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Executives

Jeffrey Burbank – Chief Executive Officer

Robert Brown – Chief Financial Officer

Kristen Sheppard – Vice President, Investor Relations

Analysts

Bill Plovanic – Canaccord

Kevin Ellich – Piper Jaffray

Kim Gallium – JP Morgan

Danielle Antalfy – Leerink Swann

Matt Weight – Feltl & Co.

Robert Goldman – CL King

Gary Lieberman – Wells Fargo

NxStage Medical Inc. (NXTM) Q4 2012 Earnings Call February 28, 2013 9:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to NxStage Medical’s Fourth Quarter Fiscal 2012 Financial Results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. Should anyone require technical assistance during today’s conference, please press star then zero on your touchtone telephone. As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Kristen Sheppard. Please go ahead.

Kristen Sheppard

Good morning and welcome to NxStage Medical’s Fourth Quarter and Full Year 2012 Financial Results conference call. My name is Kristen Sheppard and with me here today are Jeff Burbank, NxStage’s CEO, and Robert Brown, our CFO. For your convenience, a replay of this call will be available shortly after its conclusion. In addition, the press release for the fourth quarter, slides for the company’s quarterly going deep performance metrics, and a recording of this call will be archived on our website under the Investor Relations section.

Before starting, I would like to remind you that statements we may make on this call which are not purely historical regarding the company’s or our intentions, beliefs, expectations and strategies for the future are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include topics such as the results of our operations, growth of the home and more frequent hemodialysis market in general, market adoption and demand for our product, our expectations regarding relationships with key customers and continued buys from key vendors, our plans with respect to future developments including (inaudible), beliefs as to the expected impact of current economic, reimbursement or regulatory conditions on our business, anticipated improvements in the operating efficiencies, gross margins, product quality and financial guidance for the future.

Because such statements deal with future events, they are subject to various risks and uncertainties and actual results may differ materially from these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our SEC filings, including our quarterly report on Form 10-Q for the quarter ended September 30, 2012. In addition, any forward-looking statements made on this call represent the company's views only as of today and should not be relied upon as representing our views as of subsequent dates. Future events and developments may cause these expectations to change and while we may elect to update forward-looking statements at some point in the future, the company disclaims any obligation to do so; and therefore you should not rely on these forward-looking statements as representing our views on any date subsequent to today.

Now, I’d like to hand the call over to Jeff Burbank.

Jeff Burbank

Thank you, Kristen. Good morning and thanks for joining us. I’ll provide a brief review of our financial results and a high level overview of our growth initiatives for 2013 and beyond. Robert will then provide financial results for the fourth quarter and full year 2012 as well as our outlook for 2013.

NxStage delivered another year of solid growth and progress in 2012. Annual revenue increased 11% over 2011, topping our revised revenue guidance for both the year and the quarter. Home drove this growth with an annual increase of 14% over 2011, in line with our guidance. Fourth quarter 2012 gross margin increased to 39%. For the full year, gross margin improved to 38%, up over 200 basis points from 2011. We made significant progress in our manufacturing infrastructure by completing the expansion of our Tijuana, Mexico plant in the early part of the year and the start-up of our new Dialyzer manufacturing plant in Germany as part of our relationship with Asahi.

We continued to identify and execute well on growth accelerating strategies, including investments in R&D and sales and marketing. As you can see, both our business and market fundamentals remain strong and positive. We’re proud of this execution, but I think there is a lot more opportunity to change our growth equation for the future. I believe we can significantly expand the number of patients using NxStage therapy systems. We’ve planned a pathway to achieve this which we think can deliver tremendous value for all our stakeholders – patients, nephrologists, providers, shareholders and employees.

Home is such a large developing market and we are the undisputed leader with years of experience. We remain confident the U.S. market for home hemodialysis should be about 10 to 15% of patients, which is about eight times bigger than today, or about $1 billion, likely twice that worldwide. To support this growth, we initiated a number of activities in 2012 and our focus in 2013 is to drive them to completion.

As we shared last quarter, our innovative product technology will continue to be our primary growth engine. We are seeing evidence of good execution on this front with CE Mark approvals for a number of our new product innovations. These (inaudible) are designed to make it easier, safer and more cost effective to deliver care without traditional in-center infrastructure. We’re excited at how these innovations should further reduce barriers to home adoption.

Let’s go a little deeper on this. We received CE Mark for nocturnal home hemodialysis. This was a significant milestone which we think makes the NxStage System One the first and only system specifically indicated for nocturnal home hemodialysis. We think it’s better therapy for those that want it, and we’re working hard to bring this capability to U.S. patients. We’re giving the patients the option to use sleeping time for treatment time, which can reduce the burden of home therapy.

CE Mark approval for single needle – with this revolutionary technology, we are helping allay the concern with disconnections during nocturnal therapy. We’re excited to get CE Mark approval and we’ve seen good performance in our first patient experiences. It seems we’re hitting the mark by avoiding many of the complications that single needle approaches had in the past. Higher dialysate flow rate capabilities with the System One also received CE Mark approval.

I’ve always struggled with how to convey the value of high flow for NxStage. With our first generation product, we focused on supporting more frequent dialysis based on its wonderful clinical advantages. With frequent dialysis, dialysate flow rates weren’t the limiting factor. For less frequent therapy, such as three times a week, the current System One’s treatment time is about an hour longer than with traditional dialysis machines, but with the new high flow System One, we can practically eliminate this time tradeoff for less frequent treatments like three times a week or every other day. High flow makes this a good solution for patients that want home but with the same old in-center frequency.

Later in 2013, we’ll also be launching Connected Health, our operating system of the future for dialysis therapy in the home. For us (audio interference) after adoption, we don’t want to have dialysis nurses chasing flow sheets or bogged down with the related administrative tasks. Connected Health provides them the tools that automate a significant part of this paperwork.

With these CE Mark approvals in hand, we’re focused on driving growth in international home with launches in the second half of 2013. To support getting the best return on our investment, we’re building out dedicated sales, marketing and clinical resources under our new worldwide commercial operations team. This newly organized commercial team will come under the leadership of Joe Turk. Additionally in partnership with Kimmel over the next few months, we plan to transition to a direct sales model in the U.K. We think the U.K. is the right market for this for a lot of reasons and we’re excited about the ability to drive growth with this change. We believe all these actions further strengthen our relationships with customers and position us to more rapidly take advantage of new product clearances.

We’ve repeatedly said that if we saw compelling returns in certain market programs, we’d invest to broaden their impact. We believe our direct to patient marketing initiatives in our selected test markets helped to increase training rates by over 25% versus the prior year period. We think these results justify broader use, so throughout 2013 we’re increasing our investment in direct to patient marketing. This includes more NxStage Patient Awareness tours, increasing our touch points with patients through social media and advocacy campaigns, running more direct to patient advertising and increasing billboard placements. I’m confident that our execution of both our U.S.-based direct to patient marketing initiatives and our international growth opportunity, together with key product launches in the second half of 2013 will have a significant impact on home’s growth rate, taking us to 15% annual revenue growth in 2014 and beyond.

Let me turn to our activities focused on longer term value creation. First, we are focused on developing NxStage owned centers of excellence. As many of you know, we have the challenge of more patient demand than training supply. With over 30% of our patients switching their centers and many new nephrologists to access our therapy, we see an opportunity to help build the skills and tools that can expand ready access to more patients. Capitalizing on our extensive experience and leadership in home, we’re making investments to build NxStage owned dialysis centers that are intended to be example of high quality therapy can be delivered within the economic limitations. We’re on track to have our first center operational around mid-2013. We’re excited to be making progress and while it is still early, we believe our centers of excellence can facilitate growth in home over the mid to longer term.

We’re also continuing to aggressively invest in our product pipeline, including our next generation hemodialysis product and our revolutionary PD product. PD is a huge opportunity for us and we’re excited with the progress we’re making. It’s a multi-billion dollar market where we have tremendous infrastructure and innovation. This will be a long path to market given how innovative our PD product is, but we believe it’s simplicity, safety, efficiency and clinical capabilities should win over support.

Although I spend most of my time discussing home, I continue to feel good with the execution in both critical care and in center. These teams had solid performance and they have clear opportunities that support the company’s growth goals in the near, mid and long term.

In sum, we’ll continue to grow the business and expand it with good execution and investment in key areas. We expect top line 2013 revenue to be strong and grow at a rate similar to 2012, followed by accelerated success with over 15% annual revenue growth in 2014 and beyond. This goal excludes any benefit of service revenue from NxStage owned centers of excellence.

With that, let me now turn things over to Robert to review our financials in more detail and to provide our full guidance for 2013.

Robert Brown

Thank you, Jeff. I will review revenue for the fourth quarter and full year 2012, including details of our two reporting segments, discuss the company’s operating performance, balance sheet and cash flow results, and then finish with a discussion regarding our outlook for the first quarter and fiscal year 2013. I will discuss the numbers on both a GAAP and a non-GAAP basis. Please refer to the reconciliation table in our press release for further information in this regard.

Before we dive into the numbers, I want to highlight a few broad themes for the year. We delivered another year of strong revenue growth coupled with solid improvements in gross margin. We continued to focus on our leadership by expanding access and growing the number of patients using NxStage therapy systems, as well as by making significant advancements in our robust product pipeline. We made significant progress in our manufacturing infrastructure with the completion of the expansion of our Tijuana, Mexico plant in the early part of the year and the start-up of our new Dialyzer manufacturing plant in Germany. Additionally, we made good progress on our bottom line while maintaining our investments in research and development.

Now turning to the details – total revenue for the fourth quarter topped our guidance at 65 million. This represents a 14% increase over the fourth quarter of 2011. We also topped our revised annual guidance with record revenue of 242.1 million, an 11% increase over 2011. Home grew to 31.4 million in the fourth quarter of 2012, representing an 11% increase over the fourth quarter of 2011. As expected, though, fourth quarter home revenue was impacted by low capital equipment purchases from our international distributors. Full-year 2011 revenues for home increased 14% over 2011, consistent with our guidance.

As Jeff indicated, as part of our international growth efforts, we are transitioning from a distributor channel to a direct sales model in the U.K. We believe this model further strengthens our relationships with customers and positions us to more readily take advantage of new product clearances while leveraging our expertise and infrastructure. As part of this planned transition, we expect to recognize a one-time reduction to home revenues of approximately 500,000 to $1 million in the first quarter of 2013.

Critical care increased to 11.3 million in a seasonally strong fourth quarter of 2012, representing an increase of 15% over the fourth quarter of 2011. Full-year 2012 revenues for critical care increased 13% over 2011 as we continue to build our large install base and take market share from our competitors. Our pipeline of opportunities with new and existing customers remains robust. As a reminder, machine sales historically peak in the fourth quarter and then return to a more normalized level in the first quarter.

In-center revenue increased to 21.5 million in the fourth quarter of 2012. Full-year 2012 revenues for in-center increased 4% over 2011, a bit better than our guidance due to the timing of shipments during the fourth quarter. Consistent with our experience, revenue will continue to be prone to fluctuations as a result of inventory management policies with both our distributors and end users. We also reported 800,000 and 2.1 million within other revenue, reflecting the company’s Dialyzer sales to Asahi for the fourth quarter and full year 2012 respectively. We continue to believe this relationship will provide us with long term cost efficiencies through increased Dialyzer production volumes.

Fourth quarter gross margins increased 39%, up 200 basis points from the fourth quarter of 2011. Full-year margins increased to 38% compared to 36% in 2011. We also continued to drive meaningful gross margin improvements within the System One segment, which represents our high growth market opportunity and is the majority of our revenue. System One gross margin increased to 46% for the full year 2012 compared with 42% in 2011. In-center gross margin increased to 25% for the full year 2012 compared with 23% in 2011.

With a strong track record of execution against initiatives to improve gross margin, we remain confident in our ability to achieve our long term goal of 50% gross margin, excluding the impact of our Dialyzer sales to Asahi. In fact, we expect to see a similar 200 basis point improvement in gross margin in 2013, again excluding the impact of our Dialyzer sales to Asahi.

NxStage had a net loss of 2.4 million for the fourth quarter of 2012 compared with a net loss of 4.6 million for the fourth quarter of 2011. Our full-year 2012 net loss was 15.2 million compared with a net loss of 21.4 million in 2011. We are encouraged by the improvements to our operating margin and continue to work hard toward our long-term goal of achieving profitable operating margins.

On a non-GAAP basis, adjusted EBITDA adjusted for stock-based compensation, deferred revenue recognized, manufacturing transition costs and other non-cash expenses was 2.1 million compared with 2 million in the fourth quarter of 2011. For the full year of 2012, we achieved 8 million in adjusted EBITDA compared with 7.3 million in 2011. These results reflect our continued investment across our business.

We ended the quarter with 106 million cash and zero debt. With a strong balance sheet, we believe we have the financial resources to support our investments to drive higher growth in 2014 and beyond.

Turning to our guidance, for the first quarter of 2013 we expect revenue to be in the range of 60.5 to 62 million. The components of this revenue guidance include first quarter home revenue increasing 6% year-over-year but remaining essentially flat with the fourth quarter 2012. Again, this lower revenue guidance is a result of an expected one-time reduction to home revenue of approximately 500,000 to 1 million related to our plans to transition to a direct sales operation from a distribution relationship in the U.K. For the first quarter, we also expect critical care and in-center to increase 10% and 6% respectively year-over-year. Asahi, approximately flat versus the fourth quarter of 2012. We expect a net loss in the range of 4.5 to 5.5 million or $0.08 to $0.09 per share.

For the full fiscal year 2013, we are forecasting revenue to be between 265 to 270 million. The components of our annual revenue guidance include home at 8 to 10% annual growth, critical care at 13 to 15% annual growth, in-center at 3 to 6% annual growth, and Asahi at approximately 7 million in annual revenue. We expect a net loss in the range of 13 to 17 million or $0.22 to $0.28 per share. This guidance reflects increasing our investments in three areas: global home growth, including direct to patient marketing in the U.S. and international product launches; developing our centers of excellence; and research and development. As a result of these investments and approximately 3 million of additional expenses associated with the medical device excise tax, net income is expected to remain essentially flat year-over-year. At this time, we expect capital expenditures for 2013 to be in the range of 10 to 12 million as we continue to invest in new products and our manufacturing capacity, as well as build out our centers of excellence.

Now I would like to open the call to questions. Operator, we are ready for the first question.

Question and Answer Session

Operator

[Operator instructions]

Our first question comes from Bill Plovanic of Canaccord. Please go ahead.

Bill Plovanic – Canaccord

Great, thanks. Good morning. I’m just trying to get a feel here for as you transition in the U.K., what caused you to make that decision? And then a little more clarity on how the transition impacts the P&L – are you saying that international revenues as a whole will actually be negative in the quarter because you’re buying back inventory from that distributor, or it’s more a zero for the quarter as any growth outside of the U.K. is taken off by what’s happening in the U.K.? Just some clarity, if you could, please.

Jeff Burbank

Sure, Bill. It’s Jeff. I’ll start by answering the rationale and then maybe Robert can add a little bit on the financials. Rationale is that’s one of our biggest market opportunities. We’ve worked well with Kimmel and I think our tools and capabilities that we’ve developed in the U.S. will play a very important role as that market expands. We speak the same language, so it’s an area that we can add a lot of value with the skills that we have. It’s unique to that region. I’m very pleased with the activities with the other distributors, but we think it’s going to be a good opportunity for us to focus on the front-end sales processes. We’ll continue to work with Kimmel on some of the logistics aspects. So we’re just splitting the duties in a little bit different way to optimize the success there.

With that, Robert maybe can speak to the impact of that on revenue over the next couple quarters.

Robert Brown

Yeah, Bill. I think you’ve got it right. What ends up happening is as we go direct in the U.K., we basically buy back the inventory and machines that we sold in Q1, so we end up basically not recognizing any revenue to the U.K. in Q1, which basically pushes the international number down in Q1 and then it kind of bounces back in Q2.

Bill Plovanic – Canaccord

So is the international number a negative number in Q1 because of the buyback, or is it just a flat number with the rest of international absorbing it?

Robert Brown

It’s a balance, so you take the total of that growth, minus that, and it comes out—we think it’s going to be essentially flat.

Bill Plovanic – Canaccord

Okay. And then as I look at the annual guidance for the home hemo, 8 to 10%, given your commentary of the investments making that you’ll see growth to 15 to 20% in 2014. I was just—it doesn’t quite jive, so if you could just clarify that and help me understand it better.

Jeff Burbank

Sure. First of all, we’re real pleased to be putting up solid growth this year but very excited about what we think all these activities will drive in 2014. You know this is an annuity-based business model, so activities that you do in one year typically pay off in the next year, not in the period, because you have to build up that revenue base.

I think the way patients came on in 2012 and the way we see them coming on in 2013 have a little bit of an impact on how that year-over-year growth rate comes – they were a little earlier in ’12 and a little bit later in ’13. So I think it would have been a number that felt more comfortable to you depending on where the patients came on. So that’s what’s reflected in that number, but feel very good about the programs that are coming in place relative to direct to patient marketing, new products, and then this activity around international. So feel good about where we’re going.

Bill Plovanic – Canaccord

Okay. And then last question with the U.K. – it doesn’t seem so in the guidance that as you add these efforts internationally, it’s not really impacting your operating expenses from, I guess, what my current expectations are. I’m just kind of curious how—is it just you’re not adding a lot more people, or the adding is so minimal it really doesn’t matter? How does that transition work?

Jeff Burbank

Good question, Bill, so let me just put it in a little context. We’ve leveraged sales and marketing costs over the last few years. This year, we’ll keep that percentage about level with last year, so in a sense we’re investing maybe about 4 million across the direct to patient and the international activities this year by keeping it at the same percentage of sales. So we are making an investment there that we believe is a great investment and a long-term payoff for accelerating growth rates.

Bill Plovanic – Canaccord

Great, thank you. I’ll jump back into queue, and good quarter.

Operator

Our next question comes from Kevin Ellich from Piper Jaffray. Please go ahead.

Kevin Ellich – Piper Jaffray

Hey, good morning. Thanks for taking the question. I guess first off, looking at the deferred revenues, we saw a pretty sizeable increase sequentially of almost 6 million. I think this is the biggest increase we’ve seen in the last couple years. What was driving that, and what should we expect—you know, could we see this type of growth going forward?

Robert Brown

Yeah, in the deferred revenues there is actually the deferred revenue for our Asahi manufacturing plant, so as you know, we have an arrangement with Asahi where we are contract manufacturing Dialyzers for them. As a result of that, they financed that facility and as we put that facility online, we actually have to break the liability that we have to Asahi into two components: one component is deferred revenue, the other is a liability that we owe them for our part of the plant. So there’s about $6 million related to deferred revenue on the Dialyzer facility which didn’t exist before in that number.

Kevin Ellich – Piper Jaffray

So of the deferred revenues, 6 million, the change is pretty much all Asahi, is what you’re saying, Robert?

Robert Brown

Yes.

Kevin Ellich – Piper Jaffray

Okay.

Robert Brown

That’s what you’re seeing in the quarter, yes.

Kevin Ellich – Piper Jaffray

Okay. Thank you. And then I guess Jeff, just going back to the comment you had in the press release, the 15% growth in 2014, what gives you confidence that you guys will see this acceleration, and what assumptions have you made?

Jeff Burbank

The nice part of an annuity-based business model is it is relatively predictable, and you can see the things that are having an impact on it. So as I outlined there, the direct to patient marketing where we focused on some markets in 2012 to test various approaches to that, we saw in excess of a 25% increase in patient training rates in those areas. So that was a great demonstration of what a return on investment there is, and we’re going to broaden that investment, as I said to Bill, by keeping the percentage of sales and marketing the same, which gives us a chunk of money to go invest in this, which we think is a great return.

In addition to that, we think in ’14 we’ll see the benefits of some of our activities for going direct and working with our international distributors, and we’ve really created a worldwide focus in the sales and marketing team which allows us to leverage some of the skills and capabilities that we’ve built here in the U.S. across the broader set of our distributors in the U.K., so we feel good about that.

But really the other huge one is the rate of product enhancements that we’re bringing into the market. I talked a lot about those, including higher flow, Connected Health, OneSite and nocturnal. Certainly internationally, those are all, as you know, in CE Mark now so we’re working to launch those in the second half of this year and expect to see success in most, if not all of those with regulatory approvals here in the U.S. across this year. So the combination of those makes us feel really good, and then just the underlying execution seeing that we’re seeing with the sales team. All that is building our confidence.

Kevin Ellich – Piper Jaffray

Got it. Okay, that’s helpful. Thank you. Two last quick questions – what are you guys seeing in the critical care market to assume this slight uptick that you expect in 2013, same thing with Medisystems where you’re seeing growth from 4% this year to 6 to 8% for 2013? And then lastly Jeff, if sequestration goes into effect tonight or tomorrow, how do you think that will impact the business? Do you think we could see increased use as people are—you know, some of the dialysis providers are looking for other drivers of growth to help mitigate a 2% cut?

Jeff Burbank

Yeah, so that was a long question. Let me start with the beginning.

Kevin Ellich – Piper Jaffray

Sorry.

Jeff Burbank

So let me go backwards – sequestration I’ll take off the table. You know, that’s a 2%. We went into the new year with a higher than that increase, so it kind of neutralizes the adjustment for the year. So I think we’re going to be fine on that. As you know most of our pricing contracts are (audio interference) not feel any near term negative impact of that. Long term, I don’t think a 2% change is going to change fundamentally their strategy as it relates to home. I think all the other activities that we have in place are going to be far more impactful or meaningful.

In terms of critical care, we continue to see a great opportunity in market conversion. We continue to take more than our share there, so that feels good. We still have opportunities in the disposable side. As we do that market conversion, that drives consumables both in tubing sets but also in fluids, and we have a good fluid portfolio. In addition to that, we have investments that are early but paying off in therapeutic plasma exchange, and we have an investment that we think will start to get into the market, at least international, that is a therapy we think will help patients with liver failure-type challenges. So we’ve got a number of things there that make us feel pretty good about that.

We also finished up the year pretty strong. We were a little concerned about capital, felt like it was a little pressured; but the team did a great job of bringing in those sales so we ended up kind of on the high side of what we were guiding to based on good execution with capital equipment in the fourth quarter.

Kevin Ellich – Piper Jaffray

Got it. And then Medisystems?

Jeff Burbank

So I think you got the number a little off. I think we’re guiding 3 to 6% growth, which is around market growth. Market growth is probably around 4, 4.5, something like that, so we’re right around that, and that’s based on continued growth and execution, maintaining our market share with some opportunities around that. But we think real, good solid execution there.

Kevin Ellich – Piper Jaffray

Okay, thank you.

Operator

Our next question comes from Kim Gallium of JP Morgan. Please go ahead.

Kim Gallium – JP Morgan

Hey, good morning everybody. Thanks for taking the questions. So I guess first question is just on the centers for excellence. Just love to hear an update on—you know, I think you’ll have your first one live, you said middle of the year. So wondering at what point we will start to kind of get our first set of metrics around how successful those centers for excellence have been, and then maybe as we look out 12 months, how many of these centers for excellence do you foresee having up and running in the next 12 to maybe even 24 month period?

Jeff Burbank

Sure. You know, that’s an area we’re really excited about. It’s also an area we’re really new to and learning a lot, so relative to the metrics, I really don’t know and that’s why I was so careful to make sure that I was pulling that out of these guidance numbers, to say that’s kind of on the sidelines as a little bit of help of upside, but it’s something that we need to learn more about and understand before we can really give you some detailed color on that. So I’m not sure if it’s going to take a couple quarters or three or four quarters before we can say here’s the expected performance targets on these centers. So we’re going to have just work with you on that as it evolves throughout the end of 2013 and beyond. It will have very minimal impact on 2013, both on revenue but some investment there, some capital to build those out.

Focused on the first few to make sure they do really well and that we spend the time and the focus to make them successful, so there’s a lot of attention and energy being put into making them successful and getting all the systems in place and the team in place to make sure that we can do what we think can be delivered with the NxStage System One for those patients, and make it easier and with better clinical outcomes. So very excited about it but it’s early, so we’re going to be a little bit cautious because I don’t think we know enough to give you that kind of number, and I’m not exactly sure how many quarters it will take for us to feel like we’ve got something repeatable that’s worth sharing, or ready to share.

Kim Gallium – JP Morgan

Okay, but as you said, it’s really not contemplated into any of your guidance numbers right now.

Jeff Burbank

No. It’s insignificant. I mean, there’s some capital in there and some operating spend, but that’s not that different than what was last year on the operating expense and a little bit of investment in the build-out of these facilities.

Kim Gallium – JP Morgan

Okay. And I don’t know if I might have missed it earlier, but did you guys comment on – this may be for Robert – but the U.S./OUS split for home hemo in the quarter?

Jeff Burbank

No, we didn’t. We manage it really as a worldwide business, so we’ve been trying to align the metrics for you guys with the way we run the business and how we incentivize the teams and all, so we haven’t split that out. With that said, we do have the metrics that come up with the quarter on improvement, the going deep performance metrics, so you can look at those which shows domestically we continue to grow similar to the way we have in the past.

Kim Gallium – JP Morgan

Okay. All right, great guys. Thanks so much.

Operator

Our next question comes from Danielle Antalfy of Leerink Swann. Please go ahead.

Danielle Antalfy – Leerink Swann

Hey, good morning guys. Thanks so much for taking the questions. Just a follow-up on Kim’s question on the centers of excellence. Can you walk us through a little bit about what the sort of strategy is there, i.e. is it to build a patient set, is it to demonstrate the economic benefit of home hemodialysis? I guess if you could give us a better understanding of what the end game kind of is there, that would be helpful. Thanks.

Jeff Burbank

Sure. I’m very pleased with the success we’ve had as a company. At the same time, I’m frustrated for patients because I think we can be doing so much better, and there is more patients out there that need access to the therapy. I think one of the limitations has been the skills to do that within the provider community. I think the community is very good at providing in-center, three times a week dialysis and they ought to be congratulated for the quality and efficiency that they do that. I think it’s very hard to build the skills against a new offering, if you will, so we need to demonstrate and refine that business model. We need to work to show how information systems plus our technology, plus certain ways of doing things can institutionalize or make more efficient the delivery of home care and home hemodialysis, to be specific.

So a number of things can be accomplished with that effort. The first is we can try to integrate that and show how integration can provide efficiency, both economic efficiency but also quality of care. We can show our new products in use to try to de-risk them and show how to best implement for our customer partners, so it’s a way to de-risk new technology and hopefully accelerate the adoption into the market that way. It provides us an area where we can do clinical trials. We can have a better economic understanding.

So it’s a whole host of things that we’re focused on, but really if you will under one umbrella which says to mature the skills and tools to help expand home care delivery.

Danielle Antalfy – Leerink Swann

Okay, that’s really helpful. And then nocturnal, you got the CE Mark approval. Any update on the potential regulatory path here in the U.S. there? Has that sort of taken a back seat now to the high flow and single needle technology? And if you could remind us of timelines in the U.S. for that and whether there is incremental clinical data that you’d need to gather. Thanks so much.

Jeff Burbank

Sure. Let me maybe take the opportunity to expand it and just kind of go through those products and the status in the U.S. I’ll take nocturnal first because that’s the question you asked. As you mentioned, we’re very excited about getting that clearance—or CE Mark approval. We, as you know, historically did a trial, a very successful trial with agreement of the FDA on the endpoints of that. We hit those endpoints but they changed their mind about what would be an appropriate endpoint. They expanded the number of patients, so we’ve restarted the trial – in a sense, we’re adding a number of patients to the base trial we did. It was close to 40 patients; we’re taking that closer to 50 patients, 60 patients in that – we’re adding another 20 or patients.

We’re enrolling. We’re not fully enrolled but we are making progress towards that. We think we will finish that trial up and submit. I have no way of knowing whether this round the FDA will agree. So far, that trial continues to be executed well and we continue to see very good results in that, but you don’t know until the end of the trial and I don’t know until the FDA has reviewed that, so I’m always cautious about timelines on that. But we’re executing well on the steps that we have to.

In terms of high flow, we have submitted. We received a round of questions; we’re trying to answer those questions and resubmit, so we’re in some timeline associated with that. That seems to be leading to a clearance this year; but again, unpredictable relative to the FDA. In single needle, I think that one is a little bit more open on what’s going to be required. We’re working with the FDA to try to figure that out. We have now some patient experience internationally, so we feel good about the product, have the clearance internationally, also have that cleared in Canada. So we’ll continue to push that. And on Connected Health, our first generation is cleared. We’ve got some great new features that we’re going to add to that this year, so we’ll seek an additional clearance on that; but expect that to be under our belt so we can launch those additional features in the second half of this year.

Danielle Antalfy – Leerink Swann

Okay, great. And then sorry, one last question – the annual dialysis conference is coming up. Last year, they had a pretty interesting all-day home hemodialysis session. I think they have another one this year. Just curious if there’s anything that you’d point us to to sort of pay attention coming out of that meeting. I know it’s not as big as ASN, but anything incremental that might be coming out there that we should be watching for. Thanks so much.

Jeff Burbank

You know, I don’t know what competition is doing there, but from our perspective it continues to support good data for the adoption of home care. That meeting tends to be a real rally call for expanding home hemodialysis, so we’re always very enthusiastic about participating in that. We have a few events that I don’t want to foreshadow – I want the marketing team to do their job there, so I don’t want to get ahead of their activities. But we’re always enthusiastic to be a part of that meeting because it really feels like coming home.

Danielle Antalfy – Leerink Swann

Okay, great. Thanks guys.

Operator

Our next question comes from Matt Weight of Feltl & Company. Please go ahead.

Matt Weight – Feltl & Co.

Good morning. Jeff, I don’t know if this is semantics here, but you guys were guiding for home revenue to be over 14% for the year, and it came in just under that. So I was wondering if the international contracted more than you were expecting, or was the home weaker than what you were expecting—or U.S. rather?

Jeff Burbank

Yeah, I don’t know comparing math. We thought we were right at 14. That’s where we guided. International, as you can see, on a sequential basis that capital was a little bit lighter than we expected, but we got to where we thought we did so we felt like we ranged it right.

Matt Weight – Feltl & Co.

Okay, maybe a miscommunication because I did think you were saying over 14%. I’ll move on. The charge in the first quarter that you’re taking, I assume you’re going to be shifting how you recognize revenue going to a direct sales mode? Is that why you’re—

Jeff Burbank

Primarily it’s a timing issue where it comes out of first quarter and we expect it to go into second quarter. So we just wanted to prepare you guys so that you knew what the effect of that was.

Matt Weight – Feltl & Co.

So you still won’t be amortizing the revenue internationally then, even with that change?

Robert Brown

Well actually, there is a change there. We will be taking machines and amortizing machines in the U.K. It won’t change the accounting on the revenue of the international business, but then we will also be recording sales to the end user in the U.K. The effect of those is basically they net off against each other.

Matt Weight – Feltl & Co.

Right. And can you remind me how many years do you amortize those U.K. sales over there?

Robert Brown

We’ll be amortizing those over seven years. It’d basically be—yeah, the machines will be amortized over seven years.

Matt Weight – Feltl & Co.

Okay, sounds good. And then Jeff, just stepping back, when you look at the CMS publishing the integrated care pilot program now, how do you see NxStage fitting into that opportunity?

Jeff Burbank

So we’ve always through that integrated care has been the sweet spot of what we’re doing. We thought for a long time that the industry would move in that direction, and we thought therapies that give higher clinical outcomes at a lower cost would be the ones that win in that type of environment. So we’re big believers in that, big supporters of that. With that said, the industry has to work through the specifics of the program they laid out, and we’ll try to be a partner where we can. But we think integrated care is a great idea for patients and for NxStage.

Matt Weight – Feltl & Co.

And in light of that, would you foresee them being able to go more directly marketing to the providers in that opportunity, because going directly to the patients, they may not be as clear on the integrated care pilot.

Jeff Burbank

When you say they, you mean us?

Matt Weight – Feltl & Co.

Yeah, most of your marketing efforts are going direct to the consumer, to the patient.

Jeff Burbank

Yeah, I think on that specific topic, that’s kind of a strategic topic and that’s one we sit down with the providers on. Yeah.

Matt Weight – Feltl & Co.

Okay, thanks for the questions.

Operator

Again ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. Our next question comes from Robert Goldman of CL King. Please go ahead.

Robert Goldman – CL King

Okay, thanks. Good morning. A few more questions on the international front. You did mention – and I recognize the numbers are small – that the home hemo dialysis had a bit of a headwind in the fourth quarter because of the timing of international distributor purchases. Is there anything in particular going on there, or was that just the regular ebbs and flows in a small business?

Jeff Burbank

Yeah, thanks for asking the question because one of the things that we try to move over time is some metrics that we think make more sense, and we think the annual growth normalizes the number of that; and we also anticipated that some of the actions that we’d take in the business would put additional volatility into those numbers, as you’re seeing with our going direct in the U.K. So we don’t see any of those out of the norm range or we’d share with you what’s changing. We don’t see any fundamental changes there.

Robert Goldman – CL King

And then two other questions on international. The first just to sort of help to set up the second – could you just give us some sense of how large right now you think the market is in Europe for home hemodialysis on a million dollars of revenue basis?

Jeff Burbank

Existing patients on home hemo?

Robert Goldman – CL King

Correct.

Jeff Burbank

So that’s very small. It’s only about 2.5% of the patients in the U.K. Most other markets are less than half a percent, with the exception of Australia. Australia is around 13 to 16% - Australia, New Zealand. So very small market worldwide.

Potentially we see the opportunity being similar to the U.S., that it could be 10 to 15% of patients, as Australia has demonstrated with good economic policy and a focus on quality care. So if you add up the markets that we’re in, it’s about a third of the opportunity of the U.S. market for us right now where we have presence, so we see that as a good opportunity moving forward.

Robert Goldman – CL King

And then the follow-up on the international, recognizing it’s a nascent market, which is to say international home hemodialysis, do the three new CE Marks that you’ve spoken about, the ones you’ve just received, do your marketing folks suggest that that can meaningfully impact the market size over the course of the next year, or are the international markets more sort of at the mercy in the near term of reimbursement and austere budgets, and could you provide us any, if there are, updates on changes in reimbursement internationally that could impact your business?

Jeff Burbank

Yeah, a number of things in there. Let me see if I can parse it out. The first I’ll take is have there been changes or are there new pressures in reimbursement. In the markets that we’re in, we’re not seeing that. We haven’t felt that, so it’s been as it was, so to speak. We’re not seeing any changes there. That’s not to say that there won’t be, but as we sit here today in the markets that we’re in, we haven’t seen that.

In terms of the value and opportunity with the enhanced product capabilities, we do significant value in that and think that that’s going to drive maybe 50% of the growth in acceleration of our growth rate. So we feel very good about those.

They manifest a little bit differently in some markets. Some markets have a propensity for more nocturnal therapy, and we think that’s going to be a great capability there. I think single needle is going to facilitate that, so there’s a number of really good benefits that accrue from that that we think can drive the acceleration.

Robert Goldman – CL King

Okay, thank you.

Operator

Our next question comes from Gary Lieberman of Wells Fargo. Please go ahead.

Gary Lieberman – Wells Fargo

Good morning. Thanks for taking the question. I think you at least alluded to moving towards a direct sales model in the U.S. Did I hear that correctly, and if so, can you maybe talk a little bit about the timing of doing that?

Jeff Burbank

We’ve always been direct in the U.S. The U.K. is the market that we’re talking about.

Gary Lieberman – Wells Fargo

Okay, my bad. And then I don’t know if you guys gave it – if you gave it already, I apologize. But you typically have given the split in home growth between international and domestic?

Jeff Burbank

We did. We’re managing it as a worldwide business. You can see some of the domestic performance metrics on our website as a part of this call, but we’re not breaking it out separately anymore.

Gary Lieberman – Wells Fargo

Okay. All right, thanks a lot.

Operator

I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Jeff Burbank for any closing remarks.

Jeff Burbank

We’ve gotten some feedback that it wasn’t the clearest call for some of you from a technical perspective on the phone connection. So we apologize for that – we’ll do better next time. Look forward to talking to you at the end of next quarter. Bye bye.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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