DaVita (DVA)

• Article
• Discussion
• Edit
• History
• Bookmark

Bulls: Reasons To Buy Feeling Bullish? Be the first to explain why this would make a good investment Bears: Reasons To Sell Feeling Bearish? Be the first to explain why this would make a poor investment Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Kelly Schaefer Related Articles Amgen (AMGN) Aging Baby Boomers DaVita (DVA) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Fresenius Medical Care (FMS)

DaVita (NYSE: DVA) is the second largest provider of dialysis services in the United States with about 1/3 of the market. The company treated approximately 103,000 patients in 2007 and has more than 1,300 outpatient dialysis facilities and 800 acute units hospitals.^[1]

DaVita is heavily dependent on both Medicare and private insurance programs. Over 87% of its patients are covered by Medicare, making the government program the single largest source of revenue for the company. Any changes to Medicare reimbursement policy for dialysis or related services could have a substantial impact on the company's performance - and dialysis has been a frequent target of Medicare budget cuts, most of which have been successfuly parried by coalitions dialysis companies, drug manufacturers, doctors and patient groups. Although only 13% of DaVita's clients pay using private insurance, DaVita charges these patients 2 to 3 times more than those affiliated with Medicare, and most of the company's margin comes from these patients. DaVita is facing pressure from insurance companies to lower its rates for privately insured patients. If the insurance companies are able to negotiate better rates, it could have a disproportionate impact on the company's earnings.

[edit] Business Financials

Dialysis services are used by people diagnosed with chronic kidney disease (CKD), also known as end stage renal disease. Dialysis removes toxins, fluids and salt from the blood, and patients usually require dialysis at least three times per week for the rest of their lives or a kidney transplant.

DaVita's revenue comes from fees charged for dialysis sessions and the sales of complementary treatment drugs such as Epogen. Because dialysis is a life-sustaining treatment, Medicare covers treatments for everyone (including those under 65). This coverage begins within three months for those not covered by a commercial health insurance plan and within 33 months for those initially covered by a commercial payer. Payment for dialysis is usually 2-3x higher for commercial payers than for Medicare.

In the chart below, you can see that DaVita has more than doubled its revenue and nearly doubled its operating income since 2004.

DaVita 2006 10K^[2]

This graph summarizes DaVita's 2006 dialysis revenue by source.

DaVita 2006 10K^[3]

[edit] Key Trends and Forces

• Incidence of kidney disease: Kidney disease is expected to increase with the Aging Baby Boomers and with the incidence of obesity, diabetes and hypertension. The disease has recently grown at 3-4% per year and there are currently about 335,000 ESRD dialysis patients in the United States. Some experts predict that there will be up to a 60% increase in kidney disease by 2020.

• Safety concerns and reimbursement policies for anemia medication: Epogen, a drug from Amgen used to treat dialysis patients for anemia, represents more than 40% of DaVita’s EBITDA between 2004-2006 while accounting for only 25% of revenue. DaVita is known to aggressively treat anemia, but several studies have suggested that anemia drugs may heighten mortality risk.^[4] A December 2006 congressional hearing examined whether the reimbursement policy for anemia medications encouraged overuse of certain drugs.^[5] Studies on the safety of anemia medications as well as the reimbursement policy may affect DaVita’s usage of such drugs and profitability in the future.

• Decrease in private insurance rates: DaVita charges private insurance much higher rates (2-3x Medicare rates), and there has been some pressure to reduce these rates.^[6] Approximately 35% of DaVita's revenue is from private insurance companies, even though private insurance patients represent only 13% of total patients.^[7]

• Increase in kidney transplants: If the government were to change the organ donor system to an “opt-out” one in which individuals must make the decision not to participate, there could be a significant increase in kidney transplants, which would lower the demand for DaVita’s services.^[8]

• Future medical technologies: The widespread use of dialysis is a current reality, but there are potential game-changing adjustments to ESRD treatment that could greatly affect companies like DaVita. While the development of an artificial kidney is far from a reality, it may be a possibility in the future. ^[9]

[edit] Competitors

While DaVita and its competitor Fresenius together account for more than 65% of the outpatient dialysis centers in the United States, the industry is competitive in terms of acquiring existing centers. About half of the centers not owned by these two players are owned or controlled by non-profit organizations or hospitals, and physicians can also buy centers.^[10]

• Fresenius Medical Care: Fresenius is by far DaVita’s largest competitor, with about 1/3 market share and about 150,000 patients.^[11] This company may have a cost advantage over DaVita because they manufacture dialysis supplies and equipment. In fact, Fresenius has historically been DaVita’s largest supplier of dialysis products.^[12]

• Nxstage Medical: Nxstage has developed in-home hemodialysis systems for patients to use on a daily basis. While DaVita, Fresenius and Renal Solutions have all developed such systems, DaVita entered into a National Provider Agreement with Nxstage in February 2007, which allows DaVita to purchase Nxstage products at a potential discount, depending on volume. If home-based hemodialysis becomes more popular, this could become an increasingly important partnership.^[13]

The table below compares the operational metrics for DaVita and Fresenius in 2006.

DaVita 10K^[14] Fresenius 20F^[15] Fresenius company overview^[16] "Fresenius at a Glance"^[17]

[edit] Footnotes

1. ↑ http://www.davita.com/about/
2. ↑ DaVita 2006 10K, Item 6: Selected Financial Data, pg. 33
3. ↑ DaVita 2006 10K, Item 1: Business, pg. 6
4. ↑ US Medicare seeks DaVita records on Epogen claims
5. ↑ Lawmakers Question Medicare Policy On Anemia Drug Epogen During Congressional Hearing
6. ↑ DaVita 2006 Annual Report. Section: Risk Factors. Page 68.
7. ↑ DaVita 2006 Annual Report. Section: Management's Discussion. Page 9.
8. ↑ International Lessons for Moving Forward With 'Opt-Out' Organ Donation in the United States
9. ↑ New Device Could Lead to Artificial Kidney Transplants
10. ↑ DaVita 2006 10K, Item I: Business, page 17.
11. ↑ Making a Difference in Dialysis
12. ↑ DaVita 2006 10K, Item I: Business, page 18.
13. ↑ DaVita 2006 10K, Item I: Business, page 18.
14. ↑ DaVita 2006 10K, Item 7, pg. 39 & 17
15. ↑ Fresenius 2006 20F, pg. 54
16. ↑ http://www.fmcna.com/company.html
17. ↑ http://www.fmcna.com/fmcnaglance.html