DaVita Inc.



601 Hawaii Street
El Segundo, California 90245
U.S.A.
Telephone: (310) 536-2400
Toll Free: (800) 310-4872
Fax: (310) 536-2675
Web site: http://www.davita.com

Public Company
Incorporated:
1979 as Medical Ambulatory Care, Inc.
Employees: 15,300
Sales: $2.29 billion (2004)
Stock Exchanges: New York
Ticker Symbol: DVA
NAIC: 621492 Kidney Dialysis Centers

DaVita Inc. is the second largest dialysis services provider in the United States. The company operates approximately 660 outpatient dialysis centers in 37 states and the District of Columbia, serving roughly 54,000 patients. DaVita also provides acute inpatient dialysis services through contracts with 370 hospitals. The company's largest concentration of outpatient clinics is located in California, where it operates 95 facilities.

Origins

DaVita operated under three different names during its first quarter-century of existence, but under each identity the company pursued the same corporate objective: providing service to patients with chronic kidney failure. Chronic kidney failure, technically known as end-stage renal disease (ESRD), was treatable in three ways. A kidney transplant offered the only cure for ESRD; without a successful transplant, the disease was irreversible and ultimately fatal. A shortage of kidney donors severely limited the number of transplants, however. Only 5 percent of ESRD patients in the United States could hope for a transplant, leaving dialysis—the removal of waste and toxins from the blood—as the only treatment option for a vast majority of ESRD patients. With dialysis, there were two treatment options: peritoneal dialysis and hemodialysis. Peritoneal dialysis usually was performed in the patient's home, while hemodialysis, the most common form of ESRD treatment, typically was performed in a hospital or an outpatient facility. Of those on dialysis in the United States, an estimated 92 percent received hemodialysis, a treatment that used a dialyzer to remove toxins, fluid, and chemicals from the patient's blood and another device that controlled external blood flow and monitored the patient's vital signs. Hemodialysis typically was administered three times a week to an individual patient. DaVita and its two predecessor variants, Medical Ambulatory Care, Inc. and Total Renal Care, Inc., concentrated on providing hemodialysis at company-operated facilities, targeting the vast majority of all ESRD patients.

In macabre terms, providing service to ESRD patients represented a growth industry. Specifically, the number of patients requiring chronic dialysis services in the United States increased at a 9 percent compounded annual rate during DaVita's first decades in business, jumping from 66,000 in 1982 to 200,000 in 1995. By 2002, there were 309,000 individuals in the nation who required DaVita's services. Aside from the escalating need for dialysis treatment, DaVita, from a business standpoint, was aided by another trend. Historically, outpatient dialysis facilities composed a loosely-knit, fragmented industry, with ownership of the centers held by groups of nephrologists or by hospitals. During the 1980s and 1990s, however, a new breed of operators began to emerge: multi-center dialysis companies with national, if not global, aspirations of market domination. During the 1990s in particular, the industry began to consolidate, as companies of DaVita's ilk became more prominent within the dialysis services industry. For example, seven major multi-facility dialysis providers owned 45 percent of the 3,000 facilities in operation in 1996, a sharp increase from the 30 percent they operated four years earlier. During this same four-year period, the number of facilities owned by independent physicians declined from 37 percent to 27 percent as physicians—nephrologists, generally—sought relief from adhering to changing government regulations and administrative burdens. Hospitals, too, were bowing out of providing dialysis services, choosing, like much of corporate America, to outsource the management of their facilities. In 1992, 33 percent of dialysis facilities were based in hospitals. In 1996, 28 percent of the country's facilities fell under the purview of hospitals.

The two trends of the dialysis industry—growth in the number of ESRD patients in the United States and the consolidation of facility ownership—worked in DaVita's favor, serving as the impetus for its creation and, ironically, nearly causing its ruin. The company began in 1979 as part of another company, National Medical Enterprises, Inc. Santa Monica-based National Medical, perhaps foreseeing the changes to come in the dialysis services industry, formed Medical Ambulatory Care, Inc. to own and to operate its hospital-based dialysis services business as freestanding facilities. National Medical also directed Medical Ambulatory to acquire and to internally develop additional dialysis facilities in its markets. Medical Ambulatory was an early entrant into the national race for market share, expanding at a modest pace throughout the 1980s.

1994 Spinoff

DaVita, as Medical Ambulatory, spent its first 15 years operating under the control of a parent company. It did not begin to record strong growth until it gained its independence. Against the backdrop of an industry in the midst of consolidating, Medical Ambulatory was spun off from National Medical in a leveraged buyout led by the subsidiary's management and DLJ Merchant Banking Partners, L.P. in August 1994. The transaction created Total Renal Care Holdings, Inc. and its subsidiary, Total Renal Care, Inc., the new identity for Medical Ambulatory. When Total Renal Care entered the dialysis services industry on its own, the company operated 37 outpatient facilities and maintained 28 inpatient contracts with hospitals, the extent of its expansion under the aegis of National Medical (following a federal investigation, National Medical moved its headquarters to Dallas and changed its name to Tenet Healthcare Corp.).

Total Renal Care attacked expansion with ferocity once it was on its own, taking its cue from its new leader, Victor M.G. Chaltiel. Chaltiel was a veteran of the healthcare industry, having compiled an impressive résumé that included top executive positions at several well-known companies. Before joining Total Renal Care in 1994, Chaltiel served as chief operating officer of Salick Health Care Inc. between 1985 and 1988. Next, he served a four-year term as chairman and chief executive officer of Total Pharmaceutical Care Inc., leaving in 1993 to assume the office of chief executive officer of Abbey Healthcare Group Inc. Under Chaltiel's charge, Total Renal Care began adding substantially to its portfolio of dialysis facilities and hospital contracts. The company nearly doubled in size in little more than a year, adding 31 outpatient facilities and 20 inpatient contracts with hospitals by the end of 1995. For Chaltiel, the progress by this point was merely a prelude to far more ambitious plans, for which he prepared by completing an initial public offering (IPO) of stock in October 1995. The IPO raised $107 million, giving Chaltiel a portion of the money to fund his ambitious plans.

In the two years following its IPO, Total Renal Care became one of the largest contenders for market dominance in the United States. By the end of 1996, the company controlled a network of 134 outpatient facilities, having added 66 new facilities during the year. It strengthened its business with hospitals as well, signing 39 inpatient contracts during the year for a total of 59 management agreements. The expansion achieved during 1996 was unprecedented in scale, but Chaltiel soon established a new benchmark to measure the company's expansion, by completing a deal that positioned Total Renal Care near the top of its industry. In November 1997, the company announced that it had agreed to acquire its closest competitor, Renal Treatment Centers. The $1.3 billion all-stock transaction nearly doubled Total Renal Care's size. The two companies also had expanded internationally, adding a piece of the overseas market to the combined entity. Total Renal Care had expanded first in Guam before either establishing or acquiring facilities in Puerto Rico and Europe in the months leading up to its acquisition of Renal Treatment Centers. Renal Treatment Centers, based in Berwyn, Pennsylvania, had established facilities in Argentina, operating, in total, 164 centers in 23 states, the District of Columbia, and Argentina. Total Renal Care, at the time the acquisition was announced, operated 194 freestanding dialysis centers in 18 states, the District of Columbia, and abroad.

Chaltiel's acquisition tightened up the national race for market share considerably. As Total Renal Care absorbed the operations of Renal Treatment Centers, it drew close to the second largest competitor in the United States, Lakewood, Colorado-based Gambro Healthcare, the U.S. subsidiary of a Swedish renal care company, Gambro AB. Total Renal Care and Gambro Healthcare each controlled approximately 15 percent of the U.S. market. The market's leading competitor was a German company, Fresenius Medical Care AG, which controlled 25 percent of the U.S. market. Chaltiel, intent on overtaking his competitors, commented on the acquisition in a November 27, 1997 interview with Modern Healthcare. "We will now have the critical mass necessary to ensure our position as the leading independent provider of dialysis services in the United States and the resources to rapidly expand." His confidence soon faded, however. The acquisition that vaulted Total Renal Care into the industry elite nearly led to the company's collapse, bringing the Chaltiel era to a disastrous conclusion.

Company Perspectives:

The name DaVita is an adaptation of an Italian phrase meaning, "he/she gives life." Everyday, in all of our clinics, we believe our name reflects our purpose.

Total Renal Care's aggressive expansion caught up with it after the Renal Treatment Centers purchase. The acquisition doubled the company's patient and staff base overnight, putting an enormous strain on its infrastructure. Often, accounts were uncollected and patients were billed incorrectly, as the company's 600-person billing and bookkeeping office in Tacoma, Washington, struggled in vain to support the vastly larger network of dialysis facilities. Further, debt escalated, reaching $1.5 billion in 1999—the consequence of the numerous acquisitions that fueled Total Renal Care's expansion from fewer than 40 facilities to nearly 500 facilities during the previous five years. In 1999, the company's situation quickly deteriorated. In the spring, it announced that its earnings would fall short of expectations, causing its stock to plummet in value and triggering shareholder unrest. Exacerbating matters, the company defaulted on its loans to creditors, leaving it teetering on the brink of insolvency. Before the year ended, Chaltiel and the company's chief financial officer resigned.

Turnaround Beginning in 1999

Total Renal Care's bid to become the largest dialysis services company failed spectacularly at the end of the 1990s. One analyst, who referred to the Chaltiel-led organization as "a disaster of a company" in an October 23, 2000 interview with the Los Angeles Business Journal , also commented: "All they did was buy things instead of focus on running the company." Chaltiel's replacement arrived in October 1999, inheriting a company with profound problems that required wholesale changes. Kent J. Thiry, who had spent the previous decade leading a healthcare services company named Vivra Incorporated, assumed the responsibility of saving the company, realizing that it needed to be thoroughly revamped to have any chance to compete in the years ahead. Thiry divested nearly all of the company's international operations and he ploughed money, technological resources, and new management into the company's beleaguered Tacoma office. He began negotiating with Total Renal Care's lenders, hoping to win their trust. After making a $35 million payment, Thiry was able to obtain a new line of credit, giving the company the financial fuel to continue its rise in the dialysis services market. Once all the fundamental changes were made, Thiry let 600 members of the company's mid- and upper-management decide on one final change at a meeting in June 2000. The managers voted on a new name, selecting DaVita Inc. as the new name for the old Total Renal Care. "We are very much a new company," Thiry explained in an October 23, 2000 interview with the Los Angeles Business Journal. "The previous company was almost exclusively focused on shareholders, and our new mission is to be the provider, partner, and employer of choice. We realize that we have to satisfy our shareholders with a reasonable return, but that is not our primary mission."

DaVita continued to expand under Thiry's rule, but unlike earlier years, the company focused on building its infrastructure as well. The company's stock value responded well to Thiry's commitment "to be the provider, partner, and employer of choice," recovering from the precipitous drop recorded during the final months of Chaltiel's leadership. In mid-1998, the company's stock was trading for more than $30 per share before beginning its rapid decline, plummeting to $2.06 per share by the spring of 2000. When it emerged under the DaVita name, the company's stock debuted at $10.25 per share and began climbing toward $50 per share during Thiry's first five years of leadership, a period highlighted by relatively small acquisitions and a disciplined approach to growth. When Thiry acquired the 24 clinics operated by Physicians Dialysis, Inc. in September 2004, it was the largest acquisition completed during his tenure. Within months, however, he would complete the largest acquisition in the company's history, orchestrating a deal that outstripped by far the size of Chaltiel's Renal Treatment Centers purchase.

By 2004, DaVita ranked as the second largest provider of dialysis services in the United States. The company served more than 45,000 patients through nearly 600 clinics and through contracts with 300 hospitals, trailing only Fresenius Medical Care in the race for market share. Gambro Healthcare ranked just behind DaVita, followed by another competitor playing a prominent role as a consolidator, Renal Care Group, which controlled 9 percent of the U.S. market. Thiry, who had acquired 120 centers during the previous five years, greatly changed the dynamics of the race among the four contenders when he brokered a deal that would give DaVita 565 new clinics overnight. In December 2004, he announced that he had reached an agreement to acquire Gambro Healthcare in a $3 billion deal that would enable DaVita to overtake Fresenius Medical Care. The merger, combining DaVita's 664 clinics with Gambro Healthcare's 565 clinics, promised to create a new towering giant in the U.S. dialysis services market, presenting a threat to Fresenius Medical Care that did not go unanswered. In May 2005, Fresenius Medical Care announced that it had agreed to acquire Renal Care Group, a transaction that promised to return the German company to the leadership position. Once the two proposed mergers were completed, the race for dominance would be a contest between DaVita and Fresenius Medical Care, setting the stage for the ultimate battle in an industry shaped by consolidation.

Key Dates:

1979:
DaVita's earliest predecessor, Medical Ambulatory Care, is formed as a subsidiary of National Medical Enterprises, Inc.
1994:
Medical Ambulatory Care is spun off as Total Renal Care Holdings, Inc.
1995:
Total Renal Care Holdings completes its initial public offering of stock.
1997:
Total Renal Care Holdings announces its acquisition of Renal Treatment Centers.
1999:
After struggling to absorb Renal Treatment Centers, the company appoints Kent Thiry as its new chief executive officer.
2000:
Total Renal Care Holdings changes its name to DaVita Inc.
2004:
DaVita announces the acquisition of Gambro Healthcare.

Principal Subsidiaries

DaVita Nephrology Medical Associates of California, Inc.; DaVita Nephrology Medical Associates of Illinois, P.C.; DaVita Nephrology Medical Associates of Washington, P.C.; DaVita Nephrology Associates of Utah, L.L.C.; DaVita - Riverside, LLC; DaVita - West, LLC; Physicians Choice Dialysis of Alabama, LLC; Physicians Choice Dialysis, LLC; Physicians Dialysis Acquisitions, Inc.; Physicians Dialysis of Lancaster, LLC; Physicians Dialysis of Newark, LLC; Physicians Dialysis Ventures, Inc.; Physicians Dialysis, Inc.; Physicians Management, LLC; Renal Treatment Centers - California, Inc.; Renal Treatment Centers - Hawaii, Inc.; Renal Treatment Centers Illinois, Inc.; Renal Treatment Centers, Inc.; Renal Treatment Centers - Mid-Atlantic, Inc.; Renal Treatment Centers - Northeast, Inc.; Renal Treatment Centers - Southeast, LP; Renal Treatment Centers - West, Inc.; Total Renal Care, Inc.; Total Renal Care of Colorado, Inc.; Total Renal Care North Carolina, LLC; Total Renal Care of Utah, L.L.C.; Total Renal Laboratories, Inc.; Total Renal Research, Inc.

Principal Competitors

Fresenius Medical Care Aktiengesellchaft; Gambro AB; Renal Care Group, Inc.

Further Reading

Alva, Marilyn, "DaVita Inc. El Segundo, California; Dialysis Clinic Owner Makes Full Recovery," Investor's Business Daily , January 21, 2005, p. A6.

Bowe, Christopher, "DaVita Pays $3 Billion for Gambro's U.S. Clinics," Financial Times , December 8, 2004, p. 21.

Brinsley, John, "Management Change Gives New Vigor to Health Firm," Los Angeles Business Journal , October 23, 2000, p. 38.

Cole, Benjamin Mark, "Total Renal Care Slates Secondary Offering," Los Angeles Business Journal , April 22, 1996, p. 12.

"DaVita Completes Acquisition of Physicians Dialysis, Inc.," Blood Weekly , September 30, 2004, p. 77.

"DaVita to Acquire Physicians Dialysis, Inc.," Blood Weekly , August 19, 2004, p. 83.

Eckart, Kim, "California-Based Kidney Dialysis Provider Resurfaces with New Name," News Tribune , October 8, 2000, p. B3.

Marcial, Gene G., "There's New Life at DaVita," Business Week , July 21, 2003, p. 90.

Snow, Charlotte, "Renal-Care Biggies Plan Merger," Modern Healthcare , November 24, 1997, p. 20.

—Jeffrey L. Covell



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