Good evening. My name is Debbie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita fourth quarter 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Thank you. Mr. Gustafson, you may begin your conference.
Thank you. Welcome everyone to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today are Javier Rodriguez, our CEO, Joel Ackerman, our CFO, LeAnne Zumwalt, Group Vice President, and Jim Hilger, our Chief Accounting Officer. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our fourth quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q.
Our forward-looking statements are based upon information currently available to us, and we do not intend and undertake no duty to update these statements. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.
Thank you, Jim. Good afternoon, everyone. We appreciate your interest in DaVita and look forward to your questions and comments. I will start with clinical highlights as a reminder of life-sustaining care that we provide to more than 235,000 people. While we discuss clinical outcomes in lowering the total cost of care, our goal is to improve our patients' quality of life. One specific example has been to focus on reducing infections in our patients. Dialysis patients are prone to infections, which can often lead to lengthy hospitalization stays and increase in mortality. I'm excited to report that our efforts have paid off. In 2019, we reduced the rate of bloodstream infections by 13% and improved the rate of peritonitis by 20% versus the prior year. This is a meaningful improvement that kept many of our patients out of the hospital.
Let me transition to our results and outlook for 2020. We had a strong performance in 2019. We met the EPS and free cash flow growth targets we set for the year. We're committed to achieving our 2020 financial guidance. In fact, we're raising our EPS target range by $0.50. Joe will provide the financial details on both the quarter and our 2020 guidance. Let me pull back for a few minutes to share our high-level views on clinical and on policy. We are in an exciting time for kidney care. We're bridging the transition of care from the nephrologist office to different sites of care. We're working with our payers to use predictive analytics to identify CKD patients with the highest risk of transition to ESRD.
Once we support these patients, we will work on avoiding or delaying the onset of kidney failure. We remain excited about Nephrology Care Alliance, the new physician-led entity with nearly 1,100 nephrologists that will be the vehicle to connect DaVita to the nephrologist practice. The goal is simple, provide world-class analytics and education to help physicians best deploy their time to care for the right person at the right time. For those patients who do transition to ESRD, we built a leading education platform to empower patients to choose to start on the right treatment modality for them. For patients who choose home modality, we continue to invest in our leading home platform, where we serve the most home patients of any provider. In 2019, we saw our highest growth ever in PD modality.
We're working to maintain our leadership in the home dialysis with a 2020 goal of achieving double-digit growth in the PD modality. Moving on to policy. We continue our multi-year journey towards integrated care. We're encouraged by the quality improvements that are evident in our demonstration, such as the ESCO. We're hopeful that there will be additional models and opportunities to scale integrated care for ESRD patients at national levels. We remain optimistic about the administration's view for value-based care models. We believe that the capabilities that we've built will support our collective goal to improve clinical outcomes while managing total cost. There's been a lot of recent conversation about Medicare Advantage in the 21st Century Cures Act. We would remind everyone that Congress passed this legislation with the intent of making additional insurance options available to Medicare-eligible patients, ESRD patients.
With respect to expectations of adoption, no one really knows what choices will be made by the patients. We continue to believe that the selection into MA will be more gradual. We look forward to working with planned partners to manage the care and the cost of these patients. In parallel, our advocacy efforts are focused on ensuring adequate funding in both Medicare fee-for-service and MA. As we've said before, we remain ready and eager to advance integrated care for Medicare fee-for-service population. Shifting to state policy, we will keep advocating for our patients in California and other states where some labor unions are pursuing policies that are not good for patients, costs, or the care delivery system. Now let me transfer it on to Joel, so he will provide additional details on the quarter and specifics on 2020 guidance.
Thanks, Javier. Before I begin, I'd like to point out that we've adjusted the first section of the press release this quarter. We hope this format will give investors easier access to some of the most important results that have historically appeared later in the release. I'll start with Q4 results and then move to 2020 guidance. We generated $2.9 billion of revenue in the quarter, an increase of 2.75% over Q4 2018. Our operating income was $463 million, which included approximately $67 million in profit related to Calcimimetics, resulting in an operating margin of 16%. Earnings per share from continuing operations was $1.86. Let me take you through some of the underlying drivers, starting with the components of the U.S. dialysis and lab segment. Non-acquired growth for the quarter was 2.1%, relatively flat with the prior two quarters.
Revenue per treatment was down sequentially by $1.10, which includes a $1.68 per treatment decrease in revenue attributable to Calcimimetics. Excluding Calcimimetics, RPT was up by $0.58. To recap performance for the full year 2019 versus guidance, which excludes the impact of Calcimimetics, we finished at the high end of our RPT guidance range of 0%- 1%. We fell outside of the very narrow range that we provided on commercial mix, and ended 2019 with a year-over-year decrease of approximately 20 basis points. Although this decline did not have a meaningful impact on our revenue per treatment. Combined patient care costs and dialysis and lab segment G&A expense was down approximately $2 per treatment quarter-over-quarter, driven primarily by lower compensation and benefits costs. Turning to Calcimimetics.
We generated operating income of approximately $67 million in the fourth quarter on revenue per treatment and cost per treatment of $12.86 and $4.19 respectively. For the full year, we generated approximately $220 million in operating income as we negotiated significant cost decreases on oral Calcimimetics. For 2020, we now expect approximately $40 million- $70 million of operating income from Calcimimetics, with approximately half of this to be realized in the first quarter, as we expect ASP reimbursement to decline in subsequent quarters. With that said, there is still significant uncertainty around this outlook given the complexity in the ASP methodology. Now turning to international. For the quarter, operating income was approximately $2 million, including an FX loss of $4 million. For the full year, we generated positive adjusted operating income of $2 million, excluding goodwill impairment and including an FX loss of $2 million.
Our effective tax rate on adjusted income attributable to DaVita from continuing operations for the quarter was 25.2% and was 27.5% for the full year. Our effective tax rate for the fourth quarter and the full year benefited from a decrease in our estimated state tax rate. Now on to cash flow. For the full year 2019, operating cash flow from continuing operations was $2 billion, and our free cash flow was $1.1 billion. Both operating cash flow and free cash flow were positively impacted by significant improvements in our DSOs and unusually low cash taxes in 2019. These two factors combined to improve cash flow during the year by approximately $300 million. We do not expect these to recur in 2020.
CapEx for the year was $728 million, slightly below the revised guidance range of $740 million-$780 million, and well below our initial guidance from the year of $800 million-$840 million. The better result in Q4 was due to the timing of certain projects that were pushed into 2020. Since October 1, 2019, we purchased almost 8.7 million shares at an average amount of $64.80 per share. As a result of our recent repurchases, we reduced our share count by approximately 41.3 million shares or 24.8% since the close of the DMG transaction in June 2019. This week, we expect to complete a repricing of our $2.7 billion term loan B that will reduce the interest rate on this tranche of debt by 50 basis points.
We now expect our debt expense to be approximately $90 million in Q1 2020, and then approximately $85 million per quarter in the subsequent quarters. I'll conclude with some comments on our guidance ranges for 2020. We are updating our 2020 adjusted earnings per share guidance by $0.50 per share to $5.75-$6.25. As a reminder, this includes the expected benefits from Calcimimetics, as well as the expected cost of ballot initiatives in California. Due to the timing of Calcimimetics that I mentioned and the expected timing of ballot-related costs in the second half of the year, we expect some fluctuations in earnings per share between quarters this year. Our revenue guidance for the year is $11.5 billion-$11.7 billion, and our operating income margin guidance is consistent with the target range of 13%-14% that we talked about at our Capital Markets Day.
We expect to generate approximately $600 million-$800 million of free cash flow this year. I will point out that cash flow is inherently subject to greater swings than is operating income due to the time of working capital and other items such as the timing of payroll cycle, tax payments, and intra-period changes in the collections of AR. This worked in our favor in 2019 and could swing the other way at some point in the future. Operator, let's now open the line for questions.
Certainly. Thank you. If you would like to ask a question, please press star followed by the number one on your phone, pick up your phone and record your name and company name clearly when prompted. To cancel your request, press star followed by the number two. Our first question will come from Justin Lake with Wolfe Research. Your line is now open.
Thanks. Good afternoon. I wanted to go through a couple of moving parts here. First, in terms of the higher EPS range year-over-year, is it fair to think about it as two-thirds coming from Calcimimetics benefit that wasn't in the numbers before, maybe the rest coming from lower debt costs? Maybe you could tell us any other moving parts, including California kind of delaying implementation of the legislation out there on the ACA?
Sure. Justin, you've got the basics right. Calcimimetics is the biggest component of this, and a decrease in our expected cost for AB 290 plays into this as well. Those are the two big things I'd call out. There are a lot of other moving pieces in here. Our share count moves around as the stock price goes up, and a whole bunch of other things related to core OI. I would say Calcimimetics and AB 290 are the two big things to call out.
Great. Maybe you can just give us an update on, is there any change in terms of the sustainability of Calcimimetics, in your mind, beyond 2020? Do you still expect that to migrate down to kind of neutral? Do you have a new AB 290 number for us? I think the old one was 25-40.
Sure. On Calcimimetics, we still expect under the current TDAPA, that it'll migrate down to zero over the course of 2020. As you can see, we've not been able to predict how ASP would come down. The positive numbers for 2020 is the result of ASP not coming down the way we expected it would three months ago. I don't know that our visibility on how the rest of the industry has behaved, combined with some of the black box natures of ASP, have improved. We do think this has to get down pretty close to zero by the end of the year. In terms of AB 290, we don't have a new number. Clearly, the number will be smaller. That said, there will be some legal costs associated with AB 290, and there certainly is the possibility that it gets implemented towards the end of the year.
The numbers are getting to a size where I don't think it's worth calling out a specific number, but clearly below the 25-40.
Okay, just one last follow-up before I jump back in the queue. The Calcimimetics, is it fair to say here that you think costs have come down to a kind of normal range, and we just need to track the ASP.
Yes.
See how close it is to that $4 number.
Yeah. I'm not saying costs couldn't continue to drift down a little bit, but the real action for 2020 is on the trajectory of ASP.
That's helpful. Thanks, guys.
The next question will come from Kevin Fischbeck with Bank of America. Your line is now open.
Great. Wanted to ask a little bit about this year's guidance, kind of in the context of your 2022 guidance, because it looks like you're kind of there in a lot of your metrics. I guess from midpoint to midpoint, only looking for 2% revenue growth per year. I guess just want to understand that jumping point off. Is that still the right point, or are there things in here that now maybe there's a different way to think about the long-term trajectory? I guess trying to think about this year's guidance versus that 22 number. I guess the 22 number is going to have a headwind of Calcimimetics coming out, then I guess your guidance still assumes that AB 290 goes into place. Just want to make sure that that's one thing we have to figure out if we're trying to.
Yeah. You're spot on both those factors of Calcimimetics coming out of here and AB 290 going into place. In terms of some of the other things I'd call out n n the cash flow number, 2019 was surprisingly high. We called out in the script two of the factors, which are the DSOs having come down as well as cash taxes. I'd also note cash flow was helped by Calcimimetics as well and the impact that had on OI. That happened faster than expected. We also benefited to some extent in the year by some of the CapEx we were expecting late in the year getting pushed into 2020. The 2020 number might get impacted by that to the negative. There's certainly the possibility that at the end of 2020, we'll see some push into 2021 t hat could flip either way.
The one other thing I'd call out is the margins. We spoke about margins of 13% to 14%. We're not changing that view of the world. As you think about what the margins could be in 2022, I'd stick with that number.
Okay, that's helpful. Appreciate the preliminary comments on MA, I guess, it sounds like some of the managed care companies are starting to worry this is going to be an issue for them into 2021. I was wondering if you could talk about your conversations that you're having with MA companies. Is there pushback on rates or anything that you would highlight there that could impact or change the impact it's going to have on you over the next few years?
Thanks, Kevin. This is Javier. We've gotten a fair amount of questions on MA, and so I think it's useful to just pull up a little and revisit the origin of it. Number one, this is the only patient population, the ESRD population, that was excluded from having the right to pick MA, and so it was fixing a deficiency in the system. Number two, what is our role going forward? Our role is to just make sure that our patients are well-informed so they can make the best decision individually. Point number three is everybody's trying to size it, and when you try to size something like this, there's two variables, of course. One is rate and the other one is volume. What we've said is that our rate is above Medicare but substantially below commercial. We're not going to give any more on that variable.
The one that's most undecided at this juncture is the pickup of the volume. All of you know the same as we do, which is there's a lot of variables at play. One individual has a primary insurance, a secondary insurance. Do they have Medigap coverage, et cetera? We continue to think that it's reasonable to think that penetration will reflect the overall market. In addition, many people believe that our patients will have a quick trigger to pick an insurance when there's so many complicated variables, and they have, many of them, been in Medicare for quite some time. Status quo might just keep going. We're literally asking, how will our patients interpret their benefits?
We don't know, many people are continuing to size that it's going to be some kind of an aggressive movement, and we continue to think that it'll be more gradual.
I guess that's definitely helpful. I guess two thoughts on that. Is there anything that you would think of as you think about that rate differential that you currently get that makes you think that for whatever reason, it wouldn't be sustainable? I guess, obviously, it sounds like managed care companies want to bring that delta down over time, but is there any reason why you think that could be the case or that maybe you could keep those economics but maybe change the way that you actually contract with managed care, take more risk, things like that?
I would think it as an opportunity for us to expand the way we talk to our contracts, and to our payer providers. It's an exciting time where we're all aligned and trying to make sure that we have integrated care for our patients. We're leaning in and trying to see how we can best serve them and be a partner. If they think that the MA volume is going to be higher than us, that might also be an opportunity to contract in that way. We're excited. Obviously, they want lower rates. We would like higher rates, and that dance is never going to change. The question is: Can we all get creative on coming up on a win-win situation?
Okay. I guess to your point about the shift into MA, point well taken, that inertia tends to be the way people tend to act when it comes to health insurance because it's kind of daunting to shift for that. I would assume that the fact that you're able to meet with these people three times a week, explain what their current options are, would potentially change that dynamic. When we do our analysis in the 20 states where MedSup isn't available for people under 65 in an affordable way, I would think that adoption would be quite large. The question ends up being, though, about where in those states where it is available, is there a rationale for those patients to switch from a MedSup plan into an MA plan?
Similarly, for a dual-eligible population, which is 40% of your Medicare book, is there an incentive for those patients to move? Why would either of those classes see the benefit of an MA plan?
Yeah. The first premise that you discussed, which is access to the patient, is worth exploring because you might be more talented than us, but when you talk to people about their insurance, it's not usually like Netflix or anything. They don't want to keep watching the next episode. People usually start to glaze over a bit and say, when you talk about deductibles, when you talk about co-insurance, when you talk about those kind of things, it is not normal vernacular for most of these folks. They've been on Medicare for some time, and it works for them. You got to start to explain that maybe it's more restrictive, maybe they can't see their doctor, but it's got other benefits, and you get into it, and then you can see that some people just tune out.
The question is: Is it our obligation to go back at them? The answer, I think, is no. If you're satisfied with your insurance, we just have to make sure that you know that you have a new option. On all these, on the duals, sometimes that could actually have very little out-of-pocket. You might not want to switch that situation. It is very specific to each individual. Again, the net of it is that we think we're not going to look very different than the overall population, but there's the range that we're all playing with.
Just last question. Is there a time period when you feel like you will know how that shift is going? Will you know during the open enrollment period in Q4, or do you actually have to wait till January for the patient claims to actually start coming in under the new payers?
I think we're going to have to wait till January. We will have some preliminary stuff. Unlikely that we're going to want to predict how that'll play out until we see it, since it's the first time we're experiencing it.
All right, great. Thank you.
Thank you, Kevin.
The next question will come from Pito Chickering. Your line is now open with Deutsche Bank.
Hey, guys. Thanks for taking my questions. A few ones here. On the 2020 revenue guidance, what are you guys assuming in terms of organic treatment growth and revenue per treatment? How does the commercial reimbursement look for 2020?
Sure. Hey, Pito. On NAG, we're guiding to 1.5%-2.5%. In terms of revenue per treatment, we're not going to guide to RPT anymore in the level of specificity we have in the past. That said, I think it's safe to say going forward that it'll look similar to what it looked like in the recent past. The same dynamic in terms of commercial RPT, Medicare RPT, and mix should play out next year the way they have in the recent few years. The one big change, obviously, is on Medicare fee-for-service reimbursement. We got that in 2019, and we see that continuing forward. Again, as we think about how we want to guide, and this is consistent with what we raised at Capital Markets Day, more of a focus on margin than on any of the individual inputs.
That said, if you think about the inputs of RPT and the subcomponents there, as well as cost per treatment and the other things, we don't see anything particularly different next year to call out than what we've seen in the recent past.
Great. On the 2020 margin guidance, let me ask this a different way. If we exclude Calcimimetics for 2019, the operating income margin is like 12.5%. If you exclude $47 million of Calcimimetics for 2020, it looks as though you're guiding to about 50 basis points improvement in 2020 versus 2019. First quarter 2019 was a very easy comp, so if you exclude Calcimimetics for 2019 and 2020 and easy comp of first quarter 2019, how should we think about core operating income margin in 2020 versus 2019?
Pito, you lost me there on your math, but I'll tell you the way I think about my math, and I apologize if this doesn't tick and tie to what you asked, but you can follow up with Jim afterwards. For adjusted normalized numbers, this excludes Calcimimetics, we came in just north of 14% in 2019. We expect that. Again, we're not guiding to OI. Again, we said that at Capital Markets Day. We're sticking with that. That said, either through a top-down analysis using revenue and our margin guidance or bottoms-up through EPS, you can all do the math and come up with a range.
I'm going to give some high-level thoughts relative to what's probably the middle of the range of what you should be thinking about, which should show you a little bit of margin compression in 2020 versus 2019, although still very much in that 13%-14% range we talked about at Capital Markets Day. If I had to point out what is driving that, you've got a little bit of AB 290 in there. You've got the continued pressure on labor costs associated with the strong environment we're in. We are also looking at making some investments in the form of operating costs, investing in our future around things like home, things like integrated kidney care, things like data and analytics.
If you put all those things together, you'd come up with a little bit of margin pressure in 2020 over 2019, but still very much in the range of what we talked about at Capital Markets. Is that helpful?
Yes, very much so, which actually sort of the last question that at the annual state you talked about capital growth with CapEx coming down to 650 in 2022, and you just mentioned sort of kidney start home-based programs. Can you quantify how many of yo ur centers have separate home treatments options today, and how many are freestanding home centers as well?
I don't know the answer to that.
We'll follow up on it.
We can follow up with you on that, Pito.
Great. Thanks so much, guys, I appreciate it.
The next question will come from Andrew Mok with Barclays. Your line is now open.
Hi, good afternoon. Just wanted to follow up on the 2020 guidance components, given all the moving parts. You raised EPS guidance by $0.50. It sounds like that increase is largely accounted for by the benefit from Calcimimetics and the reversal of AB 290. Is it fair to say that the underlying assumptions on share repurchase remain the same, given the $2.4 billion of share repurchase you did in 2019, combined with the nice run in the stock price the last few months? How should we think about the size and cadence of share repurchase in 2020?
Sure. The fundamentals of our share repurchase philosophy haven't changed in terms of focusing on intrinsic value and ensuring we're not buying above what we believe intrinsic value is. Also, with the general expectation to stay most of the time, although not all of the time, within our leverage guidance of 3-3.5 times. I will take a second here to note that you'll see the leverage number in the press release is around 3.1, which would bring it in at the low end of our range. If you think about that excluding Calcimimetics, which I think is a better way to think about it would put it at the higher end of our range. With all that said, our philosophy on buybacks has not changed.
I think what has changed since we spoke to you in November is the stock is up from the high 50s, low 60s to now in the 80s, and that does impact our share buyback thinking really in two fundamental ways. One is that the dollars we would apply to share buybacks will just buy that many fewer shares because the stock price is up. Second, as we think about intrinsic value and comparing that to where the stock is, where the stock is will fundamentally impact how we think about buybacks. We're not going to give you any foresight in what we plan to do. We've always shied away from that. I wanted to give you kind of a bit of an update there on how we're thinking about things.
Great. Appreciate the color. Second question on the home dialysis front. The mandatory model from the executive order was supposed to go into effect last month, and now that's delayed. Are you hearing anything out of D.C. on why that model got delayed? Does a temporary or even permanent delay of the model impact your strategy to increase home penetration?
No. In general, I think the executive order had a lot in it, and they asked for comments, and the community was very united on its views. We are glad that the administration has taken its time because we want a good outcome rather than meeting a deadline. No to the other question, which is, while policy of course impacts, at the end of the day, the patient and the physician pick the modality, and that's what's driving the movement to home, people picking it or not picking it as opposed to any policy changes at this juncture.
Okay, great. Thanks.
Thank you.
The next question will come from Steve Tanal with Goldman Sachs. Your line is now open.
Good afternoon, guys. Thanks for the question. Wanted to go back to the 2021 rule change. I guess where I'm struggling with the idea that penetration of ESRD patients should reach the overall market is just this notion that today, MA penetration of ESRD patients is already 25% for the market at large, despite the fact that they can't freely enroll in the plan. Wouldn't that tell us that this patient panel probably prefers MA and that penetration could exceed 35% over time? I guess I know we're still anchoring to that, looks like CMS last week with the changes in the advance notice for MA rates took their forecast up to 33 in 2021 and then going to 41 by 2024, then 42 thereafter. Obviously a much more optimistic outlook than you guys have. Any thoughts on those pieces there?
Steve, I think that all of the opinions are quite reasonable, and we don't proclaim to be right. We are all staring at the same data as to economics, deductibles, out-of-pocket max, sort of coordination of care networks, narrow networks or broader networks. When we put all the variables in place, we just think that in general, we think that it'll take a little bit longer for people to settle in to the choice than others that think that it'll be what I call a very efficient and effective market. We, of course, could be wrong. There is that range that is, let's call it the low, the base case and the high case, and we don't have any additional insight that you or CMS doesn't. There's no detailed information that we're relying on.
Helpful. Okay, I just heard you correctly, Joel, in terms of making sure your patients are aware of their options. I imagine that applies to all states regardless of whether there's guaranteed issue for MedSup or not. Is that correct?
Yes.
Okay. I guess I wanted to also ask about another part of that proposed rule to the extent you guys have had time to go through all this, but the network adequacy proposals, there's a few things in there. I won't go through all of them here, but some could be presumably read as maybe mitigating some of the market power in dialysis. How do you guys think about that dynamic in general? I guess I'd leave it open-ended there. I don't want to sway any or share my view, I guess.
Appreciate it, Steve. Obviously, network adequacy is critical in any disease state. When you are signing up for a product, you want to make sure that it's got coverage so that if you end up signing up and then you have ESRD, that you don't end up having some kind of restricted network. Of course, it matters whether it's in there or not. The plans have been quite vocal, and from our perspective, what we want to do is going back to our conversation earlier, is we want to change the dynamics with our payer partners, so that they see what we're doing and how we're adding value so that they do want to contract with us in a way that's a win-win.
Perfect. Helpful. Maybe one more on this, and then I'll yield. Just going back to the treatment deltas, the MA versus fee for service. Appreciate that you guys don't want to give a certain difference, but maybe you can comment on how much variability there is in that spread and what factors dictate DaVita's willingness to contract for lower versus higher spreads with different MA plans.
Well, I appreciate the question, Steve, but I think you probably know it had low odds of being answered. Since every plan is staring right now as to how they want to contract with us. Actually, even if I try to answer it and be helpful, the contract is very specific to each plan and their ability to take risk and our ability to take risk. It's very specific. Unfortunately, I can't give you more detail on that.
That's fine. Thanks a lot. Appreciate it.
Thank you.
The next question will come from Whit Mayo with UBS. Your line is now open.
Hey, thanks. Good afternoon. Just a couple here on Calcimimetics. Your guidance to $40 million-$70 million of OI this year, 50% of that is falling in the first quarter, which implies about 25% of today's run rate of $220 million in the first quarter. I'm just curious what you're basing that on. Is that based off of ASP for the quarter today? How much visibility do you have into the first quarter contribution at this point, I guess, is what I'm asking?
We've got pretty good visibility with the ASP number came out, I think, in December. Not perfect visibility, so on Q1 we've got that. The trajectory of what that looks like going forward, though, is where we don't have perfect visibility, and we won't know ASP for Q2 for a little bit a while now.
Okay. It looks like that's about a 60% sequential decline off the fourth quarter for ASP. Is that right?
Hold on, Whit, there are other factors that go into that in terms of the cost decline, the changing mix between Sensipar and Parsabiv, and Parsabiv cost differential. I'm not sure you can get as clean a number as you'd like from that.
I mean, presumably the ASP number's available, can you disclose what it is for the quarter?
Yes. It's down a little bit more than 40%.
Okay. Some other factor would be driving your cost up to lower the OI by 60%.
Well, there are other factors besides cost because there's a mix issue between the oral and the IV as well.
Yep. Got it. Okay. Thinking about the remaining $50 million or, not $50 million, but the remaining earnings, how should we think about the progression of that earnings? Is it fall ratably throughout the year? I don't know, just any help. I mean, I know you have about as much visibility into this as we do.
Yeah. If you think about it getting cut in half each quarter going forward, that's a reasonable algorithm to use, and then it goes to zero by the end of the year.
Okay.
That's not a prediction. That's just to help you all with your modeling.
Yeah. Is there a scenario where by the time the industry sort of sees the benefit of Calcimimetics zero out that you are still carrying some level of earnings from Calcimimetics given that you've presumably been buying below the market for some time?
Unlikely, just because the numbers get so small in terms of the cost.
Okay.
I think the more interesting question about Calcimimetics is ultimately how it gets bundled.
Bundled, yeah.
The TDAPA stuff will play out relatively quickly.
Okay. Just a couple other quick ones here. Just Joel, maybe any factors influencing your decision to bring the range down?
Let me grab that. This is Javier. We continue to look at the macro ranges. We just think that that is the right place to land. We're continuing to invest in our missions and our IT and all our operations to simplify patient placement. At the end of the day, what we're focusing is ensuring that we have the discipline and capital so that we have profitable growth. We're not going to chase volume. It's just not the right thing for us. We're comfortable with that range of one and a half to two and a half.
Okay, thanks.
Just as an FYI, my memory has me right, that is not a change from capital markets. We had it at one and a half to two and a half, but I could be wrong, so let's check that.
Thank you. The next question comes from Gary Taylor with JPMorgan. Your line is open.
Hi, good evening. Just a couple questions left for me. The first is going back to the question about the ETC, the mandatory demonstration that's been delayed. Do you have any visibility on when that would start? Are you incurring any costs to prepare for it? I presume since that model had some dialysis center reimbursement cuts, which you could potentially earn back since this is delayed, any potential financial impact is not contemplated in the 2020 guidance.
The short answer is we do not have any more information than any of you. We were given an opportunity, just like all providers, to give our opinions and insights, and we did, and they're processing that, and we have not heard back. We are not incurring any costs right now associated with it, and it was not embedded in our guidance. Right now you're even-steven, if you will. There's no changes.
All right. Thanks. My last one to Joel, I just wondered if you would perhaps just review and clarify for us on either an EPS basis or a dollar basis what actually is in 2020 for advocacy cost. I know in the third quarter you bumped that up $0.50 or call it $87 million pre-tax. That, I think, was on top of what you view as your recurring sort of normal advocacy. Then with the AB 290 delay, maybe some of that cost came back in your direction. Maybe just some help on when we think about the 2020 guide, how much above sort of what you'd call your normal advocacy spend is built into 2020?
Sure. Nothing's really changed in that, Gary. There hasn't been any interplay between 2020 ballot initiative spend and AB 290. They're pretty independent. The $0.50 per share is the right number, and that's over and above the $30 million baseline that we plan to spend year in, year out. The one correction I would make to your numbers is this ballot initiative cost is not tax-deductible.
Right.
Your $87 million pre-tax is overstated because my guess is you got to that calculation assuming this was tax-deductible.
Yeah, I recall you told us that. No, more like $60 million-$65 million range, probably.
We're sticking with $0.50 a share.
All right. Thank you.
The next question is from Justin Lake with Wolfe Research. Your line is now open.
Thanks. Just figured I'd run through what's left on my question list here, if that's all right with you guys. First on the cash available for deployment at year-end. I think if recollection is correct, you guys typically want to run around $500 million at the parent at quarter end. Is it fair to think about you guys having another $500 million, give or take?
I think it's-
Of deployable cash kind of at year-end. Is that right?
Yeah, that's about right. $500 million is typically what we want to have in the system. Yeah, the $600 million is the number above that.
Okay, that's helpful. Joel, you spent time talking about the intrinsic value kind of coming into repo and given you did a tremendous amount of repo at a really attractive price for the benefit of shareholders. Now that the stock's in the eighties, it looks like you bought a little bit less back at those levels. Is there anything we should read into your view of the intrinsic value here at the current price and how you expect to buy back stock? Could you give us a kind of at-the-moment update?
Yeah. We've never really been willing to talk about what our views of intrinsic value are at any moment in time, and I don't expect to deviate from that here. I think the one thing I would point out is intrinsic value is a moving target. It's not something that stays static, and it's impacted by our results, and it can be impacted by our buybacks and everything else. I think what our views of intrinsic value were six months ago aren't necessarily the same as our views of intrinsic value today.
One dynamic, Justin, that is rarely talked about publicly also is that we have big blackout periods. You have plans and you have restrictions and whatnot. What you want to do is not look at one quarter or two quarters, but overall what is our track record. I think you see our track record over time. It's quite fluid, consistent with what Joel said.
That absolutely makes sense. Thanks. Just quickly on your commercial mix, Joel, you said it was down 20 basis points year-over-year, but not really a material impact on revenue per treatment. Can you just give us some more color on that, given how key that metric is?
Yeah, look, not every commercial payer is created equal, if the mix comes from payers with lower rates, it has much less impact on our RPT than a payer who's at an average rate.
Would you say this is, instead of it being just normal, aging of the population type of thing, did you proactively walk away from some contracts that were lower priced, or was that just the way things fell?
I would say that, what Joel started off with on an earlier question still holds, which is there's no new dynamic, and the ecosystem/negotiation is relatively stable. There was no big decision one way or another, and the world played out the way it did.
Okay. Just a few couple others here. One, just to make sure we understand, you're not giving OI guidance, but back to Pito's question on margins, core margins, X kind of moving parts are down a little bit year-over-year, revenue's up a little bit. Core OI, Calcimimetics changes, things like that, is effectively flat year-over-year within your guidance. Is that a reasonable way to think about it?
I'm reluctant to get drawn into the OI guidance question because we're not guiding on OI. That said, I think, again, you can look at the ranges top-down or bottoms-up. I would say it's fair to say that at the middle of the ranges, you should expect some OI growth year-over-year.
At core, like ex moving parts.
With margin compression, which would say it's not going to grow at the rate of revenue.
Okay.
That's core excluding Calcimimetics and other noise.
Got it. Maybe quick commentary, I think the industry was going to run its own ballot initiative in California and then decided to back off that. Is there some reason why you decided to back off, or do I have that wrong?
No, you have it right. I think the right way to think about it, Justin, is very early on, you have to explore all your options. There's some filing restrictions, et cetera. We were exploring our option, making sure that we had everything at our disposal. After evaluating it, we did not think that that was something that we should pursue, that it's not in the best interest of our strategy, and that it's cleaner to go right after it, literally straight at it, as opposed to doing a countermeasure.
Okay. Thanks for all the time, guys.
Thank you, Justin.
The next question will come from Maggie Jiang with Bank of China, New York branch. Your line is open.
Thank you for taking my call. My question here is, what is your priority in terms of the international expansion? I see that there are about 241 centers in the international as of 2018. I'm not sure if that number goes up in 2019.
Sure. Our priorities for international are similar to our priorities in the U.S., which is capital-efficient growth. We continue to see it as a growth business. We've continued to deploy capital there in the markets that we see as having the best opportunities, and those are opportunities where we can either acquire things at attractive rates or build de novos at attractive rates, and where we have an opportunity to add value. Growth in 2019 was relatively in line with our expectations. We see 2020 continuing along that path.
Okay. In terms of the long-term goal for the international business, just because different regions would have different type of reimbursement system, affordability, and customers, clientele, would you expect the international profitability versus your core in U.S.?
I think that'll vary very much country by country. As you noted, some countries have better reimbursement, others less so. I think it'll be a bit of a mix, and where it winds up relative to the U.S. will depend a lot on the different mix in the different countries and where we choose to prioritize our investments. It's hard to predict now what the ultimate margin will be relative to the U.S. margin.
Okay. It seems that the revenue coming from the international is roughly about 4.5%. However, the growth, if I just purely look at Q4 2018 versus Q4 2019, the growth from the international revenue is 6.45%. That seems to be a brighter spot than the aggregate revenue growth around 2.7%. Do you think that you'll continue to approach international, particularly in China? However, on the other hand, we do see net operating loss from international.
Yes, I do think we're going to continue to invest in international, whether it grows faster than the U.S., we're not giving specific guidance on that, although I think looking at the past is a reasonable guide to the future there. Yes.
I see. Then in terms of your footprint in Asia, I see there are a few centers in Taiwan and China. You're also working with your APAC JV. Can you just give me a sense in terms of what's your business model, and how do you approach China or Greater China?
We generally don't get into too much detail on any individual country. I'm going to pass on that one.
Thank you.
Thank you, Maggie.
Speakers, there are no questions in queue at this time.
Well, I want to thank you all for investing the time. We look forward to talking to you again. We're going to do our hardest to deliver on all that we committed. Thank you. Talk again soon.
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