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)
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.
