DaVita: An Essential Provider of Dialysis Services
A cash flow powerhouse operating in a peculiar industry
Note to readers: This article is the second in a two-part series on the dialysis industry. For background information that will be helpful while reading this article, please read Kidney Failure and the Dialysis Industry which was published last week. In order to keep this article focused on DaVita, the discussion will assume that the reader is aware of the nature of end-stage renal disease and the options that are available to treat it.
DaVita is one of the leading kidney care providers in the United States. The company serves approximately 203,100 patients with chronic kidney failure and end-stage renal disease (ESRD) through a network of 2,809 outpatient dialysis centers located in 46 states and the District of Columbia. DaVita also delivers inpatient dialysis services in approximately 850 hospitals and the company provides training, equipment, and logistical support to patients who prefer to perform dialysis treatments at home.1
At the end of 2019, 809,103 individuals in the United States had ESRD. Of this population, 492,096 patients were receiving hemodialysis in an outpatient clinical setting, 12,243 patients were performing in-home hemodialysis, and 62,275 patients were receiving peritoneal dialysis. At the end of 2019, there were 239,419 patients who had a functioning kidney transplant. Without dialysis or a kidney transplant, the outcome for patients with ESRD is certain death within a short period of time.2
The dialysis industry in the United States is highly concentrated. DaVita’s market share is ~36% while Fresenius has market share of ~38%.3 The industry has been consolidating for over two decades and is effectively a duopoly in many regions. ESRD patients tend to be very sick and rely heavily on outpatient clinics that provide dialysis three times per week for four hours per session. It is important for patients to have safe access to these complex treatments in outpatient clinics that are located a reasonable distance from home. Missed treatments can result in traumatic and expensive hospital admissions, often via the emergency room.
The health care industry, broadly defined, has a number of peculiar characteristics due to heavy government involvement from a regulatory and payment perspective. In the case of kidney care, government policy plays a particularly important role that must be explored in order to clearly understand the dialysis industry.
After presenting a brief company overview, I focus primarily on DaVita’s dialysis business in the United States which accounts for the vast majority of the company’s revenue and all of its profitability. Understanding the intricacies of the U.S. dialysis business is the key to understanding DaVita’s overall business model.
While DaVita has posted strong free cash flow over many years and has been a major repurchaser of shares, there are a number of risks associated with DaVita’s business in particular and the dialysis industry in general. DaVita has a highly leveraged balance sheet. While debt servicing is not a problem given the current stability of the business, political risks could change the situation for the entire industry.
Finally, I briefly consider the fact that Berkshire Hathaway is a major investor in DaVita and currently owns ~38% of the company. Is there a chance that Berkshire could acquire DaVita in a friendly transaction?
DaVita operates in two segments. The U.S. Dialysis segment accounts for ~91% of revenue and the Ancillary Services segment accounts for ~9% of revenue. DaVita sold DaVita Medical Group (DMG) in August 2019 after a long divestment process. DMG was classified as a discontinued operation in 2017 and isn’t discussed in this article. The exhibit below shows DaVita’s operating results for the past five years as well as the first quarter of 2021 and 2022:
The U.S. dialysis business produces the vast majority of revenue and is responsible for all of the company’s profits while the ancillary services segment operates at a loss. As we will explore in more detail in the next section, the U.S. dialysis business produces stable and predictable revenue and operating profits.
Net income was $978 million in 2021 while management’s calculation of free cash flow was $1,133 million. Free cash flow has exceeded net income at DaVita in recent years. Management has used free cash flow as well as proceeds from the DMG sale to retire more than half of its shares since the beginning of 2017 for a total of $7.6 billion.
As of mid-day on May 20, 2022, DaVita common stock was trading at ~$93.50 per share. There were 94.6 million shares outstanding as of April 29, 2022 giving the company a market capitalization of approximately $8.85 billion. The company had $844 million of shareholders equity and $8.87 billion of long-term debt on the balance sheet as of March 31. With $421 million of cash on the balance sheet, we can estimate DaVita’s enterprise value at ~$17.3 billion.