DaVita HealthCare Partners Inc (DVA) Valuation Analysis by Value Seeker

Overview of DaVita HealthCare Partners (DVA)

DaVita Dialysis

  • 2,251 dialysis centers across 46 states in US.
  • 180,000 patients in the US.
  • 36% market share of dialysis patients in US. (tied with Fresenius FMC)
  • $8.6 billion dialysis revenues in 2015 and $1.75 billion in operating income
  • $1.3 billion of ancillary services/international dialysis revenue losing about $10om in 2015 (international has 118 centers, start-up phase)
  • $2.8 million cost for new dialysis center, profitable by year 2, mature in 3-5 years
  • 89% of patients are government paying/ 11% commercial
  • 11% patient mix of commercial = 110%+ of profitability

HealthCare Partners

  • Acquired in May 2012 for $4.4 billion
  • Different type of business than legacy dialysis services
  • Groups of physicians working primarily under capitated models with Medicare Advantage patients
  • $3.84 billion revenues in 2015, only $24om Adj. EBIT
  • Has been really underperforming since 2012 acquisition, incurred $206m goodwill impairment in 2015
  • $4.95 billion care dollars under manager
  • 807,400 capitated “lives”
  • In California, Florida, Nevada, Arizona, New Mexico, Washington (Everett Clinic acquisition in 2015)
  • Mostly a “pay for performance” business model, aligned with legacy DaVita vision of “population health management”

 

  • Revenue is split about 73% in legacy DaVita Dialysis, 27% in HealthCare Partners (HCP)
  • Due to dialysis margins (~20%) being much higher than HCP (~6%), EBIT concentration is dominated by kidney care business
  • The kidney care business is being understated due to investments in international center growth (118 centers, negative margin)

DaVita HealthCare Partners

DaVita HealthCare Partners

What Guides DVA Decisions?

  • DaVita HealthCare Partners’ decisions (mostly) are tied to attempting to becoming a “population health management” company
  • Due to the expense of dialysis on the government (~$90,000/yr.) and the fact that ESRD is the only illness where anyone of age automatically qualifies for Medicare if they have ESRD, DVA likely trying to protect shareholder capital/margins by being very “value added”
  • DVA generates substantial cash flow on dialysis services, earns very high returns on tangible capital once a center becomes mature (3-5 years)
  • Like *all* regulated companies, DVA has to show they are “earning their keep”
    • Utility companies are very capital intensive, reinvest heavily, attempt to keep costs for customers low
    • Railroads are very capital intensive but are safer/better means of transporting goods, to earn solid ROIC they invest heavily, focus on safety
    • Cable companies can be capital intensive, to earn solid ROIC must be able to not discriminate against certain providers, provide services to lower income individuals
    • DaVita’s largest customer is the US. Government. Although DVA is not capital intensive, they must *show* they are a business that works with the government and improves their patients lives (which they do).

How does DaVita maintain Government “approval”?

  • DaVita HealthCare Partners is not capital intensive, like many other regulated/monitored corporations (maintenance is around 2.5% of revenue/yr.)
  • Instead, DVA looks to bring other value in other areas:
    • Improving mortality rates: patient percentages have decreased from 19.0% in 2001 to 13.7% in 2014
    • Operate a number of centers (due to patient mix) at an operating loss: ~200 centers are losing money (the scale that larger dialysis providers can afford, all others cannot)
    • Ancillary services such as DaVita RX, Village Health, Lifeline, DaVita Clinical Research (DCR), Nephrology Practice
  • Solutions (N PS) that are meant to bring more value and attention to patients but operate at a loss/breakeven
  • DaVita HealthCare Partners and Fresenius are considered LDO – Large Dialysis Organizations – and continue to operate at much higher clinical outcomes than the smaller dialysis operators
  • DaVita is, by far, the highest quality of care provider in the dialysis industry, exceeding comparable
  • Fresenius Medical (FMC) handsomely – For example, DaVita has 874 centers receiving 4 or 5 stars from CMS Star Rating, versus 318 for Fresenius Medical

What Matters the Most:

Dialysis Business:

  • Strongest clinical outcomes (CMS needs to see DVA excelling versus peers, based on CMS 5-Star Ranking)
  • The patient base for ESRD continues to grow at similar (or better) pace as historically (3.6% from 2000 to 2013)
  • DaVita HealthCare Partners continues to reinvest and develop new centers to capture the underlying need for dialysis without adequate numbers of centers available
  • Patient mix remains stable or improves (89% government, 11% commercial paying) as DaVita loses money on the government paying and any increase in government patient mix would/could cripple DVA margins (assuming CMS does not adequately reimburse DVA per treatment)
  • Modality types remain somewhat constant (hemodialysis versus peritoneal)

HealthCare Partners (HCP):

  • The business stabilizes, as it has strongly underperformed since the 2012 acquisition for $4.4 billion
  • Legacy markets maintain leadership
  • Proves their value proposition through high quality of care (look at health metrics) to stay “partner of choice” for both government and commercial payers
  • Any M&A must be done at a reasonable price, as the space has been “expensive” over last few years

See full slides below.