DVA – DaVita HealthCare Partners

[flesh]

Things are humming along. I suspect the lowered OI guidance is a result of the whole ACA debacle... not sure. EPS are showing up again, company will be receiving 538m from the govt Q1 17' which isn't included in guidance. No share repurchases in CY17' after reducing share count 8% in CY 16'.... not sure why.... tons of cash... maybe thought lowered guidance may reduce prices?

 

One thing of note, virtually all of DVA is US based. They pay full taxes going forward and I suspect they will keep most of the tax savings if rates come down to 20%. Other companies that aren't monopolistic should lose some the the tax reduction over time as competition reduces prices, I suspect this will be of a smaller magnitude with DVA.

 

DaVita Inc. 4th Quarter 2016 Results

DENVER, Feb. 16, 2017 /PRNewswire/ -- DaVita Inc. (NYSE: DVA) today announced results for the quarter and year ended December 31, 2016.

 

Net income attributable to DaVita Inc. for the quarter and year ended December 31, 2016 was $158 million, or $0.80 per share and $880 million, or $4.29 per share, respectively.

Adjusted net income attributable to DaVita Inc. for the quarter and year ended December 31, 2016, excluding the non-GAAP items described below, was $192 million, or $0.98 per share, and $789 million, or $3.85 per share, respectively.

Additionally, adjusted net income attributable to DaVita Inc. for the quarter and year ended December 31, 2016, exluding the non-GAAP items described below and further excluding the amortization of intangible assets associated with acquisitions, was $222 million, or $1.13 per share, and $897 million, or $4.38 per share, respectively.

Net (loss) income attributable to DaVita Inc. for the quarter and year ended December 31, 2015 was $(6) million, or $(0.03) per share, and $270 million, or $1.25 per share, respectively.

Adjusted net income attributable to DaVita Inc. for the quarter and year ended December 31, 2015, excluding the non-GAAP items described below, was $214 million, or $1.01 per share, and $828 million, or $3.83 per share, respectively.

Additionally, adjusted net income attributable to DaVita Inc. for the quarter and year ended December 31, 2015, exluding the non-GAAP items described below and further excluding the amortization of intangible assets associated with acquisitions, was $239 million, or $1.12 per share, and $930 million, or $4.30 per share, respectively.

The Company's adjusted net income attributable to DaVita Inc., adjusted diluted net income per share, adjusted operating income, adjusted effective income tax rate attributable to DaVita Inc. and free cash flow discussed above and below (collectively its "non-GAAP measures") exclude the effect of certain items that are reconciled to their most comparable GAAP measures at Notes 2, 3, 4 and 5 hereto.

 

For the quarter ended December 31, 2016, these non-GAAP measures excluded a goodwill impairment charge related to our vascular access reporting unit and an impairment of a minority equity investment (as discussed below), as well as an additional estimated accrual for damages and liabilities associated with our pharmacy business.

 

For the year ended December 31, 2016, these non-GAAP measures excluded the non-GAAP items mentioned above as well as goodwill impairment charges on certain DaVita Medical Group (DMG) reporting units, a gain on changes in ownership interest upon the formation of our Asia Pacific dialysis joint venture (APAC JV), a gain on the sale of a portion of our Tandigm ownership interest, a loss on the sale of our DMG Arizona business, and estimated accruals for damages and liabilities associated with our pharmacy and DMG Nevada hospice businesses.

 

For the quarter ended December 31, 2015, these non-GAAP measures excluded estimated goodwill and other intangible asset impairment charges and an estimated accrual for damages and liabilities associated with our pharmacy business. For the year ended December 31, 2015, these non-GAAP measures also excluded the debt redemption charges and a settlement charge related to a private civil suit.

 

Financial and operating highlights include:

 

Cash flow:  For the quarter and year ended December 31, 2016, operating cash flow was $482 million and $1.963 billion, respectively, and free cash flow was $329 million and $1.412 billion, respectively. For the definition of free cash flow, see Note 5 to the reconciliation of non-GAAP measures.

 

Operating income and adjusted operating income:  Operating income for the quarter ended December 31, 2016 was $381 million, and adjusted operating income for the quarter was $445 million.  Operating income for the year ended December 31, 2016 was $1.895 billion, and adjusted operating income for the year was $1.849 billion.

 

In connection with the acquisition of DMG, we recorded receivables against the acquisition escrow balance to offset specific potential tax liabilities. Certain of these potential tax liabilities expired, resulting in the reduction of this asset during the third and fourth quarters of 2016. This negatively impacted operating income by $4 million and $31 million for the quarter and year-ended December 31, 2016, respectively, and is included in our general and administrative expenses. The reduction in operating income was directly offset by a reduction in income tax expense due to the expiration of the corresponding tax liabilities.

 

Operating income for the quarter ended December 31, 2015 was $245 million, and adjusted operating income for the quarter was $474 million. Operating income for the year ended December 31, 2015 was $1.171 billion and adjusted operating income for the year was $1.898 billion.

 

Volume:  Total U.S. dialysis treatments for the fourth quarter of 2016 were 6,889,069, or 87,203 treatments per day, representing a per day increase of 3.7% over the fourth quarter of 2015. Normalized non-acquired treatment growth in the fourth quarter of 2016 as compared to the fourth quarter of 2015 was 4.0%.

 

The number of member months for which DMG provided care during the fourth quarter of 2016 was approximately 2.3 million, of which approximately 1.0 million, 1.0 million and 0.3 million related to senior, commercial and Medicaid members, respectively.

 

Goodwill and other asset impairment charges:  During the quarter ended December 31, 2016, we determined that circumstances indicated it had become more likely than not that the goodwill of our vascular access reporting unit had become impaired. These circumstances included changes in governmental reimbursement and our expected ability to mitigate them. We have performed the required valuations to estimate the fair value of the net assets and implied goodwill of this reporting unit with the assistance of a third-party valuation firm. Based on this assessment, we recorded a goodwill impairment charge of $28 million, of which $8 million was attributed to noncontrolling interests. In addition, we recognized an income tax benefit of $7 million related to this charge.

 

During the fourth quarter of 2016, we also recognized an impairment charge of $15 million on a minority equity investment within our international business, offset by an income tax benefit of $5 million related to this charge.

 

Effective tax rate:  Our effective tax rate was 32.3% and 30.6% for the quarter and year ended December 31, 2016, respectively. The effective tax rate attributable to DaVita Inc. was 36.3% and 34.1% for the quarter and year ended December 31, 2016, respectively.

 

Our effective tax rate for the quarter ended December 31, 2016 was impacted by a non-deductible portion of the estimated accrual associated with our pharmacy business and an adjustment to reduce a receivable associated with the DMG acquisition escrow provision relating to an income tax item. Our effective tax rate for the year ended December 31, 2016 was impacted by the foregoing items as well as partially deductible and non-deductible goodwill impairment charges, the loss on the sale of our DMG Arizona business, a non-deductible portion of the estimated accruals associated with our DMG Nevada hospice and pharmacy businesses, a gain on the APAC JV ownership changes, the adjustments related to the reduction in the receivables associated with the DMG acquisition escrow provision relating to income tax items, and the amount of third-party owners' income attributable to non-tax paying entities.

 

The adjusted effective tax rate attributable to DaVita Inc. for the quarter and year ended December 31, 2016, excluding these items from their respective periods was 36.5% and 38.4%, respectively. The decrease in our adjusted effective tax rate attributable to DaVita Inc. compared to the third quarter of 2016 of 40.0% is due to a decrease in the state tax rate and related true-ups.

 

Center activity: As of December 31, 2016, we provided dialysis services to a total of approximately 203,000 patients at 2,504 outpatient dialysis centers, of which 2,350 centers were located in the United States and 154 centers were located in 11 countries outside of the United States. During the fourth quarter of 2016, we opened a total of 27 new dialysis centers and acquired four dialysis centers in the United States. We also acquired ten dialysis centers and opened five new dialysis centers outside of the United States.

 

Share repurchases: During the quarter ended December 31, 2016, we repurchased a total of 6,718,658 shares of our common stock for $416 million, or an average price of $61.96 per share. During the year ended December 31, 2016, we repurchased 16,649,090 shares of our common stock for $1.1 billion, or an average price of $64.41 per share. We have not repurchased any shares of our common stock subsequent to December 31, 2016. As a result of these transactions, as of February 16, 2017 we have a total of approximately $677 million in outstanding Board repurchase authorizations.

 

Settlement: In the first quarter of 2017, we reached an agreement with the government for $538 million for amounts owed to us for dialysis services provided over several years to patients covered by the Veterans' Administration. This one-time gain, subject to taxes and consideration of noncontrolling interests, is expected to be recognized in the first quarter of 2017 and is excluded from our 2017 adjusted operating income guidance.

Outlook

 

The following forward-looking measures and the underlying assumptions involve significant risks and uncertainties, including those described below, and actual results may vary significantly from these current forward-looking measures. We do not provide guidance for consolidated operating income, Kidney Care operating income or effective tax rate attributable to DaVita Inc. on a GAAP basis nor a reconciliation of those forward-looking non-GAAP financial measures to the most directly comparable GAAP financial measures on a forward-looking basis because we are unable to predict certain items contained in the GAAP measures without unreasonable efforts. These non-GAAP financial measures do not include certain items, including the anticipated gain related to the government settlement.

 

We expect our adjusted consolidated operating income guidance for 2017 to be in the range of $1.635 billion to $1.775 billion.

We expect our adjusted operating income guidance for Kidney Care for 2017 to be in the range of $1.525 billion to $1.625 billion.

We expect our operating income guidance for DMG for 2017 to be in the range of $110 million to $150 million.

We expect our consolidated operating cash flow for 2017 to be in the range of $1.750 billion to $1.950 billion, which includes the net benefit of the anticipated VA payment.

We expect our 2017 adjusted effective tax rate attributable to DaVita Inc. to be approximately 39.5% to 40.5%.

[no_free_lunch]

Good summary of the legal situation surrounding DVA.

 

Dialysis treatment companies like DaVita (and Fresenius) made contributions to the American Kidney Foundation (AKF)

AKF would then pay for premiums for patients in need of dialysis

Treatment facilities like DaVita would steer patients to coverage, paid for by AKF

..

Why is Davita anticipating lower operating income in 2017? The way in which they had been obtaining some profitable patients has been blocked — at least for a while — by the Department of Health and Human Services, is being investigated by the Department of Justice, and the subject of a potential class-action investor lawsuit.

 

That’s quite a trifecta, which we’ll continue to track.

 

http://stateofreform.com/featured/2017/03/davita-regulated-investigated-sued/

[Spekulatius]

Regarding the kidney transplant issue, this is not a simple procedure. And success is not just due to availability of kidneys.

It's dangerous depending on the patient's health and age. I had discussions earlier this year with Director of U of Chicago Kidney Transplant Center.

 

The problem for many of these "candidates" is that they are unhealthy and many times overweight. U of Chicago will not do a transplant on individuals above a certain body mass index - those candidates have to lose a significant amount of weight.

The side effects of  infection, drugs, etc can be fatal.  Risk of infections goes up significantly with overweight patients.

Powerful drugs to fight these infections can damage the heart, etc.

 

Her opinion: those on dialysis can live very long and healthy lives without a transplant.

Transplants should not be viewed as a silver bullet. I am not a doctor - but this is how I understand the issue.

 

I am not qualified to have a medical opinion on this issue, other that I am hearing stories from my wife, who works as a nurse in a dialysis center.

 

Most of these patient are sick due to loss of kidney function, with very high blood pressure being the most common problem. The dialysis only can do a fraction of the function that a healthy kidney can do. A kidney transplant, while not without risk, seems vastly preferable, but there are not enough transplants available and many patient are not eligible (weight, blood pressure etc). Also, transplants wear out due thenneed to use heavy medication that suppress rejection, so there are issues with that as well. It sucks have a kidney that does not work and not being able to per , since you basically can't dispose of waste. in addition, the kidney fulfills other duties to control blood pressure, produces hormones and dialysis by itself  does not Adresse those at all.

 

Just an opinion, by there is a real need for a better mousetrap and a huge unmet need to replace failing kidney functions. Hopefully someone will find a way to meet that need better than the current dialysis procedure, but there is nothing out there in the net 10 years, if not more.

[flesh]

http://pressreleases.davita.com/2017-05-02-DaVita-Completes-Acquisition-of-Renal-Ventures

 

"We are excited to have Renal Ventures' employees, physicians and patients join the DaVita Village," said Javier Rodriguez, CEO of DaVita Kidney Care. "Both DaVita and Renal Ventures have talented caregivers with relentless passion towards enhancing the quality of life for patients. We look forward to benefiting from the power of the combined talent dedicated to delivering industry-leading outcomes and comprehensive care."

 

DaVita acquired 38 dialysis centers and divested seven centers in connection with the approval of the transaction by the Federal Trade Commission."

 

http://pressreleases.davita.com/2017-05-02-HealthCare-Partners-Nevada-Completes-Acquisition-of-WellHealth-Quality-Care

 

"WellHealth Quality Care is one of the most respected privately held medical organizations in Nevada, and we look forward to working with this group collaboratively to benefit patients in this community," said Bard Coats, MD, Nevada market president for DaVita's Medical Group division.

 

WellHealth Quality Care has a network of over 3,000 providers across Southern Nevada as well as a multi-specialty medical group with specialties including obstetrics and gynecology, anesthesiology, cardiology, endocrinology and primary care. WellHealth Quality Care has provided optimal care to the residents of Nevada for over two decades and currently operates in 11 locations.

 

"We're excited about this union," said Warren Volker, MD, founder, and CEO of WellHealth Quality Care. "The range of services that each of our groups provides complements one another, and through our integration of care we will provide more access and better care to our patients."

 

Earnings later today.

 

 

 

 

[flesh]

http://pressreleases.davita.com/2017-05-08-DaVita-Acquires-Purity-Dialysis

 

It's quite clear these guys have more money than they know what to do with. What do you do with a cash machine when you have no where to put it? It's too bad the international economics apparently are not apples to apples, if it was, there would be more money going there.

 

I can't think of many companies that are at once economically insensitive and most likely to benefit from a corporate tax reduction and selling at a low multiple while still growing slowly with a long runway and some operating leverage. Insofar that it is true that reduced corporate rates will eventually cause companies to reduce prices as the excess profits are competed away or at least slow the rate of price increases, dva should be insulated from this. It's the low cost producer in a duopoly market where the prices aren't set by the market because there isn't price discovery. Instead we have layers of slow moving bureaucracy plus on the medicare/caid side prices have already been frozen until 2019. 

 

I reduced from 15%-10% at 68 and will be adding if it gets much cheaper.

[no_free_lunch]

Thanks for your input and bringing this up again Flesh.

 

Would anyone have any idea, even an approximation of what normalized free cash flow is?  E.g. approximately what would you expect on average over the next few years?  They are showing $1.8B for trailing 12 months but 40% was just in the most recent quarter and I think there was a one off in there.

 

I continue to have concerns about some type of technological replacement but admittedly based on little evidence.  In some ways this reminds me of a tobacco company or health insurer where there is always these threats to their existence and yet they continue to just pump out the cash.

[flesh]

Just added at 62.45

 

http://www.businessinsider.com/john-oliver-healthcare-story-davita-dialysis-2017-5

 

 

[jgyetzer]

Seems like a perfect point to do so. Most of that Oliver bit is sensationalized. Little to do with the underlying business...

 

[writser]

Seems like a perfect point to do so. Most of that Oliver bit is sensationalized. Little to do with the underlying business...

 

Probably you are right but the situation looks eerily like something we've seen before. Crazy CEO, healthcare roll-up, horrible balance sheet, famous gurus are long, company is possibly gaming the system, a few smart shorts are honing in on the situation .. Obviously that's a cheesy comparison and DVA looks way more fairly priced than VRX but I'd be at least a little bit careful. There's some reflexivity embedded in situations such as this: if public sentiment turns against DVA things can go downhill fast.

 

That said I have not nearly done as much homework as flesh so you should probably ignore me. Just a comment from the sidelines.

[racemize]

I remember this company having some weird situation where most of their profits came from a very small population of who they were serving, which turned me off of it from the outset.  Was it that only the private insurers gave the profit?

[maybe4less]

I remember this company having some weird situation where most of their profits came from a very small population of who they were serving, which turned me off of it from the outset.  Was it that only the private insurers gave the profit?

 

Yes, that's correct for the dialysis business at least.

[rb]

I remember this company having some weird situation where most of their profits came from a very small population of who they were serving, which turned me off of it from the outset.  Was it that only the private insurers gave the profit?

That's correct. It's what put me off from buying it a few years ago.

 

Basically people requiring dialysis are overwhelmingly of the older variety and they fall under Medicare. Medicare's pricing is pretty tight and they even had a price cut from Medicare a couple of years ago as I remember though not as steep as Medicare was looking for. I should mention that I'm not sure whether to say that all the profit comes from the private insurers is entirely accurate. This is because without the Medicare business paying for the rent, the light, and such DaVita would not be able to service the private business.

 

However I think that the thesis has changed because of the new administration. Under the current regime I don't see Medicare pushing against them so much on one hand and on the other hand there may be more people pushed into private insurance and thus higher fees for DVA. I'm not entirely sure about this though. There's also quite a few non-profits in the dialysis space that are of some concern.

 

[Guest roark33]

The situation here is really clear if you open the 10-k.

 

They have basically struck a three-way deal with private insurance companies, medicare/medicaid and dialysis providers.

 

If you are under a commercial plan, i.e. under 65, the commercial insurance provider will only have to cover your dialysis treatment for 30 months.  After that, you are kicked to medicare, where the providers basically lose money until you get a transplant or pass away.

 

medicare can't really cut this because providers are already money losing and if commercial tries to cut it, the providers, DVA and Fresenius will protest to the govt to change the 30 month rule to 36 months or something like that. 

 

It's a 3-way dance and Davita constantly gets caught sticking their hand in the cookie jar trying to juice their profits.  The EPO usage issues, charity premium pushing people to commercial instead of medicaid, etc, etc.  Davita doesn't have clean hands, but they are basically serving 89% of their customers at money-losing prices, so there is that. 

 

Chanos/Oliver have a lot of things right, but Davita isn't exactly making a profit off the govt here and they should theoretically be making more money if the commercial insurance companies didn't have such a strong lobby to create this 30-month rule.  What other diagnosis have this type of rule in the US....none.

 

 

 

 

[flesh]

I don't expect anything fantastic here, 10-20% a year for a couple year's at todays prices seems reasonable, better than that with tax reform. Less economic sensitivity is a box I don't mind checking. When the price freeze ends in 19' that could be huge as well, maybe that starts getting priced in about a year or so from now.

 

I think the company should be private.

 

The CEO IS weird. Thiry and the ceo from trip are both too over the top for me. The trip ceo always reminds me of that guy from office space, the TPS report guy. His voice drives me crazy, I don't need a therapist, I'm always waiting for him to ask me how I feel on the earnings calls.

[jgyetzer]

Certainly not without flaw ethically, but they are providing lifesaving services that would otherwise be unavailable so I think the likelihood of regulation to the point of failure is low due to political risk to whomever goes after these centers.  (Who wants to take credit/blame for shutting down grandma's dialysis unit?)

 

As far as private vs. gov't payers it's true that they account for all profits from the 10% of patients on private plans. The transition to Medicare actually occurs after only 90 days on hemodialysis. A mitigating factor is that this is a high fixed cost business and if the government payor patient base can be thought of as marginal revenues after all fixed costs are covered by the private patients, then treating Medicare is still a net positive.

[Spekulatius]

I remember this company having some weird situation where most of their profits came from a very small population of who they were serving, which turned me off of it from the outset.  Was it that only the private insurers gave the profit?

 

Yes, that's correct for the dialysis business at least.

 

They make their profits from private insured patients (%10 of total), the government paid patient actually lose a bit of money, but also ensure coverage of fixed costs.

[flesh]

Just listened to capital markets day. Here's the short version as I'm short on time.

 

International Dialysis becoming break even for the first time in 18 profitable in 19.

 

DMG ebitda expected to grow massively 17-19'

 

Medicare/caid rates improving in 18' then moving to market basket rates in 19 (moderate price increases).

 

New cfo has private equity background.

 

They are planning on bringing there debt ratio from the historical 3x to higher than that. In the mean time ebitda is expanding and there's plenty of cash currently and accumulating on the balance sheet. Why then should dva take on more debt?

 

Obviously the only possibility I can think of short of a massive acquisition which is unlikely, is massive buybacks. I think 19' is presumed to be the breakout year having all the moving parts moving into place concretely that year and in the interim we'll see massive share count reduction and debt levels moving up. The ceo was super opaque here about any timing and only being directional.

 

There's a lot more but that's the short version. Check out the replay.

 

 

[rb]

Did anyone look in detail at American Renal Associates (ARA). If so why are they doing so much worse than DVA? As I understand it these dialysis centers are pretty standard (nothing special about DVA centers) and their product is a commodity. In this case you'd expect clinics and profitability to be similar across clinics. So why is DVA doing better than these other guys?

[winjitsu]

Did anyone look in detail at American Renal Associates (ARA). If so why are they doing so much worse than DVA? As I understand it these dialysis centers are pretty standard (nothing special about DVA centers) and their product is a commodity. In this case you'd expect clinics and profitability to be similar across clinics. So why is DVA doing better than these other guys?

 

My guess is the government insurance/private insurance customer mix. It's something you can't control [unless... you decide to donate to a foundation that pays the premiums for government insured patients to switch over to private insurance :)]

[DeepSouth]

Did anyone look in detail at American Renal Associates (ARA). If so why are they doing so much worse than DVA? As I understand it these dialysis centers are pretty standard (nothing special about DVA centers) and their product is a commodity. In this case you'd expect clinics and profitability to be similar across clinics. So why is DVA doing better than these other guys?

 

ARA has fewer treatments per patient, fewer patients per clinic, more Medicare quality penalties, and was more aggressive in taking charity assisted ACA exchange patients.

[rb]

Is there a particular reason why davita would have a better patient mix the someone like ARA? The way i understand it is that patients essentially go to the nearest clinic and DaVita's centers aren't exactly "luxurious". I'm thinking that maybe they're located in more affluent areas but at DVAs size i doubt it's that.

[DeepSouth]

Is there a particular reason why davita would have a better patient mix the someone like ARA? The way i understand it is that patients essentially go to the nearest clinic and DaVita's centers aren't exactly "luxurious". I'm thinking that maybe they're located in more affluent areas but at DVAs size i doubt it's that.

 

I think ARA actually has higher % of commercial payors than DVA but still generates weaker $/treatment

[walkie518]

Does anyone have a feel for why Fresenius trades at such a premium to DVA? 

 

Putting Thiry's eccentricities and management style aside, as far as I can tell, DVA might be the better of the two major players in the US market?  Is this solely by the hand of John Oliver? 

[sleepydragon]

i think it's because DVA's HCP/DMA division has been performing poorly since been acquired by DVA.

[K2SO]

Interesting comments from Jim Chanos on rent seeking in US healthcare and dialysis in particular (yes, he's short, so take it with a grain of salt). In particular, he points to dialysis costs as a key cause of the failure of ACA exchanges.

 

https://www.bloomberg.com/news/videos/2017-06-07/invest-spotlight-jim-chanos-makes-his-calls-video

 

Relevant comments start around 9:00.