DaVita HealthCare Partners Inc (DVA) Valuation Analysis

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

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’ 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).

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

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.