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DaVita Thesis?


txlaw
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I have no plans on putting any money into DaVita, but I'm interested in seeing if any board members have a thesis on why BRK is so interested in the company.

 

Anyone want to provide such a thesis?  I know very little about the company.

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I have no plans on putting any money into DaVita, but I'm interested in seeing if any board members have a thesis on why BRK is so interested in the company.

 

Anyone want to provide such a thesis?  I know very little about the company.

 

I believe dialysis falls within Ted's circle of competence and he must really like the wacky CEO

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  • 2 weeks later...

Davita being accused of a massive overbilling fraud...

 

http://www.cnn.com/2012/11/30/health/medicare-fraud-case/index.html?hpt=hp_t3

 

Thanks. Not the best PR for Davita.

 

+ The Vainer Private Civil Suit started in 2008 and covers Vitamin D and Iron Agents

+ The Woodward Private Civil suit that was started in 2007 was settled recently for 55mln recently and related to EPO dosages

+ I'm not a huge fan of the 100mln spent to build the new HQ in Colorado. I don't know if that's a lot for HQ but it seems a bit high. Thoughts?

+ Kent Thiry does get paid well

+ If the claims from the Vainer suit are true I don't understand why the government is not involved in supporting the litigation.

 

 

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Berkshire Hathaway Enlarges DaVita Stake as Company Expands

2013-01-18 Forbes.com

http://www.forbes.com/sites/gurufocus/2013/01/18/berkshire-hathaway-enlarges-davita-stake-as-company-expands/?partner=yahootix

 

------

 

Why Ted Weschler Keeps Buying DaVita (DVA)

2012-11-09 GuruFocus.com

http://www.gurufocus.com/news/196687/why-ted-weschler-keeps-buying-davita-dva

 

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Ted Weschler has known DVA and has been buying DVA since 10+ years. He has no shortage of capital seeing as how he works for BRK now. He wants to buy DVA as much as possible without causing a mayhem, but seeing as how stock has been rising relentlessly, one has to wonder what does he think this company is worth?

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  • 3 months later...

I believe here's the thesis in a nutshell:

 

1- Returns on capital are very high. 

http://www.gurufocus.com/financials/dva

 

EBIT / (Net fixed Assets + Working Capital) is around 50%.  In other words, pre-tax ROIC is roughly 50%.

 

2- Davita is really well managed.  Ken Thiry became the CEO in 1999.  His asset allocation is top notch.  He buys back shares when they are cheap, uses stock as currency when it is expensive, etc. etc.

 

This is mostly a bet on management.  Thiry came in and turned the company around because the previous management team made a mess out of it.  If Thiry dies, it will be really bad for this company.  I don't think that Davita has a moat.

 

---

This is a wonderful business selling at an ok price.

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One of my better friend's father is one of the best kidney doctors in Sweden. I talked to him about companies providing dialysis and he suggests that "the more, the better" a dialysis treatment is. He suggested the trend of recent years that increased amount of treatment for dialysis patients is very likely to continue as we grow richer, as it leads to a noticable improvement in the well-being of the patients.

 

Sure, you shouldn't ask the barber whether you need a haircut, but I find that this thesis goes well with my basic knowledge in medicine.

 

I looked through a couple of 10-Ks for DVA, and I cannot say I understand the investment thesis at the current price (although I would rather bet on the ability of Ted than myself).

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DaVita enters standstill agreement with Berkshire Hathaway (BRK.B) -- 8K

Tuesday, May 07, 2013 08:35:55 PM (GMT)

 

 

Pursuant to the agreement, BRK.B agreed, subject to certain exceptions and to the termination provisions specified in the Standstill agreement, not to acquire beneficial ownership of the company exceeding 25% of the company’s then-outstanding common stock, and to certain other provisions respecting stockholders meetings, mergers and other matters specified therein.

Berkshire currently holds 14.2% of the outstanding shares of DVA according to a Form 4 filed on 4-Mar

 

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DaVita enters standstill agreement with Berkshire Hathaway (BRK.B) -- 8K

Tuesday, May 07, 2013 08:35:55 PM (GMT)

 

 

Pursuant to the agreement, BRK.B agreed, subject to certain exceptions and to the termination provisions specified in the Standstill agreement, not to acquire beneficial ownership of the company exceeding 25% of the company’s then-outstanding common stock, and to certain other provisions respecting stockholders meetings, mergers and other matters specified therein.

Berkshire currently holds 14.2% of the outstanding shares of DVA according to a Form 4 filed on 4-Mar

 

I'm going to speculate that Ted is going to build his position right near that 25% threshold if given more capital to put to use

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8K:

http://www.sec.gov/Archives/edgar/data/927066/000119312513204531/d533361d8k.htm

 

 

Standstill Agreement:

http://www.sec.gov/Archives/edgar/data/927066/000119312513204531/d533361dex991.htm

 

Section 1. Proposals.

(a) For any period (the “Standstill Period”) during which Investor beneficially owns ... 15% or more of the then-outstanding Common Stock, Investor shall not, directly or indirectly, (i) call, or seek to call, a meeting of the stockholders of the Company, (ii) submit any stockholder proposal ... to seek representation on the Company’s Board of Directors, or any other proposal to be considered by the stockholders of the Company, nor publicly recommend that any other stockholder vote in favor of, or otherwise publicly comment favorably about, or solicit votes or proxies for, any such proposal submitted by another stockholder of the Company, (iii) otherwise seek to control or influence the management, Board or policies of the Company, or (iv) nominate any directors for election at any meeting of stockholders of the Company.

 

(b) During the Standstill Period, Investor shall cause, for any meeting of stockholders of the Company, all shares of voting stock of the Company owned by Investor as of the record date, to be present for quorum purposes.

 

© From and after the Investment Authority Date, Investor shall cause any Excess Shares to vote or consent on any matter in the same proportion as the votes or consents of shares of the voting stock of the Company voted or consented with respect to such matter (excluding shares with respect to which the votes were withheld, abstained or otherwise not cast) and not beneficially owned by Investor, whether at an annual or special meeting of stockholders of the Company, by written consent or otherwise. In furtherance of the foregoing, Investor shall deliver to the Company upon the Company’s written request, with respect to any Excess Shares, executed proxies naming the proxies appointed by the Company, so that the Company may vote such Excess Shares in the proportional manner described in this Section 1©.

 

“Excess Shares” means any shares of voting stock of the Company beneficially owned by Investor in excess of 15% of the then-outstanding voting stock of the Company, and “Investment Authority Date” means the first date on which both (i) Warren E. Buffett is no longer Chief Executive Officer of Investor and (ii) R. Ted Weschler is no longer an investment manager of Investor.

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I haven't looked into the name for a few years, but here is my quick take.

 

The thesis seems simple:

1) Customer is trapped, once you start starting using dialysis you're going to need it for life or until you get a new kidney

2) Duopoly market - DVA and FMS dominate the market (at least in the US) - scale advantages make it unlikely for a new entrant to come in and undercut you on price.

3) Favorable demographic and lifestyle trends should provide a long-term tailwind

 

However, the biggest concern and the reason I would never invest in it is that you are reliant on the government. something like 60-70% of revenue is from Medicare. You are making the (IMO risky) assumption that Medicare doesnt decide to cut reimbursement rates. IMO that risk is too great. Also, with most healthcare fee for services, it is ripe for fraud. Over prescribing EPO or what not.

 

 

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1) Customer is trapped, once you start starting using dialysis you're going to need it for life or until you get a new kidney

I don't think that they are.  I believe that medicare customers are free to change clinics.  Allowing customers to change clinics is very important.  If they weren't allowed to change clinics, they would have a hard time going on vacation since they HAVE to find a city with a suitable dialysis clinic.

 

The government also wants to have competition amongst dialysis providers.  (Even if it's not a good idea???)

 

2- I don't really understand how all the Medicare and Medicaid rules and regulations work.  The government has numerous competing goals:

a- Reduce cost to taxpayers.  Quality care may reduce costs to taxpayers.

b- Ensure that patients receive quality care.  In theory, you can do this by giving bonus payments to clinics that deliver quality care.

c- Avoid fraud.  Usually when you transfer money to other people, fraudsters will figure out how to abuse the system.  If you allow bonus payments for quality care, then unscrupulous people will figure out how to game the system.  So Medicare might be layering on all these insane rules to stomp out fraud.  Unfortunately, they may not be doing a good job of ensuring quality care.

d- Sometimes the politicians interfere.  This can lead to really dumb decisions.  If they think that Medicare expenses can be cut (because they want to be seen as people who create efficiencies and cut out excessive spending and can balance a budget), then this could have reactions that causes overall costs to go up.  (e.g. dialysis clinics are forced to provide crappy care to stay in business, which affects the health of patients, which end up requiring really expensive treatment when they have health problems)

 

Apparently this leads to a crazy system with lots of dumb rules.

 

3) Favorable demographic and lifestyle trends should provide a long-term tailwind

It seems to me that Davita has grown much faster than the overall market.

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I didn't mean they are necessarily locked into Davita, but they will be a dialysis customer for life until they get a kidney transplant. The ultimate repeat customer business.

 

Vacation issue is one of the reasons why it makes sense to a have a duopoly. If I am a DVA/FMS user and I go on vacation or travel I am more comfortable going to a branch of the same company rather than trying to find a mom and pop no name dialysis clinic.

 

I think it is too easy to see a situation like sequestration where there could be 1-5% across the board medicare reimbursement cut that hits dialysis. If it was more reliant on commercial insurance or self pay I would agree that it is a wonderful business, however with the risk of Medicare cuts I am not so convinced.

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