Mon Apr 30, 2012 9:29am EDT

Apr 30 -

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Summary analysis -- DaVita Inc. ----------------------------------- 30-Apr-2012

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CREDIT RATING: BB-/Stable/-- Country: United States

State/Province: Colorado

Primary SIC: Kidney dialysis

centers

Mult. CUSIP6: 23918K

Mult. CUSIP6: 23918V

Mult. CUSIP6: 759671

Mult. CUSIP6: 89151A

Mult. CUSIP6: 89151B

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Credit Rating History:

Local currency Foreign currency

03-Mar-2005 BB-/-- BB-/--

28-Jan-2004 BB/-- BB/--

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Rationale

The rating on Denver-based DaVita Inc., a dialysis service provider, reflects its "fair" business risk profile and "aggressive" financial risk profile. Standard & Poor's Ratings Services' view of DaVita's business overwhelmingly reflects its dependence on the treatment of a single disease and its exposure to potential adverse changes in payor mix and reimbursement. Its fair business risk profile also recognizes positive attributes of the sector, such as steady demand from patients with end-stage renal disease for essential dialysis treatments, favorable demographic trends, and relatively low investment requirements.

We expect DaVita's revenues to grow about 10% in 2012, incorporating the September 2011 acquisition of DSI Renal Inc., and at a mid-single-digit annual rate thereafter. We expect treatment growth at DaVita's existing centers to slightly exceed the 3.5% to 4.0% annual growth in total U.S. dialysis patients, with incremental revenue growth coming from newly opened and acquired clinics. We expect DaVita's profit margins to remain stable, supporting continued generation of robust discretionary cash flow (DCF).

Payor mix is an important credit consideration for U.S. dialysis service companies. Medicare does not fully reimburse dialysis providers for treatment cost, and government programs (mainly Medicare and Medicare Advantage) pay for about 90% of the treatments DaVita provides. DaVita loses money on each Medicare treatment. Thus, the percent of treatments that commercial insurers cover, the commercial insurers' pricing, and efficient management practices are important. In recent years, DaVita has experienced some erosion in the percent of revenue from private payors, most likely because of high unemployment and improved patient mortality (commercial insurance does not cover more than 33 months of treatments). Moreover DaVita has experienced downward pressure on its realized payment rates from commercial payors. In 2011, commercial insurers accounted for 34% of DaVita's dialysis revenue, down from 35% in 2008, but only 11% of 2011 treatments were covered by commercial payors (10% at the end of the year). We expect commercial payors will continue to be very aggressive in their negotiations with dialysis-service providers.

In addition to reimbursement pressure from commercial payors, major changes in Medicare reimbursement are underway. A key feature of this new regime, which began in 2011, is a bundled payment, replacing separate reimbursements for services and injected pharmaceuticals. The bundled reimbursement contributed to a 2% decline in DaVita's revenue per treatment in 2011. Oral drugs are slated to be added to the bundle in 2014, which could place further pressure on profitability. The Medicare base reimbursement rate rose 2.1% in 2012, which we believe may not cover DaVita's cost increases. The 2011 Budget Control Act will result in a 2% across-the-board cut (sequestration) in Medicare reimbursement in 2013 unless the law is amended. We estimate this could reduce DaVita's 2013 revenue and EBITDA by about $100 million. Beginning in 2012, Medicare reimbursements will be partly linked to clinical outcomes for patients, primarily anemia management. A broader array of performance metrics will be added in 2014. We believe DaVita could benefit from this Quality Incentive Program. Overall, we believe the combined effects of Medicare changes in 2012 and beyond are not likely to significantly affect DaVita's credit metrics.

As of Dec. 31, 2011, DaVita served approximately 142,000 patients through a network of about 1,800 outpatient centers and 900 hospitals. Similar to some other health care firms with a "fair" business risk profile, DaVita has a strong position in a relatively narrow business with considerable risks. DaVita and Fresenius, each with about 30% to 35% of the U. S. dialysis market, are by far the leading players. The remainder of the market is fairly fragmented, although consolidation is occurring. DaVita's size and geographic diversity give it advantages over smaller competitors because it can more easily undertake increased spending for information technology infrastructure and it has leverage to negotiate with large commercial payors and suppliers. DaVita and 'BB+'-rated Fresenius SE & Co. KGaA have had similar returns on capital and EBITDA margins. We view Fresenius' business risk more favorably because it is substantially more diverse, both geographically and in the range of services and products it offers.

DaVita's EBITDA margin has been quite stable for at least six years, despite price pressure from third-party payors and changes in the Medicare reimbursement scheme. We expect this measure to remain around 19% to 20% (as reported) in the years ahead, reflecting DaVita's demonstrated ability to manage its costs, integrate acquisitions, and adapt to evolving third-party reimbursement. Profitability benefited from reduced drug utilization in 2010 and 2011, but we assume utilization has stabilized. Our base-case forecast indicates return on capital will remain in the 13% to 14% range.

As of Dec. 31, 2011, adjusted debt to EBITDA was 3.9x. Our adjustments include the capitalization of operating leases; we add stock compensation expense to EBITDA; and we deduct net income attributable to noncontrolling interests (NCIs) from EBITDA when measuring debt leverage. We expect adjusted leverage to remain above 3.5x and it may temporarily exceed 4.0x for acquisitions and/or share repurchases. We project the adjusted funds from operations (FFO) to debt ratio will remain approximately 20%. Given our expectations for acquisitions and shareholder returns, we do not expect debt reduction.

Liquidity

DaVita's liquidity is strong, underpinned by its consistent and substantial generation of DCF after distributions to NCIs. Internally generated funds easily finance capital expenditures and modest working capital requirements. We expect excess cash flow to be applied opportunistically to a mix of acquisitions and share repurchases. We assume the combination of stock buy-backs and acquisitions will be roughly $400 million to $500 million or more annually, compared with $1.4 billion in 2011.

Our view of DaVita's liquidity profile incorporates the following assumptions and expectations:

-- We expect sources of liquidity, mainly FFO, to exceed uses by about 1.5x over the next 12 months. We assume about $310 million of capital spending and a $130 million working capital increase in 2012.

-- We expect that net sources would be positive, even with an unlikely 30% drop in EBITDA. Moreover, DaVita could curtail share repurchases and acquisitions if liquidity was constrained.

-- As of Dec. 31, 2011, DaVita had $394 million of cash and $298 million of funds available from a $350 million revolving credit facility, after deducting $52 million committed for letters of credit.

-- As of Dec. 31, 2011, there was substantial headroom under DaVita's loan covenants and we expect this to continue.

Recovery analysis

Our rating on DaVita's senior secured debt is 'BB', one notch above the corporate credit rating, and our rating on its senior unsecured debt is 'B', two notches below the corporate credit rating. Our recovery rating on the senior secured debt is '2', indicating our expectation for substantial (70% to 90%) recovery of principal, and our recovery rating on the senior unsecured debt is '6', indicating our expectation for negligible (0 to 10%) recovery of principal, both in the event of payment default. For our complete recovery analysis, please see the recovery report on DaVita Inc., to be published following this report on RatingsDirect.

Outlook

Our outlook on DaVita is stable. We believe the company will continue to generate strong cash flow from its position as a market leader in the dialysis service sector, and it is well-placed relative to others to respond to the evolving reimbursement environment. We believe DaVita will aggressively execute substantial acquisitions and share repurchases, as it has in the past. However, if we are convinced that it will choose to direct cash to debt reduction, leading to lease-adjusted debt to EBITDA averaging about 3.5x on a sustained basis, we could raise our ratings on DaVita. If DaVita makes larger-than-expected debt-financed acquisitions or stock repurchases, or takes other shareholder-friendly actions that keep leverage above 5x, we could lower our ratings. Debt-financed stock repurchases of $1,630 million would boost adjusted leverage above 5.0x, based on 2011 EBITDA. Although not likely, we could also lower our ratings if adverse trends, possibly attributable to payor mix, reimbursements, or regulatory-based developments, weaken DaVita's business risk profile and significantly erode its profitability.

Related Criteria And Research

-- Credit FAQ: How Standard & Poor's Evaluates U.S. Health Care Service Companies That Invest In Joint Ventures, Oct. 20, 2011

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

...

ST. JOHN'S, NEWFOUNDLAND—Patients on peritoneal dialysis (PD) are at 51% higher risk of being hospitalized for infections than those receiving hemodialysis (HD), according to findings presented at the Canadian Society of Nephrology annual meeting.

“Higher risk of infection-related hospitalization among peritoneal dialysis patients is mostly explained by dialysis-related infections, which are for the most part peritonitis,” said primary investigator Jean-Philippe Lafrance, MD, of the University of Montreal. “This risk doesn't appear to be balanced by vascular-access-related infections among hemodialysis patients.”

He and his colleagues analyzed data from the Quebec health care insurance plan, Quebec hospital discharge summary databases, and the Canadian Organ Replacement Register. They analyzed information on all adults (except those who had already had a kidney transplant or fewer than three months' of follow-up data) with information in all three sets of databases who initiated chronic dialysis between January 2001 and December 2007. They investigators compared the characteristics of 915 PD patients in the resultant cohort of 5,858 patients to 915 matched HD patients.

The two groups of patients were similar with respect to all baseline characteristics the investigators examined, from age and gender to comorbidities and laboratory values.

Twenty-one percent of the PD patients had been hospitalized once in the previous year (not counting the hospitalization during which dialysis was initiated) compared with 16% of the matched HD patients. PD patients were also more likely than HD patients to have two or more and three or more hospitalizations (8% vs. 5% and 8% vs. 3%, respectively).

PD was associated with a nearly 2.9-fold higher risk compared to HD of hospitalization due to dialysis-related infections, a twofold increased risk of other hospitalizations due to other infections, including a 1.6-fold higher risk of hospitalization due to abdominal infections. However, PD also was associated with 70% and 40% lower probabilities of being hospitalized for septicemia or pneumonia, respectively.

In a previous retrospective cohort study of 168 patients initiating outpatient dialysis (71 on PD and 97 on HD), researchers at Sunnybrook Health Sciences Centre in Toronto found that patients who initiate outpatient PD do not have a significantly increased risk of infection-related hospitalization compared with patients who initiate outpatient HD, according to a report published in Peritoneal Dialysis International (2011;31:440-449). The study, however, showed that patients starting outpatient treatment on PD were significantly more likely than those starting on HD to be hospitalized for peritonitis.

...

Leaders in the dialysis community have released a report that outlines key findings and recommendations for better utilization of home dialysis as an alternative to in-center treatment.

The “Report of the Delegates” is a culmination of the first-ever meeting of the National Summit on Home Dialysis Policy held in Washington, D.C., on March 29. More than 50 clinicians, patients, and policymakers attended the meeting to address the disparities of treatment modalities for dialysis patients.

“Despite the significant lifestyle, clinical and economic advantages of home dialysis, currently less than 10% of U.S. dialysis patients receive treatment at home,” summit organizers wrote in the report.

The report contains 15 specific recommendations in areas of accessibility (patient education and training), accountability (programs to support home dialysis services), and aligning incentives (physician reimbursement policies). Among the recommendations, it urges federal policymakers to maintain parity between home and in-center dialysis treatment in Medicare reimbursement, encourage patient-to-patient mentoring and education, and align federal and state regulatory requirements for home therapies.

...

WIXOM, MI -- (Marketwire) -- 04/30/12 -- Rockwell Medical (NASDAQ: RMTI), a fully-integrated biopharmaceutical company targeting end-stage renal disease (ESRD) and chronic kidney disease (CKD) with innovative products and services for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis, announced today that it has completed patient enrollment in its PRIME clinical study, which is designed to investigate the reduction in the need for erythropoietin stimulating agents (ESA) in hemodialysis patients receiving Soluble Ferric Pyrophosphate (SFP) via dialysate.

Robert L. Chioini, Chairman and CEO of Rockwell, stated, "We are excited to achieve another important milestone in our SFP clinical development. The PRIME study is expected to generate compelling clinical data that we anticipate will differentiate SFP as an advanced iron-delivery therapy for hemodialysis patients, once FDA approved."

The PRIME study is a nine-month, multi-center study randomizing 100 patients equally to dialysate containing SFP-iron versus conventional dialysate. The primary objective of the study is to determine whether regular administration of SFP-iron via dialysate reduces the requirement for erythropoietin stimulating agents (ESAs) by maintaining iron balance and optimizing iron delivery. The primary end point is percent change from baseline in ESA dose required to maintain Hgb in the target range. Secondary endpoints include ESA response index (ERI), measures of oxidative stress, hemoglobin variability and amount of supplemental intravenous iron needed.

About Rockwell Medical:
Rockwell Medical is a fully-integrated biopharmaceutical company targeting end-stage renal disease (ESRD) and chronic kidney disease (CKD) with innovative products and services for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis. Rockwell's lead drug candidate for iron therapy treatment is called SFP. SFP delivers iron in a non-invasive, physiologic manner to dialysis patients via dialysate during their regular dialysis treatment. SFP is currently in ongoing Phase III clinical trials (CRUISE-1 and CRUISE-2) and addresses a $600M U.S. market. Rockwell's Calcitriol (Active Vitamin D) injection for treating secondary hyperparathyroidism addresses a $350M U.S. market.

Rockwell is also an established manufacturer and leader in delivering high-quality hemodialysis concentrates/dialysates to dialysis providers and distributors in the U.S. and abroad. These products are used to maintain human life by removing toxins and replacing critical nutrients in the dialysis patient's bloodstream. Rockwell's operating business is designed as a ready-made sales and distribution channel to provide seamless integration for its drug products into the commercial markets, Calcitriol and SFP upon FDA market approval.

Rockwell's exclusive renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are intended to deliver safe and effective therapy, while decreasing drug administration costs and improving patient convenience. Rockwell Medical is developing a pipeline of drug therapies, including extensions of SFP for indications outside of hemodialysis. Please visit www.rockwellmed.com for more information. For a demonstration of SFP's unique mechanism of action in delivering iron via dialysate, please view the animation video at http://www.rockwellmed.com/collateral/documents/english-us/mode-of-action.html.

Certain statements in this press release constitute "forward-looking statements" within the meaning of the federal securities laws. Words such as "may," "might," "will," "should," "believe," "expect," "anticipate," "estimate," "continue," "predict," "forecast," "project," "plan," "intend" or similar expressions, or statements regarding intent, belief, or current expectations, are forward-looking statements. While the Company believes these forward-looking statements are reasonable, undue reliance should not be placed on any such forward-looking statements, which are based on information available to us on the date of this release. These forward-looking statements are based upon current estimates and assumptions and are subject to various risks and uncertainties, including without limitation those set forth in Rockwell Medical's SEC filings. Thus, actual results could be materially different. Rockwell Medical expressly disclaims any obligation to update or alter statements whether as a result of new information, future events or otherwise, except as required by law.

Contact:
Michael Rice
Investor Relations
646-597-6979

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