Recently, DaVita Inc. (DVA) agreed to pay $55 million in a bid to settle a lawsuit, indicting it for overuse of Amgen Inc's (AMGN) Epogen, an Anemia drug used for increasing the red blood cell count in kidney patients. While the company maintains its stand that the charge is baseless and physicians employed by it are not guilty, it believes that a settlement is the most beneficial option for its shareholders. Apart from the settlement amount, the company will also have to pay attorney fees. The lawsuit was filed a decade ago in a district court in Texas by a whistleblower, who claimed that DaVita overused Epogen for almost 10 years. Although the government investigated into the mater but it did not take any action against the company.
Epogen is highly beneficial for patients suffering with kidney-related diseases as it increases the red blood cell count, which trims down the need for blood transfusions. However, it is also believed that the risk of stroke doubles with regular use of the drug, making its overuse detrimental for the patients' health.
As DaVita still stands by its anemia management policy and made it clear that the settlement does not translate into admission of guilt, the news does not seem to have reduced shareholders' confidence. The company's share price increased 0.09% to close at $97.71 on July 3, when the announcement was made.
Moreover, DaVita has adequate cash balance for the settlement payment. As of March 31, 2012, the company had cash and cash equivalents of $449 million.
However, DaVita is involved in various other lawsuits as well. In October last year, two law firms started investigations against the company regarding alleged over-billing of Medicare by the company. Going ahead, such charges could weigh on the company's financials.
DaVita, which competes with Lincare Holdings Inc. (LNCR) and HealthSouth Corporation (HLS), currently retains a Zacks #3 Rank, implying a short-term 'Hold' rating. We maintain a long-term 'Neutral' recommendation on the stock.
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