Making A Difference In Dialysis (FMS,DVA,NXTM)

By Dean Lundell | August 16, 2007 AAA

Kidney failure is a terrible condition to suffer through. End-stage patients have two options; dialysis or a kidney transplant. Since the list of organ donors is painfully short, dialysis is often the only option. These treatments can be three to five times a week for hours each day. We're going to look at three companies who provide the equipment, drugs and facilities needed to help renal failure patients lead as normal and productive a life as possible.

Improving Mortality Rates
Fresenius Medical Care Corporation (NYSE:FMS) is one of the dominate forces in this market. The company is a world leader with about 2,000 outpatient clinics, three-quarters of which are in the Unites States. FMS owns roughly one-third of the total number of dialysis clinics in North America and it treats over 150,000 patients. The firm's products are sold to customers in about another 100 countries.

FMS is a market heavy weight with a market capitalization of almost $13.9 billion and annual sales of nearly $8.5 billion. The company's size and technological prowess give it economies of scale to not only generate a 12.3% return on equity, but more importantly give its patients a 7% to 10% lower mortality rate then they would otherwise have.

Fresenius wants to expand internationally, hoping to achieve a 35% global market share. The major downside is that the company is dependent on Medicare and Medicaid reimbursements. A recent acquisition, while making it a world-class operation also increased its debt load by $4.1 billion. Fortunately or unfortunately, this is a burgeoning market with a captive audience.

A Growing Market
Davita (NYSE:DVA) is also in the renal care business. This company provides a dialysis solution to roughly 100,000 patients suffering from chronic kidney failure through 1300 outpatient clinics. DVA also manages in-patients at about 800 hospitals.

Davita is not a small-time operation. It has almost $6 billion in market capitalization and generating just over $5.1 billion in sales. And sales are expanding at an impressive rate: DVA's revenue growth has averaged 24.2% for the past five years, 34.3% for the prior three years and last year increased a whopping 64.1%. It is no wonder Davita's return on equity is 24.7%

Davita recently acquired Gambro Healthcare which had been a customer of Fresenius Medical Corporation. How this particular maneuver will play out is unknown - stay tuned.

Do It Yourself Dialysis
NxStage Medical (Nasdaq:NXTM) has developed a home care solution for dialysis patients. The potential market for this technology is impressive. Of the 300,000 people that have to undergo treatment, 90% have to visit a clinic or hospital. This new technology is considerably less bulky and more user friendly than previous systems. This new system takes on even more significance with the backing of Davita.

NXTM is a relatively new company, it went public in late 2005, so net profits could be awhile in coming. Although at present the firm's return on equity is almost -60% you should also realize the company's revenue increased just over 247% year-over-year.

Even with Davita's backing for the next several years, NXTM is up against two industry heavyweights; Fresenius Medical Care and Baxter Labs (NYSE:BAX) the leader in peritoneal dialysis (a form of home dialysis that rivals NxStage's hemodialysis) that could develop its own technology. NxStage has this one product or system so the risk of going head to head with giant firms is a risky venture.

Not Going Away
Treating renal failure is serious business and one that is not going away. With the vanguard of the baby-boomers turning 60 this past year, this looks like a bull market. All these shares have done fairly well. NXTM and DVA have both increased by roughly 25% over the past two years, but FMS is the star. Fresenius Medical Care has risen about 70% during that same period.

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