Jefferies in a note on Monday downgraded shares of Davita Inc (NYSE: DVA), citing slowing treatment growth and a tight rate environment.

DaVita is a kidney dialysis services company, operating through two units, namely DaVita Kidney Care and DaVita Medical Group.

Organic Growth To Slowdown

Analyst Chris Cooper expects a 50–100-basis-point slowdown in organic treatment growth to 4–5 percent, offsetting the benefit he had previously expected from cheaper Erythropoietin-agent stimulating therapy input costs.

Specifically, the analyst expects 4-percent Kidney Care operating income growth versus the 2–7-percent guidance.

Patient-Steering Challenge Hurts Negotiations

The analyst also noted that DaVita is worried about the challenging rate environment, with patient-steering allegations continuing to hinder negotiations.

The allegations have come about as federal health regulators are assessing whether some health care providers are steering people into Obamacare plans in order to pocket higher insurance reimbursements.

"We continue to expect Retacrit approval (biosimilar EPO) by end-17 but US distribution will remain locked up by the FMEVifor JV, limiting the opportunity for DVA to close the cost gap created during 2016 (Mircera switch), further hindering negotiating position," the firm indicated.

Medical Group To Help Only Meagerly

The firm expects the Medical Group segment to contribute $230 million by 2019, which however, would be inadequate to drive a meaningful acceleration in consolidated profit. The unit's contribution to Group EBIT CAGR of 6 percent is expected at 2 points, the firm said.

Challenges Remain But Opportunities To Support Stock

Jefferies said a 50–100-basis-point revision to volumes reflects concerns it has been raising on negative new patient growth.

"We believe a less competitive cost base and patient steering overhang is hindering rate negotiations," the firm added.

Accordingly, the firm sees risk to its consensus forecast, but still expects a 10-percent earnings per share growth on compounded annual basis compared to the guidance of 5–12-percent growth.

Meanwhile, Jefferies thinks there is enough opportunity to support shares through current challenges, including cost relief from 2020 biosimilars and mix upside from 2021. The firm sees re-basing risk in 2019 being overplayed, since CMS would need to consider the wide differential in ESA costs across all providers.

"Whilst we see scope for near-term cons downgrades, our new forecasts drive a 10% EPS CAGR (guidance 5-12% FY17-20) and longer-term drivers should provide support," the firm concluded.

Jefferies downgraded shares of DaVita to Hold from Buy, while it maintains its price target to $70.

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