The quarter was slightly better and guidance was reiterated. Our timelines are moving out, but we don't see a good reason to exit the short. With patient volume slowing, mix deteriorating, legislative and regulatory pressure, and a fully consolidated industry with excess capacity, DVA is still a good short even when they say there is no risk.
Q: "So when you look at the year, you're contemplating the possibility could come at the low end on treatment, but you've reiterated the OI guidance. So is the messaging just from that?"
A: "We've got enough other things that we're not worried about the OI range even if we come in below on that. [volume]"
PATIENT VOLUME LOWER THAN EXPECTED
Patient volume was lower than consensus and management expectations. A key driver of our short thesis is our patient and mix model that calls for 2-3% market growth largely coming from growth in the Medicare population, volume that carries a negative margin. While FMS showed 4% volume growth, DVA reported growth of 2.9% volume on a per day basis and 2.4% adjusted, essentially in line with our expectations. Management addressed the volume questions by commenting on share losses and competitive de novo sites. We are at the end of a 20 year roll up in dialysis with 2 large competitors, very little unconsolidated, and excess capacity overall.
Revenue and cost per treatment
Revenue per treatment was in line with our model. Management commented that commercial mix was up slightly in QoQ, although it is difficult to see that in the revenue per treatment result. Commerical pricing was in line with management's expectations. Treatment costs were lower than expected on lower costs for EPO. Under the transitional payment system in place for calcimimetics, before inclusion in the ESRD bundled payment, the drug is being reimbursed at ASP+6%. This transitional payment added $17 to revenue and $11 to cost on a per treatment basis and added $20M tailwind in the quarter. Management held out that the timing of generic entrants creates uncertainty for the remainder of the year, but the net impact longer term will be "margin neutral to slightly negative." Upward labor cost trends were offset by a $3.00 decline in advocacy expenses on a per treatment basis related to lobbying over California legislation and ballot measures.
DMG SALE STILL HAPPENING
DVA’s sale of DMG to UNH was addressed both in echoing UNH's comment of “a clear path to approval” of the transaction, and describing the process as a question of time and attention by regulators. Management reiterated they will move to refinance existing debt, target a leverage ratio of 3.0X to 3.5X and use the incremental balance sheet capacity to repurchase shares. The EV/EBITDA ratio is 9.5X and 7.5X pre and post the sale of DMG to UNH. The positive impact of the sale has been anticipated for some time.
California AB 290 Moving
California Assembly Bill 290 is moving along, following the same trajectory as it did in 2018. Commentary from management was that they continue to lobby against the bill but all signs point to passage (again) by the California legislature. The bill would in effect reduce commercial reimbursement to Medicare rates when a third-party like the American Kidney Fund provided premium assistance for commercial coverage.
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