| DAVITA INC Item 1A Risk Factors |
| This Annual Report on Form 10-K contains statements that are forward-looking statements within the meaning of the federal securities laws |
| These statements involve known and unknown risks and uncertainties including the risks discussed below |
| The risks discussed below are not the only ones facing our business |
| Please read the cautionary notice regarding forward-looking statements in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation” |
| If the average rates that commercial payors pay us decline, then our revenues, earnings and cash flows would be substantially reduced |
| Approximately 35prca of our current dialysis revenues are generated from patients who have commercial payors as the primary payor |
| The majority of these patients have insurance policies that pay us on terms and at rates materially higher than Medicare rates |
| Based on our recent experience in negotiating with commercial payors, we believe that commercial payors will continue to negotiate for lower payment rates as a result of general conditions in the market, recent and future consolidations among commercial payors, our acquisition of DVA Renal Healthcare, and other factors |
| In addition, DVA Renal Healthcare contracts with commercial payors, which on average provide for lower rates than our historical commercial rates |
| The integration of DVA Renal Healthcare’s operations may lead to increased volatility in payment rates from commercial payors as a result of reconciling and integrating existing contracts with commercial payors |
| If the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our revenues, earnings and cash flows |
| If the number of patients with higher-paying commercial insurance declines, then our revenues, earnings and cash flows would be substantially reduced |
| Our revenue levels are sensitive to the percentage of our patients with higher-paying commercial insurance coverage |
| A patient’s insurance coverage may change for a number of reasons, including as a result of changes in the patient’s or a family member’s employment status |
| For a patient covered by an employer group health plan, Medicare generally becomes the primary payor after 33 months, or earlier if the patient’s employer group health plan coverage terminates |
| When Medicare becomes the primary payor, the payment rate we receive for that patient shifts from the employer group health plan rate to the Medicare payment rate |
| If there is a significant reduction in the number of patients under higher-paying commercial plans relative to government-based programs that pay at lower rates it would have a material adverse effect on our revenues, earnings and cash flows |
| Future declines, or the lack of further increases, in Medicare payment rates would reduce our revenues, earnings and cash flows |
| Approximately one-half of our current dialysis revenues are generated from patients who have Medicare as their primary payor |
| The Medicare ESRD program pays us for dialysis and ancillary services at fixed rates |
| Unlike most other services covered by Medicare, the Medicare ESRD program has not provided for regular inflation increases in payment rates |
| Increases in operating costs that are subject to inflation, such as labor and supply costs, have occurred and are expected to continue to occur regardless of whether there is a compensating increase in payment rates |
| We cannot predict with certainty the nature or extent of future rate changes, if any |
| To the extent these rates decline or are not adjusted to keep pace with inflation, our revenues, earnings and cash flows would be adversely affected |
| Changes in the structure of, and payment rates under, the Medicare ESRD program could substantially reduce our revenues, earnings and cash flows |
| The Medicare composite rate is the payment rate for a dialysis treatment, including the supplies used in those treatments, specified laboratory tests and certain pharmaceuticals |
| Other services and pharmaceuticals, including EPO (a pharmaceutical used to treat anemia, a common complication associated with ESRD), vitamin 18 ______________________________________________________________________ [19]Table of Contents D analogs and iron supplements, are separately billed |
| Changes to the structure of the composite rate and separately billable payment rates became effective January 1, 2006 as Medicare moved payment rates for pharmaceuticals from average acquisition cost to average sale price plus 6prca |
| Future changes in the structure of, and payment rates under, the Medicare ESRD program could substantially reduce our revenues, earnings and cash flows |
| CMS continues to study the ESRD payment system through a number of demonstration projects which will take place over the next few years |
| Pharmaceuticals are approximately 35prca of our current total Medicare revenues |
| If Medicare begins to include in its composite payment rate the pharmaceuticals, laboratory services or other ancillary services that it currently pays separately, or if there are further changes to or decreases in the payment rate for these items without a corresponding increase in the composite rate, it would have a material adverse effect on our revenues, earnings and cash flows |
| Changes in state Medicaid programs or payment rates could reduce our revenues, earnings and cash flows |
| Approximately 5prca of our current dialysis revenues are generated from patients who have Medicaid as their primary coverage |
| When state governments face increasing budgetary pressure, they may propose reductions in payment rates, limitations on eligibility or other changes to Medicaid programs |
| If state governments reduce the rates paid by those programs for dialysis and related services, limit eligibility for Medicaid coverage or adopt changes similar to those adopted by Medicare, then our revenues, earnings and cash flows could be adversely affected |
| Changes in clinical practices and payment rates or rules for EPO and other pharmaceuticals could substantially reduce our revenues, earnings and cash flows |
| The administration of EPO and other pharmaceuticals accounts for approximately 35prca of our current total dialysis revenues |
| Changes in physician practice patterns and accepted clinical practices, changes in private and governmental payment criteria, the introduction of new pharmaceuticals and the conversion to alternate types of administration could have a material adverse effect on our revenues, earnings and cash flows |
| For example, CMS has issued a new payment coverage policy for EPO which will be effective April 1, 2006 |
| This new policy restricts payments based on EPO doses for certain patients and may affect physician prescription patterns as they adopt the new policy, which could have a negative impact on our revenues, earnings and cash flows |
| Additionally, there is a risk that certain of our fiscal intermediaries may choose to interpret the guideline in a manner that further limits payments and thus negatively impacts our revenues, earnings and cash flows |
| Adverse developments with respect to EPO and the use and marketing of Aranesp^® could materially reduce our earnings and cash flows and affect our ability to care for our patients |
| is the sole supplier of EPO and may unilaterally decide to increase its price for EPO, subject to certain contractual limitations |
| Although our agreement with Amgen for EPO pricing continues for a fixed time period and includes potential pricing discounts depending upon the achievement of certain clinical and other criteria, we cannot predict whether we will continue to receive the discount structure for EPO that we currently receive, or whether we will continue to achieve the same levels of discounts within that structure as we have historically achieved |
| In addition, our contract with Amgen provides for specific rebates and incentives that are based on patient outcomes, process improvement, data submission, purchase volume growth and some combination of these factors |
| Failure to meet or exceed the targets and earn the specified rebates and incentives could have a material adverse effect on our earnings and cash flows |
| An increase in the cost of EPO could have a material adverse effect on our earnings and cash flows |
| Amgen has developed and obtained FDA approval for Aranesp^®, a pharmaceutical used to treat anemia that may replace EPO or reduce its use with dialysis patients |
| Unlike EPO, which is generally administered in 19 ______________________________________________________________________ [20]Table of Contents conjunction with each dialysis treatment, Aranesp^® can remain effective for between two and three weeks |
| In the event that Amgen begins to market Aranesp^® for the treatment of dialysis patients, we may realize lower margins on the administration of Aranesp^® than are currently realized with EPO In addition, some physicians may begin to administer Aranesp^® in their offices, which would prevent us from recognizing revenue or profit from the administration of EPO or Aranesp^® to those physicians’ patients |
| A significant increase in the use of Aranesp^® could have a material adverse effect on our revenues, earnings and cash flows |
| The investigation related to the subpoena we received on March 4, 2005 from the US Attorney’s Office for the Eastern District of Missouri could result in substantial penalties against us |
| We are voluntarily cooperating with the US Attorney’s Office for the Eastern District of Missouri with respect to the subpoena we received on March 4, 2005, which requested a wide range of documents relating to our operations, including documents related to, among other things, pharmaceutical and other services provided to patients, relationships with pharmaceutical companies, financial relationships with physicians and joint ventures and the related requests for additional documents related to specific medical director and joint venture arrangements and certain patient records relating to the administration and billing of EPO we received in October 2005 and February 2006 |
| To our knowledge, no proceedings have been initiated against us at this time, although we cannot predict whether or when proceedings might be initiated or when these matters may be resolved |
| Compliance with the subpoena requires management attention and significant legal expense |
| In addition, criminal proceedings may be initiated against us in connection with this inquiry |
| Any negative findings could result in substantial financial penalties against us, exclusion from future participation in the Medicare and Medicaid programs and criminal penalties |
| The investigation related to the subpoena we received on October 25, 2004 from the US Attorney’s Office for the Eastern District of New York could result in substantial penalties against us |
| We are voluntarily cooperating with the US Attorney’s Office for the Eastern District of New York and the OIG with respect to the subpoena we received on October 25, 2004, which requires production of a wide range of documents relating to our operations, including DaVita Laboratory Services |
| DVA Renal Healthcare received a similar subpoena on November 4, 2004 |
| To our knowledge, no proceedings have been initiated against us or DVA Renal Healthcare at this time, although we cannot predict whether or when proceedings might be initiated or when these matters may be resolved |
| Compliance with the subpoenas will continue to require management attention and legal expense |
| In addition, criminal proceedings may be initiated against us and DVA Renal Healthcare in connection with this inquiry |
| Any negative findings could result in substantial financial penalties against us and DVA Renal Healthcare, exclusion from future participation in the Medicare and Medicaid programs and criminal penalties |
| The pending federal review related to the subpoena we received in May 2002 from the US Attorney’s Office for the Eastern District of Pennsylvania could result in substantial penalties against us |
| We are voluntarily cooperating with the Civil Division of the US Attorney’s Office for the Eastern District of Pennsylvania and the OIG in a review of some of our historical practices, including billing and other operating procedures, our financial relationships with physicians and pharmaceutical companies, and the provision of pharmaceutical and other ancillary services, including laboratory and other diagnostic testing services |
| The US Attorney’s Office has also requested and received information regarding certain of our laboratories |
| We are unable to determine when these matters will be resolved, whether any additional areas of inquiry will be opened or any outcome of these matters, financial or otherwise |
| Any negative findings could result in substantial financial penalties against us and exclusion from future participation in the Medicare and Medicaid program |
| If we fail to adhere to all of the complex government regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows |
| Our dialysis operations are subject to extensive federal, state and local government regulations, including Medicare and Medicaid payment rules and regulations, federal and state anti-kickback laws, the Stark II physician self-referral prohibition and analogous state referral statutes, and federal and state laws regarding the 20 ______________________________________________________________________ [21]Table of Contents collection, use and disclosure of patient health information |
| The regulatory scrutiny of healthcare providers, including dialysis providers, has increased significantly in recent years |
| Medicare has increased the frequency and intensity of its certification inspections of dialysis centers in recent years |
| For example, we are required to provide substantial documentation related to the administration of pharmaceuticals, including EPO, and, to the extent that any such documentation is found insufficient, we may be required to refund any amounts received from such administration by government or private payors, and be subject to substantial penalties under applicable laws or regulations |
| In addition, fiscal intermediaries have increased their prepayment and post-payment reviews |
| We endeavor to comply with all of the requirements for receiving Medicare and Medicaid payments and to structure all of our relationships with referring physicians to comply with the anti-kickback laws and the Stark II physician self-referral law |
| However, the laws and regulations in this area are complex and subject to varying interpretations |
| For example, none of our medical director agreements establishes compensation using the Stark II safe harbor method; rather, compensation under our medical director agreements is the result of individual negotiation and, we believe, exceeds amounts determined under the safe harbor method |
| If an enforcement agency were to challenge the level of compensation that we pay our medical directors, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse effect as a result of a challenge to these arrangements |
| Because of regulatory considerations unique to each of these states, all of our dialysis operations in New York and some of our dialysis operations in New Jersey are conducted by privately-owned companies to which we provide a broad range of administrative services |
| These operations accounted for approximately 6prca of our 2005 dialysis revenue |
| We believe that we have structured these operations to comply with the laws and regulations of these states, but we can give no assurances that they will not be challenged |
| If any of our operations are found to violate these or other government regulations, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings and cash flows including: • Suspension or termination of our participation in government payment programs; • Refunds of amounts received in violation of law or applicable payment program requirements; • Loss of required government certifications or exclusion from government payment programs; • Loss of licenses required to operate healthcare facilities in some of the states in which we operate, including the loss of revenues from operations in New York and New Jersey conducted by privately-owned companies as described above; • Reductions in payment rates or coverage for dialysis and ancillary services and related pharmaceuticals; • Fines, damages or monetary penalties for anti-kickback law violations, Stark II violations, submission of false claims, civil or criminal liability based on violations of law, or other failures to meet regulatory requirements; • Claims for monetary damages from patients who believe their protected health information has been used or disclosed in violation of federal or state patient privacy laws; • Mandated practice changes that significantly increase operating expenses; and • Termination of relationships with medical directors |
| If our joint ventures were found to violate the law, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings and cash flows |
| As of December 31, 2005 we owned a controlling interest in approximately 70 dialysis related joint ventures, representing approximately 15prca of our dialysis revenue |
| Because our relationships with physicians are governed by the “anti-kickback” statute contained in the Social Security Act, we have sought to structure our joint venture arrangements to satisfy as many safe harbor requirements as we believe are reasonably possible |
| However, our joint venture arrangements do not satisfy all elements of any safe harbor under the federal anti-kickback statute |
| Based on the exceptions applicable to ESRD services, we believe that our joint venture arrangements and operations materially comply with the Stark II law |
| The 21 ______________________________________________________________________ [22]Table of Contents subpoena we received from the United States Attorney’s Office for the Eastern District of Missouri on March 4, 2005, includes a request for documents related to our joint ventures |
| If our joint ventures are found to be in violation of the anti-kickback statute or the Stark provisions, we could be required to restructure the joint ventures or refuse to accept referrals for designated health services from the physicians with whom the joint venture centers have a financial relationship |
| We also could be required to repay amounts received from Medicare and certain other payors by the joint ventures pursuant to prohibited referrals, and we could be subject to monetary penalties and exclusion from government healthcare programs |
| If our joint venture centers are subject to any of these penalties, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings and cash flows |
| We may be subject to liability claims for damages and other expenses not covered by insurance that could reduce our earnings and cash flows |
| The administration of dialysis and related services to patients may subject us to litigation and liability for damages |
| Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in connection with a claim that is outside the scope of any applicable insurance coverage, including claims related to contractual disputes, professional and general liability claims and claims from commercial payors and other third parties relating to DVA Renal Healthcare’s settlement with the Department of Justice |
| We currently maintain programs of general and professional liability insurance |
| However, a successful professional liability, malpractice or negligence claim in excess of our insurance coverage could have a material adverse effect on our earnings and cash flows |
| In addition, if our costs of insurance and claims increase, then our earnings could decline |
| Market rates for insurance premiums and deductibles have been steadily increasing |
| Our earnings and cash flows could be materially and adversely affected by any of the following: • Further increases in premiums and deductibles; • Increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; and • An inability to obtain one or more types of insurance on acceptable terms |
| If businesses we acquire have liabilities that we are not aware of, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows |
| Our business strategy includes the acquisition of dialysis centers and businesses that own and operate dialysis centers, as well as other ancillary businesses |
| Businesses we acquire may have unknown or contingent liabilities or liabilities that are in excess of the amounts that we estimated |
| Although we generally seek indemnification from the sellers of businesses we acquire for matters that are not properly disclosed to us, we are not always successful |
| In addition, even in cases where we are able to obtain indemnification, we may discover liabilities greater than the contractual limits or the financial resources of the indemnifying party |
| In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows |
| If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, then our revenues, earnings and cash flows would be substantially reduced |
| Many physicians prefer to have their patients treated at dialysis centers where they or other members of their practice supervise the overall care provided as medical directors of the centers |
| Additionally, both current and former medical directors have no obligation to refer their patients to our centers |
| If a medical director agreement terminates, whether before or at the end of its term, and a new medical director is appointed, it may negatively impact the former medical director’s decision to treat his or her patients at our center |
| Also, if the quality of service levels at our centers deteriorates, it may negatively impact patient referrals and treatment volumes |
| 22 ______________________________________________________________________ [23]Table of Contents Our medical director contracts are for fixed periods, generally three to ten years |
| Medical directors have no obligation to extend their agreements with us |
| We may take actions to restructure existing relationships or take positions in negotiating extensions of relationships to assure compliance with the safe harbor provisions of the anti-kickback statute, Stark II law and other similar laws |
| These actions could negatively impact the decision of physicians to extend their medical director agreements with us or to refer their patients to us |
| If the terms of any existing agreement are found to violate applicable laws, we may not be successful in restructuring the relationship which could lead to the early termination of the agreement, or force the physician to stop referring patients to the centers |
| The level of our current and future debt could have an adverse impact on our business |
| We have substantial debt outstanding, including debt we incurred to finance the DVA Renal Healthcare acquisition |
| In addition, we may incur additional indebtedness in the future |
| The high level of our indebtedness, among other things, could: • make it difficult for us to make payments on our debt securities; • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes; • expose us to interest rate fluctuations to the extent we have variable rate debt; • limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; • place us at a competitive disadvantage compared to our competitors that have less debt; and • limit our ability to borrow additional funds |
| If additional debt financing is not available when required or is not available on acceptable terms, we may be unable to grow our business, take advantage of business opportunities, respond to competitive pressures or refinance maturing debt, any of which could have a material adverse effect on our operating results and financial condition |
| We will require a significant amount of cash to service our indebtedness |
| Our ability to generate cash depends on many factors beyond our control |
| Our ability to make payments on our indebtedness and to fund planned capital expenditures and expansion efforts, including any strategic acquisitions we may make in the future, will depend on our ability to generate cash |
| This, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control |
| We cannot assure that our business will generate sufficient cash flow from operations in the future, that our currently anticipated growth in revenue and cash flow will be realized on schedule or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness, including the senior and senior subordinated notes, or to fund other liquidity needs |
| We may need to refinance all or a portion of our indebtedness on or before maturity |
| Our senior secured credit facilities are secured by substantially all of our and our subsidiaries’ assets |
| As such, our ability to refinance our debt or seek additional financing could be limited by such security interest |
| We cannot assure that we will be able to refinance our indebtedness on commercially reasonable terms or at all |
| If the current shortage of skilled clinical personnel continues or if we experience a higher than normal turnover rate for DVA Renal Healthcare employees during integration, we may experience disruptions in our business operations and increases in operating expenses |
| We are experiencing increased labor costs and difficulties in hiring nurses due to a nationwide shortage of skilled clinical personnel |
| We compete for nurses with hospitals and other health care providers |
| This nursing 23 ______________________________________________________________________ [24]Table of Contents shortage may limit our ability to expand our operations |
| If we are unable to hire skilled clinical personnel when needed, our operations and treatment growth will be negatively impacted, which would result in reduced revenues, earnings and cash flows |
| In order to successfully integrate the DVA Renal Healthcare operations into our own, we require the services of DVA Renal Healthcare’s clinical, operating and administrative employees |
| If we experience a higher than normal turnover rate for DVA Renal Healthcare employees, we may not be able to effectively integrate DVA Renal Healthcare’s systems and operations |
| The acquisition of DVA Renal Healthcare was significantly larger than any other acquisition we have made to date |
| The integration of DVA Renal Healthcare centers into our operations is significant and we may not realize anticipated benefits |
| The DVA Renal Healthcare acquisition is the largest acquisition we have made to date |
| There is a risk that, due to the size of the acquisition, we will be unable to integrate DVA Renal Healthcare into our operations as effectively as we have prior acquisitions, which would result in fewer benefits to us from the acquisition than anticipated as well as increased costs |
| The integration of the DVA Renal Healthcare operations requires implementation of appropriate operations, management and financial reporting systems and controls as well as integration of the clinical protocols, policies and procedures of both companies |
| We may experience difficulties in our ability to successfully bill and collect for services rendered as a result of our upgrade and integration of the billing and collection systems |
| We may experience difficulties in effectively implementing these and other systems and integrating DVA Renal Healthcare’s systems and operations |
| The failure to successfully integrate these and other systems could have a material adverse impact on our revenues, cash flows and operating results |
| In addition, the integration of DVA Renal Healthcare requires the focused attention of our management team, including a significant commitment of their time and resources, which could distract them from non-integration matters |
| The need for management to focus on integration matters could have a material and adverse impact on our revenues and operating results |
| If the integration is not successful or if our DVA Renal Healthcare operations are less profitable than we anticipated, our results of operations and financial condition may be materially and adversely affected |
| If DVA Renal Healthcare does not comply with its corporate integrity agreement, or DVA Renal Healthcare otherwise has failed or fails to comply with applicable government regulations to its operations, we could be subject to additional penalties and otherwise may be materially harmed |
| DVA Renal Healthcare entered into a settlement agreement with the Department of Justice and certain agencies of the United States government relating to the Department of Justice’s investigation of DVA Renal Healthcare’s Medicare and Medicaid billing practices and its relationships with physicians and pharmaceutical manufacturers |
| If DVA Renal Healthcare does not comply with the terms of the corporate integrity agreement or otherwise has failed or fails to comply with the extensive federal, state and local government regulations applicable to its operations, we could be subject to additional penalties, including monetary penalties or exclusion from participation in government programs, and otherwise may be materially harmed |
| The costs associated with compliance with the corporate integrity agreement and cooperation with the government could be substantial and may be greater than we currently anticipate |
| In addition, as a result of the settlement agreement, commercial payors and other third parties may initiate legal proceedings against DVA Renal Healthcare related to the billing practices and other matters covered by the settlement agreement |
| We have assumed substantially all of DVA Renal Healthcare’s liabilities, including contingent liabilities |
| If these liabilities are greater than expected, or if there are unknown DVA Renal Healthcare obligations, our business could be materially and adversely affected |
| As a result of the DVA Renal Healthcare acquisition, we assumed substantially all of DVA Renal Healthcare’s liabilities, including contingent liabilities |
| We may learn additional information about DVA Renal Healthcare’s business that adversely affects us, such as unknown liabilities, issues relating to internal controls over financial reporting, or issues that could affect our ability to comply with laws and regulations governing 24 ______________________________________________________________________ [25]Table of Contents dialysis operations |
| As a result, we cannot assure that the DVA Renal Healthcare acquisition will not, in fact, harm our business |
| Among other things, if DVA Renal Healthcare’s liabilities are greater than expected, or if there are obligations of DVA Renal Healthcare of which we are not currently aware, our business could be materially and adversely affected |
| We have limited indemnification rights in connection with the settlement agreement and other regulatory compliance and litigation matters affecting DVA Renal Healthcare, as well as with known contingent liabilities of DVA Renal Healthcare that we assumed in connection with the acquisition |
| DVA Renal Healthcare may also have other unknown liabilities of which we are not currently aware that we assumed in connection with the acquisition |
| If we are responsible for liabilities not covered by indemnification rights or substantially in excess of amounts covered through any indemnification rights, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows |
| The integration of DVA Renal Healthcare and the realization of cost savings will require us to make significant expenditures |
| In order to obtain the cost savings and operating income that we believe the integration of DVA Renal Healthcare should provide, we will be required to make significant expenditures |
| We are in the process of integrating DVA Renal Healthcare but the extent and amount of these expenditures remains uncertain |
| In addition, we may not achieve the cost savings we expect through the integration of the DVA Renal Healthcare operations regardless of our expenditures, which failure would materially and adversely affect our financial results |
| If we lose the services of a significant number of DVA Renal Healthcare’s medical directors, our results of operations could be harmed |
| Certain of DVA Renal Healthcare’s contracts with its medical directors provide that the contract is terminable upon a change of control of DVA Renal Healthcare |
| These termination provisions were triggered by our acquisition of DVA Renal Healthcare |
| If we lose the services of a significant number of DVA Renal Healthcare’s medical directors and if they set up competing centers and our patients decide to receive treatments at their centers, our results of operations may be harmed |
| Our alliance and product supply agreement with Gambro Renal Products Inc |
| will limit our ability to achieve cost savings with respect to products and equipment we are required to purchase under this agreement |
| We entered into a ten-year alliance and product supply agreement with Gambro Renal Products Inc, a subsidiary of Gambro AB, pursuant to which we are required to purchase from Gambro Renal Products specified percentages representing a significant majority of our requirements for hemodialysis products, supplies and equipment at fixed prices |
| This will limit our ability to realize future cost savings in regard to these products and equipment |
| For the year ended December 31, 2005, our total spending on hemodialysis products, supplies and equipment was approximately 8prca of our total operating costs |
| If Gambro Renal Products is unable to fulfill its obligations under the agreement, we may have difficulty finding alternative sources of supplies on favorable financial terms, further reducing our ability to achieve cost savings |
| For instance, Gambro Renal Products’ supply from its manufacturing plant in Italy has been recently interrupted, which could require that we make alternative arrangements to satisfy our needs for products supplied from that location |
| We are unable to predict whether or when the interruption will be resolved |
| If we are unable to find alternative supply sources, our results of operation could be harmed |
| In addition, as we replace existing equipment from other third-party manufacturers with Gambro Renal Products’ equipment, we may incur additional expenses as we transition to this new equipment |
| 25 ______________________________________________________________________ [26]Table of Contents Our ability to effectively provide the services we offer could be negatively impacted if certain of our suppliers are unable to meet our needs which could substantially reduce our revenues, earnings and cash flows |
| We have significant suppliers that are either the sole or primary source of products critical to the services we provide or to which we have committed obligations to make purchases, including Amgen, Gambro Renal Products, Baxter Healthcare Corporation, as well as others |
| If any of these suppliers are unable to meet our needs for the products they supply and we are not able to find adequate alternative sources, our revenues, earnings and cash flows could be substantially reduced |