Not long ago, the chief executive of a leading kidney dialysis
franchise,DaVita Inc. (
), addressed concerns over the shrinking number of acquisition
"We periodically but regularly get asked, 'Gee, your industry
is awfully consolidated. What does that imply for growth in the
core business?'" said CEO Kent Thiry in prepared remarks to
The question has merit considering that acquisitions have long
played a major role in DaVita's growth as it built a leading
franchise in kidney dialysis treatment.
Thiry explained that the firm's dialysis business would, at
the very least, still benefit from steady growth in new patients,
at a rate of 3.5% to 4% a year.
That was May 2. It was the same day Thiry described
first-quarter results, released the day before, as "solid." (Net
income: $140 million, or $1.46 per share vs. $94.5 million or 96
cents a share a year earlier. Revenue: $1.86 billion vs. $1.56
billion the prior year.)
On May 21, Denver, Colo.-based DaVita announced it would grow
in a different way altogether. By acquiring Torrance,
Calif.-based HealthCare Partners, a privately held operator of
integrated medical and physician groups, DaVita would hop aboard
the health-reform train.
In buying HCP for $4.4 billion, DaVita would provide, as Thiry
stated, "new and exciting levels of clinical quality, service,
and consumer/taxpayer savings."
The deal is expected to close in the fourth quarter. HCP would
then operate as a subsidiary of the newly named parent company,
DaVita HealthCare Partners.
While many liked the deal -- the stock jumped nearly 5% the
day of the announcement -- others were skeptical.
"It's outside the core competency of what DaVita does," said
Piper Jaffray analyst Kevin Ellich, "which makes people scratch
their heads a little bit."
But after some head-scratching, they may agree with Ellich's
assessment that the proposed merger "is a statement by the
company that this is the direction health care in the U.S. is
HCP posted revenue last year of $2.4 billion. It offers
patients everything from preventive and ongoing care and lab work
to hospitalizations. It operates in Southern California, Central
Florida and Southern Nevada.
"HCP is about the future," said DaVita President Javier
Rodriguez in a phone interview. "It has a proven model that saves
money, and it's good for the patient."
It could also be quite good for DaVita. As Leerink Swann
analyst Jason Gurda wrote in a client note: "We may be in the
minority on this, but we actually like the HCP business model
better than DaVita's existing dialysis business."
He said that while organic patient growth in dialysis may be
stronger and more consistent, the business "depends on a smaller
percentage of commercial patients for most or all of its
profits," rather than the larger patient population under
Rodriguez says the government doesn't cover all of its costs
for dialysis treatment. "Private pay accounts for all of our
profits," he said.
Profits have grown 12% on an annual compounded rate the last
two years. First quarter's 52% year-over-year gain in earnings
was off a weak 2011 quarter.
"With few (if any) synergies between the companies," Gurda
wrote, "we believe DaVita was mostly motivated by the opportunity
to get involved with a strong asset and a substantial growth
That sounds like DaVita's view as well. "Right now, we are
taking care of dialysis (patients). We want to go above and
beyond that," Rodriguez said.
He says HCP has a 20-year track record and "incredibly
Skeptics seem to have warmed to the idea as they've had time
to absorb the merger's impact, Ellich says. DaVita's stock has
climbed more than 23% since the deal was announced, last trading
"For an acquisition like this outside your core, you kind of
have to make a bet on management," Ellich said.
Thiry took over DaVita's helm in 1999, when runaway growth had
left the company overleveraged, bleeding cash and deep in debt.
He turned the company around and resumed its acquisitive
DaVita operates more than 1,800 dialysis centers in the U.S.
In 2005, it gained 520 through the $3 billion acquisition of
Sweden's Gambro Healthcare U.S. Gambro was DaVita's largest
acquisition, but HCP will take that mantle when the pending
As for the company's newest and biggest acquisition, it
doesn't hurt that Medicare has designated HCP as an Accountable
Care Organization, or ACO, Ellich says.
A list of ACOs put out late last year was part of the
government's push for integrated and better quality patient care
with an eye on lowering health care costs.
In the U.S., DaVita is the No. 2 dialysis-care provider
afterFresenius Medical Care (
), the German-based dialysis giant, which runs treatment centers
worldwide and also makes dialysis equipment. DaVita buys
equipment from Fresenius.
The two hold sway over 70% of the dialysis patient market in
the U.S., Ellich says.
DaVita will continue to look for "opportunistic" acquisitions
in dialysis and other areas, Rodriguez says. And it won't be
limited to the U.S.
"Look at countries where populations are large, like China and
India," he said. "Their health care systems are currently in
He says DaVita is aligning with local partners in China and
India to develop dialysis clinics. The company also is expanding
in Europe and the Middle East.
"They have a lot of money to spend," Ellich said.
In the first quarter, DaVita generated $321 million in
operating cash, up from $235 million a year earlier.
Management forecasts that 2012 operating income will reach
$1.2 billion to $1.3 billion.
Analysts see profit rising 23% this year over last year to
$6.14 a share and rising another 10% next year, according to