NxStage Medical, Inc (NASDAQ:NXTM)
F4Q and Full Year 2008 Earnings Call
March 12, 2009 am ET
Kristen K. Sheppard, Esq. - VP, Investor Relations of NxStage
Jeffrey H. Burbank - President, Chief Executive Officer, Director
Robert S. Brown - Chief Financial Officer, Senior Vice President, Treasurer
Benjamin Andrew - William Blair & Company
[Ben] - Canaccord Adams
Good morning ladies and gentlemen and welcome to the NxStage Medical Fourth Quarter and Full Year 2008 Earnings Results Conference Call. My name is Lacy and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Miss Kirsten Sheppard with NxStage Medical. Please proceed.
Thank you and good morning. Welcome to NxStage Medical’s Fourth Quarter and Full Year 2008 Financial Results Conference Call. My name is Kirsten Sheppard. With me today are Jeffrey Burbank, NxStage’s CEO, and Robert Brown our CFO.
For your convenience a replay of this call will be available shortly after the conclusion of this call for two weeks. In addition, the press release for the fourth quarter and a recording of this call will be archived on our website under the Investor Information section.
Before starting, I would like to remind you that statements we 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 the purposes of the Safe Harbor Provision 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 products, the Company’s anticipated ability to restructure its GE credit facility, beliefs as to the expected impact of current economic 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 forward-looking statements are discussed in our SEC filings including our quarterly report on Form 10-Q for the period ended December 30, 2008.
In addition, any forward-looking statements made on this call represent the Company’s views only as of today. It should not be relied upon as representing our view as of subsequent dates. Future events and developments may cause these expectations to change and while we may elect to update these 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 would like to hand the call over to our CEO Jeff Burbank.
Thank you, Kirsten. Good morning and thanks for joining us. I am pleased to have the opportunity to discuss the Company with you today, especially as it relates to the progress we’re making in building a world-class renal technology company and how this plays with the current economic environment. I believe we can benefit from the fact that our products improved outcomes associated with life sustaining renal care treatments.
Despite the economic backdrop we’ve made meaningful progress in improving our financial performance. While we continue to make solid progress against our goal to reach positive adjusted EBITDA, we still have a lot to do and a lot to accomplish. Simply put, we delivered on each of the matrix we provided for you on the last call.
Revenues for the year came in at $128.8 million and fourth quarter revenues were above the high end of our guidance at $35.7 million. That is a 17% increase over Q3.
Gross margin increased to 20% for the fourth quarter, consistent with our guidance, and that’s up from 16% in Q3.
We reduced cash burn by $17 million from Q1 to Q4 of 2008, and again, consistent with our guidance our adjusted EBITDA loss continued to narrow coming in at $6 million for the fourth quarter. That’s down from $7.3 million in Q3. I believe we remain on track to approach positive EBITDA in the next four quarters.
We remain focused on driving the efforts that will increase adoption of home hemodialysis and grow our presence in all three of our markets.
Robert will review our financial performance in more detail. I’m going to run through my remarks quickly to tell you about our progress on the key drivers of our business which remain relatively strong.
As I said, 2008 was actually a very good year for NxStage. We continue to see growth in our businesses and have achieved significant improvement in our underlying economics. Throughout 2008 we systematically executed against our cost reduction initiatives to lower cost of goods sold. To achieve this improvement we insourced some components, improved the reliability of our products and scaled our manufacturing operations. Remember, our primary focus continues to be on revenue growth, improving gross margin, improving adjusted EBITDA and cash. This focus hasn’t changed at all.
We demonstrated solid growth in product sales while holding the line in expenses.
We remain focused on four areas of growth in the home market which are clinical data, reimbursement, going deep, and product development. I will touch on these again shortly, but I just wanted to say those haven’t changed. We’re still focused on those.
We had a good year for expanding our installed base of equipment in the critical care market and had strong product launches in the In-Center market.
We believe our business fundamentals are less vulnerable to the current economy than other businesses however we’re not immune. Most notably we’re cautious about critical care equipment revenue and tighter inventory management at our customers which may impact the revenue timing a bit. All of this is a good start, but much work needs to be done.
I will quickly review our three businesses, discuss some key operating matrix and the key items in our growth strategy. Let me start with the home.
The greatest long-term opportunity for NxStage is creating demand in the home market which we believe represents a billion dollar opportunity. We have a disrupted technology and we’re in the early stages of pioneering this market. I believe significant growth remains ahead of us.
In 2008 home revenues increased 62% for the year and 9% from Q3 to Q4. We have achieved these meaningful results with a strategy focused on advancing our four key market drivers. Again that’s clinical data, reimbursement, going deep, and product development.
Our progress on key measures in the home includes that we increase the number of centers with more than 10 patients to 80. That’s a 5% increase from Q3 to Q4 and a 54% increase over Q4 of 2007.
We increased the number of doctors prescribing therapy on System One by 66% during 2008. We also increased the number of markets with over 5% penetration by 42% in 2008 as compared to 2007.
We made significant strides in building the clinical evidence base for home dialysis in 2008. This summer we released data showing a 50% reduction in mortality for patients on our therapy as compared to the standard mortality for the overall US hemodialysis patient population. This analysis was based on over 2,000 patients on the NxStage system which are in the NxStage patient registry.
Last November we released four months FREEDOM data which showed significant benefits in five key quality of life measures including time to recover. This study shows NxStage patients gained a full day back each week where they are not overwhelmed by the consequences of therapy. Data of this magnitude is incredible. It really is disruptive and our job is to make sure that patients can get access to the benefit that these therapies provide.
Last week we provided data demonstrating that our patients experience a significant reduction in depressive symptoms that continue for a full year. We are very optimistic about how this will translate into economic advantages given that studies have shown these improvements in quality of life may result in potential reduction in hospitalizations.
The role this data plays in giving patients access to daily home hemodialysis is significant. Data like FREEDOM educates nephrologists and provides them with the clinical evidence that I believe gives them the confidence to prescribe daily therapy on the System One. Further more, I believe this data serves to establish support and advance reimbursement policies with payors including Medicare. We believe that data like that from our FREEDOM study can be a powerful catalyst in advancing reimbursement, especially as the healthcare system places greater emphasis on patient outcomes and the economic impact of treatment modalities in today’s economy.
NxStage remains focused on increasing patient access to this therapy through reimbursement improvements and is working collaboratively to build the support needed to affect change in this area.
Although we do not bring your attention very often to product enhancements, it is important for you to know we are continually enhancing and improving our offering. The majority of PureFlow SLs have been upgraded to a new version of software which is designed to improve the user experience. We have new cartridges going through the final phases of customer preference assessment along with a new fluid warmer and we continue to make progress on our nocturnal indication. These are a few of the product improvements that incorporate customer feedback. As a market leader I believe we are in the best possible position to understand what the real challenges and opportunities are within our patient and customer base.
Now let me turn to our critical care business.
In 2008 we grew critical care by 29% annually and 24% sequentially. This was well within our expectations. This is despite the weakening economy in the later part of 2008. We continue to have very strong market presence here and have won nearly all head-to-head market evaluations which we have participated in. I believe in the strength of our product offering.
We continue to innovate in this market as well and recently introduced our new ergonomic improvements to our system. It is designed to be more user friendly in the ICU setting in response to customer feedback.
We expect end user demand to be strong in 2009, particularly with respect to systems already installed; however we do foresee some changes in equipment purchasing patterns due to the current economic conditions and their impact on hospital capital budgets. Since the start of Q1 we have seen a material shift to a much more conservative capital-spending environment within our critical care customer base, putting some pressure on revenues derived from critical care system sales.
NxStage’s critical care business model is a classic razor, razor blade model consisting of the long-term System One disposable agreements with critical care facilities that account for the majority of our critical care revenues. We can play this to our advantage and offer a range of possible financial structures for equipment placements including sale, lease, and rental options. Importantly, these structures should allow capital constrained customers to move forward with a System One adoption. We are watching this closely to see how effective we can be with this approach.
Our strong fourth quarter system placements coupled with the systems now in place provide us with a reasonable level of confidence in projecting revenues for the critical care disposable business. Equipment placements are harder to predict in the current economic conditions. As such, we’re looking at a wider, more conservative range of possible system placement scenarios in Q1 and likely 2009 than might ordinarily be the case.
Now turning to In Center, we continue to see strength in our In Center business in 2008. Our fourth quarter performance was strong, as expected, as we saw good end-user demand as well as modern inventory build within our largest distributor.
Our focus in this business in 2009 is to continue to leverage the benefits of our revolutionary streamline technology. Streamline continues to demonstrate significant benefits for our customers by improving operating efficiency within their centers. There are meaningful conversion opportunities with streamline both for new and existing customers and we’re working aggressively to further capitalize on this opportunity in 2009.
For Q1 and 2009 we expect to see continued strong end-customer demand. Consistent with our experience in 2008 we expect that In Center revenues will be susceptible to some variations due to inventory stocking levels within end-users as well as within our distributors.
In closing, we feel good about the progress we’ve made in 2008. Our results demonstrate the strength of our unique business model. It’s a model that has proven formidable even in today’s economy. I will remind you that our business is centered on products used in life-sustaining treatment for patients with end-stage renal disease. That’s a population that has continued to grow between 3% and 5% on an annual basis and approximately 80% of whom are already Medicare patients.
In addition, only a relatively small portion of our annual revenues are related to up front capital purchases. With demand expected to remain strong within each of our businesses, or each of our markets, we believe NxStage is well positioned to withstand the current economic conditions. Still, we are exposed to certain factors outside of our influence including the length and severity of the current economic conditions and the impact it could have on our critical care customers and distributors’ purchasing decisions in 2009.
Generally speaking, we are all operating in a more conservative environment and being more conservative and cautious in how we forecast and run our business. As a result of our progress in reducing cost of goods sold we are forecasting first quarter revenues to be between $32 and $34 million and full year revenues to be between $135 and $145 million. Despite this economic pressure it’s important to note that we expect to drive meaningful improvements in our underlying business operations. As a key measure used by management of our operational performance, we believe adjusted EBITDA is a good indication of the progress we’re making against our goals to significantly reduce cash usage and achieve profitability.
With that, I would like to hand it over to Robert for his financial review.
Thank you, Jeff. I will review revenue for the fourth quarter of 2008 and the full year 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 the outlook for the first quarter and full year 2009. I will discuss the numbers on both a GAAP and non-GAAP basis. Please refer to the reconciliation table in our press release for further information in this regard.
Fourth quarter revenues were $35.7 million above the top end of our guidance range of approximately $32 to $35 million. These results represent a 17% increase over the third quarter of 2008 and compare favorably with the revenue of $29.9 million in the fourth quarter of 2007.
On an annual basis the Company achieved revenues of $128.8 million a 115% increase over 2007. On a pro forma basis, after giving affects of the Company’s acquisition of Medisystems, revenue increased 26%.
Revenues in the System One segment which consists of our home and critical care businesses were $19 million for the fourth quarter of 2008 compared to $14.2 million in the fourth quarter of 2007 and $16.8 million third quarter 2008. As Jeff mentioned, we continue to see solid growth in the home business.
Revenues in the In Center market were $16.7 million in the fourth quarter of 2008 compared to $15.7 million in the fourth quarter of 2007 and $13.7 million in the third quarter of 2008. This increase over the third quarter was in line with our expectations going into the quarter and was primarily the result of distributor stocking in the quarter after reducing inventory levels in the third quarter.
As a result of our progress in reducing cost of goods sold we increased overall gross margins by 400 basis points reaching 20% in the fourth quarter of 2008 compared with 16% in the third quarter of 2008 and 2% in the fourth quarter of 2007. While this represents tremendous progress we continue to execute against identified initiatives to improve from these levels and achieve our long-term gross margin target of 50%.
Operating expenses for the fourth quarter of 2008 were $18.3 million compared to $17.8 million in the fourth quarter of 2007 and $17 million in the third quarter of 2008. The increase in the third quarter primarily reflects increased spending in research and development related to clinical trials and distribution.
In the current economic environment we are even more focused on our cost structure and we will carefully manage our operating expenses during 2009. Importantly, we achieved our guidance to reduce distribution expenses as a percent of revenue. Fourth quarter System One distribution expenses were 19% compared with 30% in the fourth quarter of 2007.
Reported net loss of $9.8 million for the fourth quarter of 2008, compares with a loss of $17.4 million for the fourth quarter of 2007, and a $15 million loss in Q3 of 2008. The fourth and third quarter net loss include the impact of a $2.3 million non-cash gain and a $1.8 million non-cash loss respectively, which reflects the change of value of the financial instruments associated with a 2008 $23 million [inaudible].
In 2008 $43 million private placements which included both common stock and warrants, excluding these items, we out performed the low end of our guidance range. Since the company achieved greater than 3,100 ESRD patients prescribed to receive therapy using the NxStage System One as of December 31, 2008 the ex-life price of $550 on these warrants will not be adjusted. The warrants as of January 31, 2009 will be classified in equity and will no longer be adjusted to fair value going forward.
On a non-GAAP basis our adjusted EBITDA loss adjusted for stock based compensation, deferred revenue recognized, and the liability accounting on the private placements that I just mentioned narrowed to $6 million in the fourth quarter of 2008 and compares favorably with $11.6 million in the fourth quarter of 2007 and $7.3 million in the third quarter of 2008. Our ability to drive continued sequential improvement here is very encouraging.
We continue to see our path to profitability tightly aligned with our progress on adjusted EBITDA. Our cash usage for the fourth quarter of 2008 was $6.1 million, a $13.8 million reduction from the fourth quarter of 2007 and a $5.3 million reduction from the third quarter of 2008.
Rolling down a bit more here, with future revenue growth and continued improvements in gross margin our adjusted EBITDA and cash usage numbers progressed in the right direction. Further more, as we have previously indicated, the inventory purchases we made in the second quarter of 2008 as a result of closing out our outside manufacturing contract provided us with sufficient equipment to meet demand without spending significant additional cash during 2009. This is why we have been so aggressively focused on reducing COGS and improving gross margins.
Turning to the balance sheet and cash flow statement, cash and cash equivalents at December 31, 2008 totaled $26.6 million. We continue to believe, based on current projections, that the Company has the required resources to fund projected operating costs beyond 2009 provided we amend and restructure certain terms under our current GE credit facility.
Our financial priorities for 2009 remain focused on driving continued quarter-on-quarter improvements in four key areas: revenue, gross margin, adjusted EBITDA, and cash, all with the goal of achieving positive adjusted EBITDA and creating more value for our shareholders. We made good progress in these areas through out 2008 and believe we are positioned for 2009.
Now let’s turn to our guidance.
As Jeff indicated, in the current economic environment we are being conservative and cautious in how we forecast and run our business. This forecast is driven by initiatives for each business and builds upon the progress made in 2008. Among other factors it also takes into account the things we can’t control, the uncertainty around the length and severity of the current economic conditions and the impact it could have on our critical care customers’ and distributors’ purchasing decisions in 2009.
Despite this economic pressure we expect to drive meaningful improvements in our underlying business operations. We are forecasting revenues to be between $32 and $34 million for the first quarter of 2009. We expect a net loss in the range of $12.5 to $13.5 million or $0.27 to $0.29 per share and an adjusted EBITDA loss in the range of $6 to $7 million for the first quarter of 2009.
For the full fiscal year 2009 we are forecasting revenue to be between $135 to $145 million. We expect a net loss in the range of $42 to $47 million or $0.90 to $1.01 per share and for an adjusted EBITDA loss in the range of $13 to $18 million for the full fiscal year 2009. We expect to achieve consolidated gross margins of between 27% to 32% in the fourth quarter of 2009.
Now I would like to open the call to questions. Operator, we are ready for the first question.
(Operator Instructions) Your first question comes from Ben Andrew with William Blair & Company.
Ben Andrew - William Blair & Company
Can you talk a little about what you’re seeing from customers on the inventory side and why the build in distributor levels and how impactful that is in terms of dollars and how that may flow through the channel over the course of the year. You referred to that, but you didn’t go into much detail.
Stepping back to Q3 we saw the distributors’ take down their inventory about $1.5 million as a result of negotiations around our DaVita bloodline tubing set and so we saw them basically go back up to their restocking levels in Q4. End-user demand has stayed steady and it has been growing with the market rate, so it’s about average of the two quarters of Q3 and Q4.
Ben Andrew - William Blair & Company
So you’re not predicting some material difference over the course of ’09?
No, we expect it to grow with continued market growth.
Ben Andrew - William Blair & Company
Okay and then on the demand side, Jeff, you referred to what’s going on in the critical care setting. How does the change from a sale to a lease or rental arrangement affect cash flow and the economics for the placement, if you will, for the system for you guys?
The difference between a sale and a rental, clearly with a sale you get the cash up front on the machine. But, in the critical care market about 20% of our business is machines and about 80% is disposables, so we’ve got a good, strong, disposable base there. It’s still profitable for us to rent the equipment and it makes sense based on the current economic environment to get the machines out there and get them placed under rental if we can’t get them underneath a sale.
It shouldn’t have a meaningful impact on our cash, so we believe we can avoid that strategy without having to come back to you and say oh this is going to have a big impact here or there. There is such a high volume of revenue dollars in the disposable side that we can find ways to deal with that that won’t have a significant effect on our balance sheet.
Ben Andrew - William Blair & Company
Okay you’ve already had that baked into the ’09 assumptions that that happens.
Ben Andrew - William Blair & Company
Then on the chronic side what are you hearing from clinics relative to their willingness to kind of expand their programs with you in this environment. Is there any change in tone from them in regards to, the new patients is about what we expected this quarter, but maybe a little bit lower for next year than we were looking for.
In terms of have we heard anything from the market? As of today, as we are sitting here today patients continue to grow. Everything seems to be as it was last year in the chronic home business. That’s more driven by what we feel are those fundamental initiatives, getting clinical data, getting reimbursement, which there has probably been some good news on reimbursement. I think we feel more confident in the near term on how successful the reimbursement is working for our customer and then the others in terms of going deep and getting them good at delivering the therapy and product evolution. We see those as far bigger issues in driving market adoption than we’ve seen any effect from the current economic conditions.
Ben Andrew - William Blair & Company
Okay, thank you.
Your next question comes from Bill Plovanic with Canaccord Adams.
Ben- Canaccord Adams
Good morning this is Ben [interposing] for Bill. The question I had is in terms of the annual Dialysis Conference was run in Texas this week. There was a full day week. There was a full day set aside for home hemodialysis. Were you guys in any way a part of that program and were you attending? Can you comment at all on any treatments from that meeting?
Yes, we thought it was a very positive meeting for home hemodialysis and NxStage specifically. We had a very large presence there both in people that were involved with various programs. Had a patient that was presenting in that daylong conference and then abstracts that were presented on our technology, so very solid performance, and exposure down there. Our team came back and was, quite honestly, pretty pumped up about just the energy and the momentum at that meeting. So we felt really good about it.
Ben - Canaccord Adams
Are these types of events going to continue, or are you seeing more of a desire in the community for information about home hemodialysis? How is it helping your go strategy?
We are absolutely seeing more interest. I will take the time, kind of, to make a pitch. It is world kidney day and things like that are opportunities for us to leverage and bring awareness to home hemodialysis and for instance the New York Times on their website has patient stories told in the patients own words today on their healthcare website. You may want to take a look at that. There is a NxStage patient on that and actually even some of the transplant patients have been on NxStage as a bridge to their transplant.
We are in a long-term process of building awareness. It is very hard to drill it down to is the ADC this year going to have a meaningful impact on growth rate in the next four to six months. We saw a lot of presence from a lot of people. Some new faces there which is encouraging. We feel good about it. But, we are going to stay to our game. We are going to focus on creating better and more clinical data. Continue to focus on reimbursement over the long haul, although in the near-term I think providers are achieving what they need to achieve with their payors. Payors seem to be paying what they should be paying when they’re billed for the treatments that physicians believe the patient should be receiving. So, we are seeing some good trends, but this is a march, not a sprint. We will get there.
Ben - Canaccord Adams
Are you seeing any competitive devices in the home market coming out from any of your competitors?
Right now we are the only game in town. We’ve been here for a while. We’ve got a nice mature product. There is some talk. Of course you are going to hear that discussion. Baxter is talking about a product a few years from now in the market, so we’re always paying attention to that, but in the horizon we’re focused on in the next couple years of building this market, we don’t see a direct competitor coming in.
Ben - Canaccord Adams
Did you mention anything about the nocturnal device and could you give an update on that?
Sure. We continue to progress in those clinical trials. We are hoping for approval by around the end of this year. You can’t always call that, because obviously part of that process is in the FDA’s hands and we can’t influence their timelines, but we’re making good progress. We’ve got a number of patients on that. That is just part of growing our indication statement and handling everything that people want to do in the home and so we are making good progress there.
Ben - Canaccord Adams
Thank you very much.
At this time I show no questions in queue. I would like to turn the call back over to Mr. Jeff Burbank for any closing remarks.
Again everybody, thanks for giving us the opportunity to talk about the progress we have made and we’ll look forward to coming back to you next quarter. Take care.
Thank you for your participation in today’s conference. This concludes your presentation. Good day everyone.
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