OUTLOOK

This Management Report contains forward-looking statements, including statements on future sales, expenses and investments, as well as potential changes in the health care sector, our competitive environment and our financial situation. These statements were based on the expectations and assessments of the Management Board regarding events that could affect the Company in the future. Such forward-looking statements are, as a matter of course, subject to risks, uncertainties, assumptions and other factors. Consequently, the actual results, including the financial position and profitability of Fresenius, could therefore differ materially – positively or negatively – from those expressly or implicitly assumed or described in these statements. For further information, please see our Risk Report.

GENERAL AND MID-TERM OUTLOOK

The outlook for the Fresenius Group for the coming years continues to be very positive. Excellent growth opportunities for Fresenius are provided above all by:

• The sustained growth of the markets in which we operate: Here, Fresenius sees very good opportunities to profit from the considerable health care needs, primarily in the developing and emerging countries.
• The development of innovative products and therapies: This creates the potential to further expand our market position in the regions. In addition to innovation, best-in-class quality and the reliability of our products and therapies is key to being able to exploit opportunities for expansion.
• The expansion of our regional presence: The fast-growing markets in Asia-Pacific and Latin America especially offer further potential to increase our market shares. Besides strengthening our business regionally through market entries by our own, we plan to roll-out products and therapies from our existing portfolio successively in countries where we do not yet offer a comprehensive range.
• The broadening of our service business: Here, Fresenius Helios has concrete opportunities in the German hospital market to profit from the further privatization of public hospitals. Changes in the law could present new opportunities for instance for Fresenius Medical Care. Changes in the framework conditions for the operation of dialysis clinics for private commercial enterprises in Japan could open up new sales potential for Fresenius Medical Care, since Japan is one of the world’s biggest dialysis markets.
• Selective acquisitions: We will continue to seize opportunities to grow via acquisitions that extend our product portfolio and strengthen our regional presence.

We are also exploiting the opportunities to tap the potential in our operations for cost management and efficiency and profitability enhancement measures. These include plans for a further optimized procurement process and cost-efficient production.

Given sustained market growth and a long-term strategy oriented to profitable growth, Fresenius has set itself a midterm goal under the slogan “15/15”. Fresenius aims to reach the following in 2010:

1. Group sales of € 15 billion. Based on the sales of € 11,358 million generated in 2007, this represents a compounded annual growth rate of 10 %. It is to be achieved through strong organic growth flanked by acquisitions.
2. An EBIT margin of 15%. Earnings are therefore expected to grow at a significantly higher rate than sales.

Acquisitions have led to significant higher Group financial liabilities with a corresponding impact on net interest expense. The aim is therefore to further improve the Group’s leverage ratios.

This forecast takes account of all events known at the time the annual financial statements were prepared that could influence our operating performance in 2008 and beyond. Significant risks are discussed in the Risk Report. As in the past, we will do our utmost to achieve and – if possible – exceed our targets.

FUTURE MARKETS

As an international company, we offer our products and services in more than 100 countries. We expect that the consolidation process among competitors in our markets in Europe, Asia-Pacific and Latin America will continue. We therefore assume generally that there will be opportunities for Fresenius to penetrate new markets both by expanding its regional presence and by extending its product portfolio. In the United States, since Fresenius Medical Care and its competitor DaVita already have a share of about two-thirds of the market, acquisitions are likely to be fairly small, potential antitrust restrictions are an additional factor. New markets will open up for Fresenius as it successively rolls out its existing product portfolio in other regions.

ECONOMIC OUTLOOK

The forecasts for 2008 paint a favorable picture for the global economic outlook. Growth is expected to slow but not drastically. This scenario depends on the central banks and the big financial institutions keeping the negative spillover from the financial crisis involving banks’ liquidity within limits. There is still the risk that the turbulence on the financial markets will grow again and that the risk premiums in all segments of the credit market will increase more than temporarily. Global GDP growth of 4.6% is estimated for 2008. Growth will slow most of all in the developed countries. The emerging economies, especially in Asia, will increasingly assume the role of locomotive for the world economy. Commodity prices will remain at a high level in 2008. The US dollar’s weakness against the euro is not expected to change significantly.

• Europe
  Economic growth in the Eurozone will probably slow from 2.6% to 1.6% in 2008 as a result of a weaker world economy and a firmer euro. Despite these burdens thanks to an upturn in private consumption growth is unlikely to halt. This growth hinges on a further fall in unemployment, rising incomes and tax cuts, for instance in France. If the euro continues to firm against the US dollar, this outcome would probably be an additional burden for the industry in the Eurozone and especially for Germany with its strong export bias.
  
  In Germany, GDP should grow by 1.7%, driven mainly by exports and investment. However, private consumption, should pick up again. A positive development in the labor market and pay increases should boost households’ real disposable incomes. Since there will not be the negative effect of a VAT increase in 2008, private consumption should be responsible for about half of the economic growth in 2008. 
• United States
  GDP growth in the United States should be around 1.6% in 2008, which is below the growth of 2.2% in 2007. Observers expect the property crisis in the United States to continue in 2008. This will affect the property market insofar as there will be a wave of rate adjustments, especially in subprime mortgages.

Property prices have already fallen in response to the continued decline in demand for residential properties. Falling property prices will hurt consumption owing to their wealth effect. In this scenario, the Federal Reserve is likely to make further rate cuts.

• Asia
  Experts forecast GDP growth of 8.6% for Asia (excluding Japan). In China, concerns about the economy overheating are gaining ground. It is expected that China’s central bank will take further steps to counter this. China’s economy could receive a slight dampener as a result of the downturn in the United States, which accounts for about 20% of China’s exports. However, the economy’s dynamic will remain strong, with an expected growth rate of 10.4%. GDP growth in Japan, which has profited less strongly from the global dynamic in recent years, should be modest at an estimated 1.6% in 2008. Domestic demand is expanding only moderately; export demand continues to be the driver.
• Latin America
  Economic expansion in Latin America should continue at a slightly slower pace in 2008, mainly as a result of the slowdown in the US economy and to a lesser extent that in Europe. GDP is therefore likely to grow by 4.4%. Mexico will be hardest hit because of its strong trade relations with the United States. Mexico’s GDP should grow by 3.4%. Argentina and Brazil are the region’s two countries that are the least vulnerable to the risks that could arise from an economic slowdown in the United States and Europe and an easing in commodity prices. Their economies are more highly developed and more diversified, for instance, they are not dependent on just one export commodity. For 2008, GDP growth of 5.1% is forecast for Argentina and 4.6% for Brazil.

Source: German Council of Economic Exports Annual Report 2007/2008, bank research

HEALTH CARE SECTOR AND MARKETS  

• The dialysis market
  We expect the number of dialysis patients to rise by 5 to 7% in the coming years, although significant regional differences are anticipated. In the industrialized nations such as the United States, Japan and the countries of Central and Western Europe where people already have broad access to dialysis treatment, we expect below-average patient growth. In many developing countries, however, where the needs of patients with chronic kidney failure are still not met sufficiently, we expect above-average growth rates of up to 10 % in these markets. That more than 80% of the world’s population lives in these growth regions highlights the enormous potential of the dialysis market there.
  
  We expect the number of patients with terminal kidney failure to increase worldwide to approximately 2 million by the year 2010. The global dialysis market will probably grow to US$ 67 billion.
  
  Reimbursement schemes for dialysis treatment vary from country to country. The reimbursement structures may also differ within individual countries. They may depend for instance on regional factors, the method of treatment, regulatory aspects, or the status of the dialysis care provider. The reimbursement of dialysis treatment according to quality-based criteria also remains a central issue.

In this reimbursement model, the quality of treatment should increase while the total cost of treating a dialysis patient should remain constant. Fresenius Medical Care has been active for many years in numerous countries with a variety of health care systems and reimbursement schemes. Thanks to our international experience we are able to bolster the activities of the national health care systems, to adjust our business to the local environment, and to generate profitable growth. In the United States, our largest market, patients covered by the public health insurers Medicare and Medicaid account for about 53% of Fresenius Medical Care’s dialysis care revenues.

• The market for infusion therapies and clinical nutrition
  Demographic developments, medical advances and the often still insufficient availability of medical care in developing countries will continue to be the growth drivers in this market.
  
  We expect further cost-containment pressure and health care reforms in Central and Western Europe. Despite these trends, we believe that there will be continued growing demand for innovative and cost-effective therapies and products. We expect growth in the low single digits for the infusion therapy and clinical nutrition market in Central and Western Europe. The market for intravenously administered generic drugs in Europe should see growth rates in the mid single digits. For Eastern Europe we expect market growth rates in the high single digits.
  
  There continues to be high growth potential in Latin America and in Asia-Pacific. The rising demand for primary care in hospitals and thus for high-quality therapies will result in continued strong growth rates in many countries in these regions in the coming years. We expect the markets of Asia-Pacific and Latin America to continue growing at high single to double-digit rates. We also expect a rising demand for medical devices in the coming years.
• The German hospital market
  Hospitals face further economic pressure in 2008. The German government has increased the hospital budget for 2008 by 0.64%, while maintaining the 0.5% contribution hospitals are required to make towards improving the finances of public health insurers. Consequently, there is little scope for absorbing cost increases. According to a recent survey conducted by the German Hospital Institute, 42 % of the clinics expect their situation to deteriorate compared to 2007.
  
  The DRG system has entered the last year of the convergence phase in 2008. As the legal situation stands at present, the convergence phase will be over for the most part as from the beginning of 2009. This means that as from then all hospitals will have to bill on the basis of standardized base rates valid throughout the respective state. The new system introduces more market-driven principles and performance transparency in the area of acute care. It will also encourage further competition since it enables the budgets agreed with the health insurers to be increased if performance is enhanced because additional services will no longer have to be provided at a low marginal revenue rate.
  
  A further reform of hospital financing is currently in preparation for the year 2009. Under discussion is the introduction of so-called selective contracting, i.e. the negotiation of volumes, prices and quality standards for certain services directly with the individual health insurers. At present, the services are negotiated jointly and uniformly with all health insurers. HELIOS Kliniken would be very well positioned should the proposals be implemented.

The rationalization trend in the German hospital market will continue in 2008 and beyond. According to a study by management consultants Ernst&Young, by the year 2020 there will be only 1,500 hospitals operating in Germany. 2.9 beds will be available per 1,000 population, and the average length of stay will fall to 4.0 days (2006: 6.2 beds, 8.5 days).

Private hospital chains and clinic alliances will tend to be able to respond to the pressure to improve efficiency better than public hospitals. They often have more experience in operating commercially and creating efficient structures. They have the potential to secure cost advantages in procurement and generally have more advantageous financing possibilities. Finally, private operators have more experience with the process know-how in acquiring and integrating new facilities and quickly adjusting their cost structures.

Against this background, we expect the concentration and privatization process to accelerate further, especially among public hospitals. Overall, experts expect the market share of private operators in terms of beds to rise from approximately 14% at present to about 35 to 40% until 2015. Crucial factors for a clinic’s survival will be excellent medical standards, well-trained staff, well-organized processes and a well-structured treatment spectrum with a focus on high-quality, complex medical services.

Difficult pay negotiations are likely again in 2008 in the public sector, i.e. at the level of local government employers (as operators of municipal hospitals) and the German federal states (as operators of university clinics). The trade unions ver.di and Marburger Bund have both announced high pay demands for the professions they represent considering the economic and financing situation of the hospitals. Even a settlement on a much lower basis than the present demands would further accentuate the strained financial situation of many public hospitals. This will lead to further job cuts and privatizations.

Source: Krankenhaus-Barometer survey 2007, Ernst & Young survey “Gesundheitsversorgung 2020”,
bank research

GROUP SALES AND GROUP EARNINGS

With its international production and sales platform and its market-oriented products and services, the Fresenius Group is excellently positioned for continued growth in the coming years. The opportunities for profitable growth are indicated by the developments described in the chapter “Health Care Sector and Markets”. In 2008, we therefore expect to increase Group sales by 8 to 10% at 2007 exchange rates.

While our traditional markets in Europe and North America are growing at average low to mid single-digit rates, we see far stronger growth potential in the Asia-Pacific region and in Latin America. Here, the demand for our life-saving and life-sustaining products continues to be very high due to the still limited access to medical care. This will also be reflected in the development of sales: While we expect single-digit rates of growth in our major markets of the United States and Europe, sales in the growth regions should increase at double-digit rates.

We plan to increase Group net income significantly again in 2008. We aim to achieve this through sustained sales growth and ongoing measures to lower costs as a percentage of sales, especially in production. Despite a market environment which continues to be marked by cost-containment and price pressure, we expect to increase net income by 10 to 15% in constant currency, i.e. more strongly than sales.

SALES AND EARNINGS BY BUSINESS SEGMENT

We expect good improvements in sales and earnings in 2008 in each of our business segments. The table gives an overview.

The number of dialysis patients worldwide should rise by about 6% in 2008, leading to a continued growth in demand for dialysis products and a higher number of treatments. In 2008, Fresenius Medical Care expects revenues to grow to more than 10.4 billion in US dollars, its reporting currency. For net income, Fresenius Medical Care forecasts US$ 805 to 825 million.

Fresenius Kabi expects its positive operating performance to continue in 2008. The company estimates sales growth of 12 to 15% in constant currency. Organic growth is expected to contribute about 7% to this target. Good growth potential is expected again in the Asia-Pacific region and in Latin America. Based on the positive sales projection, further cost optimizations, especially in production, and an improved product mix, Fresenius Kabi expects to increase earnings significantly. Fresenius Kabi forecasts an EBIT margin of around 16.5%. It is anticipated that the recent acquisitions will initially contribute to Fresenius Kabi’s EBIT at a margin below par, also due to amortization of intangible assets. Adjusted for the recent acquisitions, Fresenius Kabi’s EBIT margin is expected to progress into the range of 16.5 to 17.0%.

Fresenius Helios expects a continued good performance in the hospital operations business. The company forecasts revenue to grow to more than € 2,050 million in 2008. Revenues will also be influenced to a large extent by the first-time consolidation of the newly acquired clinics, especially the Krefeld Municipal Hospitals. EBIT is expected to increase to € 160 to 170 million in 2008, despite the initially negative contribution of the Krefeld Municipal Hospitals. Growth potential is expected above all from further hospital privatizations in Germany.

Fresenius Vamed expects a good performance in 2008 given the excellent order situation. The company expects to achieve sales growth and increase in EBIT of 5 to 10%.

Fresenius Biotech will continue its clinical study program. We expect that the expenditures for our biotechnology projects will lead to negative EBIT of about € -50 million in 2008.

FINANCING

In 2007, we generated an excellent operating cash flow of € 1,296 million. The key driver was our good earnings performance. The cash flow margin was 11.4%. We estimate that this margin will be in the range of 10% in 2008, especially through further earnings improvements.

A key financial target figure for the Fresenius Group is the net debt/EBITDA ratio. As of December 31, 2007, this ratio was 2.6. Our mid-term goal is to reach a ratio in the range of 2.5, primarily through earnings improvements and a continued positive cash flow development. This target is on the assumption that no major acquisition opportunities arise.

Overall, we have a sufficient financial cushion with substantial unused credit lines under syndicated or bilateral credit facilities from banks.

GROUP FINANCIAL TARGETS
	Targets 2008	Fiscal year 2007
Sales, growth (in constant currency)	8 - 10%	€ 11,358 million
Net income, growth (in constant currency)	10 - 15%	€ 410 million
Capital expenditure	~ € 750 million	€ 705 million
Dividend	Profit-driven dividend policy	Proposal: ~15% per ordinary and preference share

As of December 31, 2007, Fresenius Medical Care’s receivables securitization program of US$ 650 million were only partially and Fresenius SE’s € 250 million commercial paper program was not utilized. Please see the Management Report for details.

Our refinancing requirements in 2008 are already fully covered by the capital market transactions carried out in 2007. There are only limited refinancing requirements in 2009 and 2010. These can be met from cash flow and, if necessary, from existing credit facilities.

INVESTMENTS

Fresenius plans to invest in further growth and to increase capital expenditure in property, plant and equipment. In 2008, we expect to invest about € 750 million in property, plant and equipment and in intangible assets. This will again be significantly more than the € 705 million invested in 2007. The increase will mainly be in the Fresenius Medical Care business segment. Approximately two-thirds of the capital expenditure budgeted will be invested at Fresenius Medical Care, while Fresenius Kabi and Fresenius Helios will each account for about 15%. Investments at Fresenius Medical Care will focus on the construction and expansion of dialysis clinics, and on the expansion and maintenance of production plants. Fresenius Kabi will invest in expanding and maintaining production facilities and in introducing new manufacturing technologies. These developments will enable further improvements in production efficiency. At Fresenius Helios we will be investing primarily in modernizing hospitals and in hospital equipment. The regional focus of the investments will be on Europe and North America, which will account for about 45% and 40%, respectively. The remainder will be invested in Asia, Latin America, and Africa. About 25% of the funds will be invested in Germany.

PROCUREMENT

As a result of the sharply increased prices for energy and raw materials, the ongoing optimization of our procurement management, including price and conditions as well as product quality, is a key factor for further earnings growth. We expect the procurement costs for oil-based intermediate products to rise.

FINANCIAL TARGETS BY BUSINESS SEGMENT
	Targets 2008	Fiscal year 2007
Fresenius Medical Care
Sales	> US$ 10.4 billion	US$ 9,720 million
Net income	US$ 805 - 825 million	US$ 717 million
Fresenius Kabi
Sales growth (in constant currency)	12 - 15%	€ 2,030 million
EBIT margin	~ 16.5%	16.4%
Fresenius Helios
Sales	> € 2,050 million	€ 1,841 million
EBIT	€ 160 - 170 million	€ 155 million
Fresenius Vamed
Sales growth	5 - 10%	€ 408 million
EBIT growth	5 - 10%	€ 26 million
Fresenius Biotech
EBIT	~ € -50 million	€ -50 million

The prices of other finished goods such as cardboard boxes and packaging materials should remain relatively stable. We will continue bundling our procurement processes on a global, cross-company basis. Procurement alliances across various sectors allow us to increase purchasing volumes and secure better conditions from our suppliers. Individual processes will also be streamlined over the longer term through the introduction of electronic requisitioning procedures.

The further steep rise in the prices of energy and oil-based products seen in 2007 is likely to continue in 2008. The sustained strong demand from growth regions and geopolitical factors are the main but not the only drivers behind this development. We also expect the prices of processed corn products to remain at a high level. While the prices of processed milk products will probably ease a little from their present level, the underlying price trend will remain high.

Procurement management at HELIOS will face new challenges in the coming years but will be continuously improved. Clinics are treating more and more patients with greater needs in terms of medical supplies. In the combined efforts of the doctors and business economists, not only do responsible patient-oriented decisions have to be reached, but a balance has also to be maintained between quality and cost efficiency. This is a constant challenge. HELIOS has also developed a special concept for integrating newly acquired clinics into the group network and into the central procurement management system. The goal for 2008 is to integrate the newly acquired clinics and unlock cost-saving potential as swiftly as possible. HELIOS is also extending the requirements bundling, for example for drugs. Purchasing strategy at HELIOS includes a more widespread use of e-procurement at the individual clinics. Electronic procurement processes are to be introduced at all HELIOS clinics by the year 2010.

RESEARCH AND DEVELOPMENT

Our R & D activities will continue to play a key role in securing the Group’s long-term growth through innovations and new therapies. We are concentrating our R & D on products for the treatment of patients with chronic kidney failure. The emphasis will be on dialysis membranes, dialysis machines and other products. We are also focusing on other extracorporeal therapies, such as those used in the treatment of patients with liver disease and research into alternative regional anticoagulants, as well as our main research areas of infusion and nutrition therapies. We are also concentrating on targeted development in the biotechnology sector, mainly in the field of antibody therapies. Biotechnology research opens up possibilities for treating diseases which cannot be cured today, and offers Fresenius potential for further growth with innovative cancer therapies. Based on the encouraging results of a phase II/III study, the filing dossier was dispatched to the EMEA (European Medicines Agency), the European drug approval agency, at the end of 2007 for the approval of the antibody Removab^® for the indication of malignant ascites. Fresenius Biotech expects a possible market introduction of this product in the indication of malignant ascites – subject to approval – at beginning of 2009. Further clinical studies with the antibodies Removab^® and Rexomun^® for various indications are ongoing.

We are planning to invest more in research and development in 2008. The increase should be higher than the expected organic growth rate in sales. The number of employees in research and development will also be increased.

Market-oriented research and development with strict time-to-market management processes is crucial for the success of new products. Using clearly defined milestones, we continually review our R & D results.

Innovative ideas, product development and therapies with a high level of quality will continue to be the basis for market-leading products in the future.

CORPORATE LEGAL STRUCTURE AND ORGANIZATION

Fresenius completed its conversion from a public limited company incorporated under German law (Aktiengesellschaft) into a Societas Europaea (SE) in 2007. No further change in the Company’s legal form is planned in the foreseeable future.

As of January 1, 2008, the Fresenius Group is divided into four business segments, each of which is a legally independent entity. The business segments are organized on a regional and decentralized basis to provide the greatest flexibility for meeting the demands of the respective markets. The “entrepreneur in the enterprise” principle, with its clearly defined responsibilities, has proven itself over many years. We will continue to follow this principle.

PLANNED CHANGES IN HUMAN RESOURCES AND THE SOCIAL AREA

The number of employees in the Group will continue to rise in the future as a result of strong organic expansion, but growth in employee numbers will be held below the expected rate of organic sales growth. The regional distribution of our employees will not change significantly – just under 50% will be located in Europe, about 35% in North America, and the remaining 15%in Asia-Pacific, Latin America, and Africa.

DIVIDEND

Continuity in our dividend policy remains an important priority, clearly demonstrated by steady dividend increases over the last 14 years. We want to remain true to this policy in the 2008 fiscal year and offer our shareholders a dividend in line with our positive earnings forecasts.