Financial Analyst Reaction to Bundling Mixed

The dialysis bundle rule is in, and financial analysts are starting to weigh in on its impact on the business side of dialysis.

Jefferies & Co. analyst Arthur Henderson said the final rule appears to be a win for DaVita. “ That’s because the fee paid to dialysis centers will decline only 2 percent to $250 to $260 per treatment and oral drugs the centers dispense will continue to be billed separately until 2014,” he told Bloomberg in a July 27 article.

Citi maintained its “buy” rating on DaVita, and said the “ESRD final rule was better than the 9/09 Proposed rule (namely the under-funded oral rx was delayed), but not perfect, as CMS finalized a 3.1% transition payment adjustment that we had hoped would be delayed or reduced (prompting 2011 EPS reductions vs our model). The increase in the unadjusted base rate from $198 to $229 materially reduces coding uncertainty and downside risk. Our thesis that DVA will materially grow operating margins under the bundled payment system (begins 1/1/11) is intact and we reiterate our rating."

Piper Jaffray analysts Mark Arnold and Bradley Fisher were more conservative and rated DaVita as “neutral” and said, “In total, the only real change to the average estimated bundled payment is the exclusion of certain oral drugs until 2014. Pending further commentary from the company, we maintain our Neutral rating and continue to view the implementation of bundling as a neutral event for DVA."

Amgen and Genzyme, and other pharmaceutical companies making oral drugs, saw a reprieve when Medicare delayed the inclusion of oral drugs into the bundle until 2014. Geoffrey Porges, an analyst for Sanford C. Bernstein & Co., told Bloomberg that the delay “gives Amgen and Genzyme a transitional period and allows them to maintain current revenue from their drugs.”

It seems Amgen could take a big hit with the bundle, though, and could see Epogen sales decline 38 percent as the rule is phased in, RBC Capital Markets analyst Michael Yee told Bloomberg. Epogen sales were $2.6 billion last year. Yee told Bloomberg that anemia drugs “were a profit center, now they’ll be an expense. Now there will be some incentive to use the minimal amount.”

He added that “the cost of anything more than the minimum would be borne by the dialysis providers.”