Ministry of Health, and defined in the norms of the Framework Agreement. The income for 1 HD session is €118. At exactly 152 budgeted sessions a year, the yearly reimbursement for HD is €17.936. The reimbursement for haemodiafiltration, a more advanced form of HD comes up to €20.368 per year, but this method is still very new and with low implementation.   However, for PD, since 2009 reimbursements are bracketed depending on how many patients allocated to that center are treated through PD out of the total number of patients: for up to 20%, the value per year is €12.700, €13.500 between 20% and 25% and €14.100 for over 25%. The reimbursement for Automatic Peritoneal Dialysis (APD), which is done at home is €15.875. This is done in order to stimulate treatment through PD, which is cheaper. For 2011, the reimbursement prices communicated by the National Health Insurance House are presented in Figure 2.
 
Payment to the providers is done approximately 60 days after the patients records are submitted to the NHIH, although regulations require settlement of invoices in the month following the one when services are provided (figure 5 shows the flows and timelines in the regulatory framework) .

 

Before that patients must request to undergo treatment at a certain center, usually referred to by their doctor. Dialysis service providers budget a certain number of patients at the beginning of the year, usually limited by the National Program for Renal Treatment. If they treat less people than they have budgeted, they do not receive the reimbursement. If more patients come into the center, the provider can ask for an increase in the budget starting with the next month. This is the point where payment problems are usually encountered: in better economic times there would have been no problem with the NHIH approving the budget increases for the providers. Now however, it is possible that 2 to 3 months might go by without the provider receiving payment for the treatment offered to unbudgeted patients, thereby reducing profits.

 
 

Market size – past performances and foreseen perspectives

Ever since the implementation of PPP, the market grew yearly, the Compounded Annual Growth Rate (CAGR) exceeding 20% for the period 2005-2011 in value terms. Figure 4 shows the evolutions in terms of money, patients and average price paid per patient for 2005-11.
 
Current statistics show that in terms of numbers treated, the prevalence in Romania is around 420 treated patients per million people, which is well below the average European prevalence of approximately 750. The richest European nations, such as Germany, Spain, France, Portugal or Spain have a prevalence between 800 and 1100, also coupled with better primary care which is able to diagnose renal complications early and an overall healthier population.
 

What this means is that local market has significant room to grow. Assuming that within the next five years the market will reach European average in terms of prevalence, market players have the opportunity of doubling their turnover in very short time.
 

Yet, there are several constraints which are likely to temper a too aggressive business growth. Amongst these most significant are:
1. Limitation of public funds. As already mentioned, all expenses generate by the provision of dialysis services are reimbursed by National Health Insurance House which is unlikely to allow a steep increase of expenditure
2. High level of investment required. In order to be able to cover more patients, current (or intended) market players need to make significant investment in infrastructure and equipment.

A possible solution may be extending the use of peritoneal dialysis, given its relatively low costs and associated improvements in patients’ quality of life. Current estimations indicate that in the future there will be the increase in number of  so-called home choice treatments.

 

However, such a trend may be hindered by players resistance, which invested in HD and might not be willing to invest in greater PD capabilities. HD is clearly the greater revenue generator. Where companies achieve cost savings in HD, they will also gain the most profits. There is also the possibility that many of the providers have unused capacity for HD. However, this also depends on how many shifts their centres run in one day. Two four hour shifts mean that the machines last for longer and patients and medical staff do not have to be in the centre for more than 8-9 hours a day. Running three shifts will mean a greater return on investment in the short-run but also patients treated later in the day and a need for more medical staff.

 

Fresenius treats the vast majority of its patients through HD (approx. 83.6%), as do most other providers. Nefromed treats 92% of patients through HD and Dialnefromed (Polisano) 90%. Avitum treats 97% of all their registered patients with HD. The only provider a significant ratio of PD to HD treatment is IHS, which treats 34% of its patients with PD. The newest stipulations in the regulatory framework require that 1 out of every 4 new patients must be treated through PD, but outside of this statement, the legislation makes no kind of mention of any penalties should the providers not comply.
 

Under the circumstances, should any of the market players gain an almost monopolistic position, its negotiation power in relation with the State may become an unwanted factor when establishing health policies. Thus, if indeed PD is an overall better treatment and can achieve both cost-savings for the taxpayer and a better life for the patients, then having a dialysis services market which is dominated by players who are fully invested into HD may mean that the Government is likely to face a great deal of resistance from the market players, since adopted public policies will  conflict with the economic interests of the private companies.
 

 

The players and their positions

As mentioned in the introduction of the Case Study, in 2005 four groups of companies were granted PPP contracts on dialysis market. Based on the information then released, the market shares wereas presented in Figure 4 attached.
 
Six years later, at the end of 2010 in terms of patients treated, Fresenius Medical Care was the clear market leader with a percentage ranging between 23 – 26% and 12 centers, followed by the public sector which treats around 16% of patients in 59 clinics and hospitals (please see Figure 6 attached). Next are IHS with approx. 12 - 14% in 10 centers and Nefromed with around 12% in 10 centers. Polisano, now Dialmed with 9 centers, and Avitum, with 7, have approx. 8% and 7% respectively and Renamed 6% with 4 centers. The remaining 14% is made up of smaller players usually operating between 1 and 3 centers, with a total of around 21 centers. Because most patients are treated with HD, for which the yearly reimbursement is fixed and equal for all, one could consider that the market shares in terms to revenue to be more or less similar to the ones for patients.
 
 

The market has seen some interesting movements as of late, with everything moving towards concentration. The most important is the acquisition by Fresenius of Nefromed and Renamed, which is still pending at the Romanian Competition Council. This was done in two parts: while the international arm of Fresenius acquired Nefromed by buying Euromedic’s dialysis division, its Romanian division made the offer for the Renamed group. If these two acquisitions are approved, Fresenius would have a market share of at least 40%, whichever estimation is used. Apart from that, it will also be geographically positioned in every corner of the country. This means that in 5 to 7 years, when we could expect treatment rates in Romania to match European ones, Fresenius will have had expanded organically to secure most areas by opening new centers in areas where is has already consolidated its position through good relationships with doctors, hospitals and patients.
 

Briefly speaking, should both acquisitions receive the sanction of the Competition Council, Fresenius would almost reach 50% market share (please see Figure 7)
 
There is a great possibility that the CC will not approve the merger in full. While it may allow for the merger with Nefromed, there is a chance that Fresenius will be forced to let go of Renamed, or at least divest some of its centers. This creates an interesting buying opportunity within the market for the other players. The closest player, IHS has been growing organically for the past few years, but would now need fast expansion in order to maintain its position. Polisano has rebranded its dialysis division as Dialmed in preparation for what could only be a sell-off. For the moment, it would seem that Diaverum, which is owned by the private equity Bridgepoint, and was the initial partner of Renamed is not interested in the Romanian dialysis market anymore, so there is a low probability that it would come in and try to take a stake in the market and Avitum owned by B.Braun, is in a poor position for an expansion (it made the biggest loss out of all providers in 2009, probably attributed to bad management). Out of all the big players, Avitum is the only one who seems to have consistently underperformed.


The small providers are even more of an enigma. Most were probably started by entrepreneurial doctors or investors caught up in the healthcare boom from 3-4 years ago. A casual look over the consolidated financial statements of most of these small operators , as well as some of the bigger ones in 2009 will reveal that they receiver very little income and/ or they are making loss. However, given that collectively they still treat a large number of patients, it would be expected that future M&A deals will target them, or at least their patient contracts. Many of these centers seem to have been built in order to be sold at a later date. Unfortunately for them, some might only be able to sell their patient contracts if their fixed assets are of lower quality than the large players would prefer.


The problem with these small players is that they do not have the benefits of integrated supply chains like the bigger companies. Those backed by a large multinational such as Fresenius, Baxter or B.Braun, or by large local pharmaceutical companies like Polisano, can achieve significant cost savings on consumables and dialysis machines and have the prestige of a large foreign multi-national associated with them, a highly valuable asset when dealing with entities such as regional political or medical authorities. These small centers then need to seek a sort of patronage from one of the bigger actors, becoming satellites, like Fresenius’s partners mentioned above.
 

The issue of financing arrangements of smaller players, if analyzed in depth, may provide further insight into the actual position held by Fresenius. Gathered market intelligence indicate that one of the small providers, Goldberg-Tzalic established 5 dialysis centers during 2010, for all of them having the financial and contractual support of Fresenius (as supplier of equipment and consumables). Another player in a similar position is Polisano, which apparently has concluded a 5 years leasing contract with Fresenius for equipment necessary to establish 5 new centers (estimated value exceeding 700,000 EUR). Interestingly, Polisano appears to be involved in a pre-sales agreement with Diaverum, again financially backed by Fresenius. 


Further insights into the specifics of the commercial relationships between dialysis equipment and consumables manufacturers and corresponding service providers, including PUT and PULL options as well as the nature and breadth of financing lines might be worthwhile to investigate in order to assess economic control exerted on the latter.


All in all, it appears that aside from directly controlling over 40% of the market (should the two acquisitions be allowed by Competition Council) Fresenius also appears to be indirectly involved in the operations of other smaller companies, which may depend on them for financing. Which exactly is the degree of control over the assets and activities of such smaller players it is rather impossible to determine. However, a certain amount of influence exists and it is possible that operations of financed entities are run in such way as to not affect the market performance of Fresenius.
 

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