NxStage Medical's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: NxStage Medical, (NXTM)

NxStage Medical, Inc. (NASDAQ:NXTM)

Q1 2013 Earnings Call

May 2, 2013 9:00 a.m. ET

Executives

Jeff Burbank – CEO

Robert Brown – Chief Financial Officer

Kristen Sheppard – Vice President, Investor Relations

Analysts

Kim Gallium – JP Morgan

Margaret Kaczor - William Blair

Bill Plovanic – Canaccord

Kevin Ellich – Piper Jaffray

Danielle Antalfy – Leerink Swann

Matt Weight – Feltl & Co.

Chris Cooley - Stephens Inc.

Operator

Good day ladies and gentlemen and welcome to the NxStage Medical’s first quarter fiscal 2013 financial results. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, today’s conference call is being recorded.

Now I’ll turn the conference over to your host, Kristen Sheppard with NxStage Medical. Please begin.

Kristen Sheppard

Thank you. And good morning. Welcome to NxStage Medical’s first quarter 2013 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 supplies from key vendors, our plans with respect to future developments including centers of excellence, 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 annual report on Form 10-K for the year ended December 31, 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 our CEO, Jeff Burbank.

Jeff Burbank

Good morning and thank you for joining us. Today I will provide a brief review of the quarter and discuss recent environment with our strategic growth initiatives. Then Robert will discuss the financials in more detail and provide guidance for the second quarter.

We remain focused on annual growth rates with the first quarter playing out as expected. Total revenue came in at the upper end of our guidance range at $61.6 million. That’s an 8% increase over the prior year period. Consistent with our guidance, home revenue increased 6% over the prior year, critical care grew 9% and In-Center grew 6%. We had a good start to the year.

In addition to meeting our near term financial objectives, we are on track with acquisition against initiatives that are focused on accelerating growth over the long term. Based on our outlook and our continuing progress in these areas, we are reaffirming both our guidance for 2013 and our belief that we are creating significant catalysts for adoption of the NxStage therapies in 2014 and beyond.

One of the most significant drivers of growth is our innovative technology. We are maintaining our first-mover advantage in what we believe is a significant $1 billion or more home hemodialysis market opportunity with regulatory approvals for a number of new product innovations such as CE mark approval for our 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. It should be a great option for those that want it. We’re giving the patients the task to use sleeping time for treatment time which makes home therapy even less the truth is.

We are also working hard to bring this capability to U.S. patients through our continuing efforts on our IV study. We received CE mark approval for single needle. With this revolutionary technology we are helping allay some of the concerns with disconnection. We are pleased to get CE mark approval and I am excited about our performance in our first patient experiences. It looks like we’re hitting the mark by avoiding many of the complications that single needle approaches had in the past.

Earlier in Q1 we received CE mark approval for a higher dialysate flow rate on the System One. I am very excited to announce yet another significant milestone with FDA approval for high flow. These new capabilities expand the System One’s flexibility, for example, three times per week or every other day therapy can be prescribed as frequent time consistent with those patients and physicians experience in the center today. We are strong believer in longer and more frequent dialysis for its clinical benefits. But high flow expands our capability to patients who want the benefit of home but in the in-center frequency. We believe higher flow will play a key role in long term adoption of our therapy.

Later in 2013, we expect to launch Connected Health, our operating system of the future for dialysis therapy in the home. Connected Health provides new features and capabilities that are important to home dialysis patients and nurses, including tools that automate the significant part of the flow sheet administrative paperwork.

We are on track to begin launching this new product in the CE mark countries in the next few months. Despite regulatory timelines being somewhat unpredictable, we are also working to get these products cleared as we move through this year and into 2014. Within the U.S. we continue our efforts to expand direct to patient marketing with a comprehensive process that results in more patients on our therapy. As we discussed in our last call, we have served some nice foods in patient training in select pilot markets as a result of the new and enhanced direct to patient marketing.

To follow-up on that, we are pleased to have seen initial increases in training in these markets to be sustained. We are now engaged in the second wave of markets to try to replicate of this activity. It’s early but we believe we have the effective strategies to increase growth rates. We remain committed to increasing our investments in these activities as we move forward. We are going to market with product enhancement and reducing various food options and we are investing in resources to drive demand more efficiently. I believe that our execution on these initiatives will have a significant impact on home’s growth rate taking us to 15% annual revenue growth in 2014 and beyond.

In terms of long term revenue creation, we believe our ability to innovate patient driven care will create a significant market opportunity. Patient driven care provides the pathways and improved quality life and an economic outcome over the long term. We’ve demonstrated our ability to bring product innovation and we will continue our investment in our product pipeline with potentially breakthrough initiatives including next-generation hemodialysis products, new options for the critical care and our future care of hemodialysis product.

We are excited about all those new technologies we are developing and look forward to bringing them to the market over the coming years. Our centers of excellence initiative is focused on patient. We have a solid track record of being an innovator. We are excited to bringing innovation to the entire process of delivering care for patients, care partners, consolidators and providers interested in home therapies. Through this initiative we look to develop a more efficient and effective care model which ultimately will expand patient access.

The key aspect of this effort involves showcasing the therapeutic flexibility of the System One to help more patients essentially basic therapy into their life goals. Our first NxStage on centers of excellence remains on track to open mid-year. Let’s not forget the strategic value and contributions from our other growing markets. We continue to feel good about our prospects for critical care and in-center market. I am pleased with the team’s execution which Robert will discuss in more detail.

In summary, it was a solid quarter which has set our foot on track for the year. Revenue growth continues to be strong across our business. Our market fundamentals remain positive and we are systematically executing against our growth strategies. All this gives us confidence to reaffirm our full year guidance for 2013. Perhaps more importantly we believe we have set the company up for an exciting new chapter of growth in 2014 and beyond. We believe the future holds enormous promise for NxStage as we continue to improve lives with innovation, design, (inaudible) standard of renal care.

With that, let me now turn the things over to Robert.

Robert Brown

Thank you, Jeff. I will review revenue for the first quarter of 2013, including details of our 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 second quarter. As Jeff discussed, we are pleased to report another solid quarter. Total revenue for the first quarter was $61.6 million at the upper end of our guidance range. This represents an 8% increase over the first quarter of 2012.

Taking a closer look at our revenues by segment, during the first quarter of 2013, our System One segment represented approximately 70% of revenue and increased 7% over the prior year period. We are pleased with our performance in home within the segment which increased 6% to $31.5 million for the first quarter of 2013 compared with $29.6 million for the first quarter of 2012. These results which reflect the impact of transition to a direct sales operation from our distribution relationship in the UK were in line with our guidance. Our market fundamentals in the home remained strong and positive and we expect that with this transition plus the other strategic growth initiatives Jeff outlined, we have the ability to accelerate home growth taking us to 15% annual revenue growth in 2014 and beyond.

Within this segment, critical care also increased to $10.7 million in the first quarter of 2013, representing an increase of 9% over the first quarter of 2012. Our pipeline of opportunities with new and existing customers remains robust. As a reminder, machine sales historically peaked in the fourth quarter and then returned to a more normalized level in the first quarter.

Our In-center segment revenue increased to $18.7 million in the first quarter of 2013. Consistent with our experience, revenue will continue to be susceptible to fluctuations as a result of inventory management policies with both our distributors and end users. Within other revenue, we reported $775,000 reflecting the company’s Dialyzer sales to Asahi for the first quarter of 2013.

First quarter gross margins increased to 39%, up approximately 150 basis points from the first quarter of 2012. We continued to drive meaningful gross margin improvements within the System One and In-center segments. With the combined improvement of 300 basis points offset by start-up costs in the new Germany filter facility, System One gross margin increased to 46% for the first quarter of 2013 compared with 45% in 2012 while In-center gross margin increased to 28% for the first quarter compared with 21% in 2012.

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.

NxStage had a net loss of $5 million for the first quarter of 2013 compared with a net loss of 5.1 million for the first quarter of 2012, reflecting our increased investment in new products and market development efforts to accelerate future revenue growth. We ended the quarter with 100 million in 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 guidance, as Jeff indicated, given both our outlook and our progress on our new growth initiatives we are reaffirming our full year 2013 guidance for revenue to be between $265 million to $270 million and a net loss in the range of $13 million to $17 million or $0.22 to $0.28 per share. For the same quarter of 2013, we expect revenue to be in the range of $64 million to $65.5 million and a net loss in the range of $4 million to $5 million or $0.07 to $0.08 per share.

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) First question is from Kim Gallium of JP Morgan.

Kim Gallium – JP Morgan

So I guess first question is, I guess my biggest question as I look at your commentary here is the expectation for the 15% annual revenue growth in 2014 and beyond. You’re kind of reiterating what you said last quarter there. So I think it would help if you could just kind of walk us through where the confidence comes from. It sounds like it’s from home but how you get the visibility that you can grow that, that top line 15% plus starting next year?

Jeff Burbank

Thanks Kim. Let me start out on the product side of it. As you have seen we have done a really good job of executing new products and bring them to market, almost the entire suite of CE mark approved and now we have added high flow clearance in the US. So that includes the nocturnal, the single needle, the high flow capability and as we go through the year, Connected Health adding into that suite. So a really strong product portfolio carrying into 2014. Little unpredictable but I think we will get the majority of these in place as we move through the year into ’14.

The second thing that really is building our confidence is our execution on marketing. So talked a little bit in my script about the direct to patient marketing, it’s more than just direct to patient, it really is a comprehensive program that starts with media, whether it’s direct mail or billboards, those types of activities to drive demand and then we’ve got the whole process to cover that demand into patients on the therapy. So we’ve got a lot better on that and as I mentioned on the last call we are investing more resources around that to grow that program as we move forward and kind of the new news in that area is we’ve seen that increase in those areas where we put the efforts in as being a sustainable growth rate and follow up in the months after we put the effort. And so we feel better about the sustainability of those programs. So that’s really good some progress on the international. We closed the deal with Camel as expected in the first quarter. So our direct operation is there, so we think it’s a little bit better upside opportunities as we move forward there.

And the in the mid term we’ve got the centers of excellence which we are making good progress. As I mentioned, we are on track to open the first one there in mid-year. That combined with our longer term product pipeline, we feel really good about all the initiatives we have, we think that will carry us into ’14 strong and then grow from there in future years. So comprehensive portfolio that we did a really good job of executing against that in the first quarter.

Kim Gallium – JP Morgan

And maybe just on the high flow, congratulations on that recent approval in the U.S. Maybe just talk a little bit about how – you covered it in your script but how we should think about the high flow contributing to the U.S. growth, how you’re really integrating that into your sales and into your growth expectations for the next kind of 12-24 months?

Jeff Burbank

Sure. So let’s look a little bit more new (inaudible) I am going to take a minute on it. I think one of the things we’ve always got a good job of is bringing great products to the market and then improving them as we move forward. So this is a great example of how we continue that value and reposition the product. At the beginning you try to bring safe, effective and reliable cost effective products to market which I think we did, but at the time we couldn’t achieve the flow rates that we were hoping to. Now we know how to do it and we’ve got the clearance to do that.

Let me talk about maybe two examples of where we see value points. So let’s say that the patient on is doing five or six times a week and their treatment time is closer to three hours. They’re working pretty hard, that’s a lot of burden for that patient to receive the benefits of more frequent care. So they are making a pretty big investment to get the benefit of more frequent care, speaks a lot to how beneficial more frequent care is. But on the other hand, we can take that treatment down to 2.5 hours, we just get them two to three hours a week back. That’s a phenomenal benefit for those patients that are making that investment. So we see an ability to almost reward them for that investment and better care. So that’s maybe on one side. Reducing the burden, we think that will play through in reducing the drop-out rate in those patients. Anything we do to make it easier makes it – we think will have those patients on the therapy longer. So that’s one side of it.

The other is, we think there is a patient population that looks at this and says I am doing three times a week in-center. I don’t really want to do five or six because they never experience the benefits of doing more frequent care. They are sitting in that center and haven’t felt what is like to be fluid managed and have that (inaudible) removed. So they are just look at it is I don’t want to do it more times. Maybe we can get that patient to three times a week and before those are going to be longer treatments, now they are going to be set very similar treatment duration to what they experienced it in-center. So we think that’s less of a burden to move those patients over into the home environment and then that gives them the opportunity, maybe they are going to try it every other day and see the benefits for how they feel from that. So that’s another advantage of doing this. It’s bringing it into the context that they are used to and then working them up the value chain to a better quality life. So we’re really excited about how they can grow the market. It’s just one more tool. I am not here to tell you, oh, this is it. We’ve finally cracked the code. It’s just one more barrier we are knocking down in our progress to create this market.

Kim Gallium – JP Morgan

Just as follow up, how -- from the centers perspective how has that changed their thinking in terms of the willingness to send their patients at the home and obviously you still have the upfront costs of treating the patient. But we understand that medication justifications is a process that works a lot better today than it did a number of years ago. But does that help at all from the standpoint of, hey, we’re not going to need – we are not going to be – and these patients aren’t necessarily going to be treating five to six times per week, they are treating maybe three to four in the home?

Jeff Burbank

Yeah, so let me put in kind of really simplistic terms. We have driven this market through patient demand. So to the extent we have features that can drive more patient demand, we think providers will respond to that the way they have from the beginning of creating this market. It’s really ultimately patient demand that drives the growth in the market, and we think this can facilitate that.

Operator

Thank you. Our next question is from Margaret Kaczor of William Blair.

Margaret Kaczor - William Blair

Can you guys first of all kind of talk through some of the one-time issues, first kind of quantify maybe the impact of that loss of the rental to sales deferred revenue, I think that was this quarter, did a couple of thousand or more than that, and as we go on throughout the year, can you talk about that on a quarterly basis? And then on the same thing for Chemo.

Jeff Burbank

The first thing we can say is that, it’s actually all of the revenue growth for the quarter was offset for the accounting of Chemo. And that was – came in exactly how we called it, we thought it would be sequentially flat. We gave the guidance on that, and that’s exactly how it came out. That other level of detail, that’s why we moved to annual guidance on growth rates because it will be up and down. There are some puts and takes around that. So we haven’t gone to that level of detail because we think that’s a better way to measure the business is on that annual growth rate.

Margaret Kaczor - William Blair

So I guess maybe asking the question a little bit differently is, outside of that loss of that rental for sales in the chemo, do you know what that growth, home growth percentage wise at all? Or is that something that you’d be willing to give us?

Jeff Burbank

We shared year over year revenue growth rate, so that’s pretty obvious. You can calculate that. I am not sure if I am understanding the question.

Margaret Kaczor - William Blair

I mean I guess the question is really related to kind of the option that we are seeing ex some of these factors. But –

Jeff Burbank

Yes, no, we continue to see patient growth. The market continues to develop the way we expected it to, and that’s all – there is puts and takes around that on the revenue line. But we are pleased with the patient growth, if that’s been what we want to do in the long term and that’s why we are investing heavily in these programs to bring that up. But it’s very consistent with what we have experienced here.

Margaret Kaczor - William Blair

And then can you talk a little bit about kind of the contract renewals that are coming up this year, both the division percentage -- I mean historically you guys have come up with some pretty good contracts for yourself. But maybe have we – and we have seen them maybe pull back sales in advance of signing that contract. So are you guys baking that in or negotiation actually expected to go out and you don’t really expect too much of an impact?

Jeff Burbank

So it’s a good question. Those are always little higher risk areas of our business. However we think we’ve put the range of reasonable outcomes of that into our guidance. So we think we are well positioned relative to those things, we have been working hard on those to get to a good outcomes for our customers and ourselves.

Operator

Our next question is from Bill Plovanic of Canaccord.

Bill Plovanic – Canaccord

A couple of things. First the housekeeping, just med device tax how much was the impact for you this quarter, Robert?

Robert Brown

It’s about 3 million for the year. So it’s pretty ratable over the year.

Bill Plovanic – Canaccord

And so for the quarter it’s just taking further to that.

Robert Brown

No.

Bill Plovanic – Canaccord

Sorry, I am working on hockey terms here. Just -- now that you have the high flow as you go to the centers of excellence, is the NxStage System One able to perform all the services you need to be able to perform in that setting?

Jeff Burbank

Do you mean the full range of therapies from three times a week to thousand times a week, and daily we are cleared and we are working on nocturnal, the answer is yes. We think all within reasonable timelines or reasonable treatment times that people will readily accept, so yes.

Bill Plovanic – Canaccord

And then do you – on the nocturnal I know you’ve hit on it in your prepared remarks. But I don’t think you gave any timing for the U.S. or kind of where you are with the FDA. Just any updates there?

Jeff Burbank

Yeah, so we gave a little bit of visibility and we are on track with that, which is we thought we could get it and done and submitted this year. We might get to one round of questions. So it’s hard to determine whether we’re going to get cleared by the end of this year or not based on FDA. But we think we can get our part of the work done towards the end of the third quarter.

Bill Plovanic – Canaccord

And then just – I think the other thing that people are looking for is I believe typically in the spring there is a proposal put out for CMS for reimbursement. Any color on the discussions you are having or any of the lobbying efforts or what have you in terms of just getting the training reimbursement improved?

Jeff Burbank

So we continue to focus on it, invest in it, continue to have meetings and work hard on it. You’re seeing some of the public activities or the results of some of our efforts, a nice letter went to the CMS from – co-signed by a number of legislators. So we were pleased to see that. This is always – you work hard but there is no certain outcome. So I don’t know how to call the results. But I am pleased with the effort that we are putting into it.

Operator

Our next question is from Kevin Ellich of Piper Jaffray.

Kevin Ellich – Piper Jaffray

Just wondering if you could provide maybe some updates on your timelines. You talked about centers of excellence, just wondering if anything has changed with PD or entering to Japan?

Jeff Burbank

So let me start with centers of excellence, we are right on the timeline, very focused on our first start there, make them as significant as possibly we can. So lot of excitement and energy going into that. Correct, hemodialysis kind of interesting that you asked, we showed some of our prototypes to the first experts, actually yesterday and got tremendous positive feedback. So we really think we’ve got something revolutionary. We are on track. When we first announced that, we said three to five years. We are now few quarters into that and we are right on time with that. Little bit on predictability, not in our execution but in what the regulatory timeline will be and we hope to get more visibility on that as we go through this year, into next and have those discussions with the regulatory agencies.

In terms of Japan, we continue to work with our partners there, Asahi and are making progress in the process of submitting and getting cleared there. So we hope to make that a market opportunity sometime in the future. It’s a bit of ways off, so it’s one of our long term opportunities, not near to mid.

Kevin Ellich – Piper Jaffray

And then just going back to the comment about 15% revenue growth in ‘14 and beyond. Do you have new products or I think enhancements that you plan to bring to market that will help contribute to the 15% growth?

Jeff Burbank

We’re talking about 15% home and that will drive the company growth rate as well. So I think (inaudible) more so than years, so they give you some visibility against how we are going to get there. So it’s a whole lift of products including a high flow, nocturnal, single needle, Connected Health and then in later term hemodialysis. So – but that’s a number of years out at this point.

Kevin Ellich – Piper Jaffray

And given all those components, in the past you guys had made with single needle, high flow, Connected Health etcetera, have you ever thought about packaging them together and kind of selling them or offering them to other providers?

Jeff Burbank

Not sure exactly what you are getting at there. There we will market some of those as upgrade, kind of a new positioning. I think you will hear about NxStage System One as a result of some of these higher capabilities, is that what you are getting at or is there something more I can answer?

Kevin Ellich – Piper Jaffray

More or less. Yeah, that’s pretty much it, Jeff. And then last question for Robert. I noticed R&D was a little bit higher, we saw it ticked a little bit higher this quarter. Anything going on there and is that kind of the new run rate we should be thinking about?

Robert Brown

Yeah, I think we are going to look at about an 8% run rate for the year. It’s what we are looking at. But it’s – the money being spent around the PD program, other programs like Connected Health that we are seeing the uptick in R&D.

Operator

Our next question is from Danielle Antalfy of Leerink Swann.

Danielle Antalfy – Leerink Swann

Jeff, I was hoping if you could give a little color, particularly as you are getting ready to open centers of excellence and you’re renegotiating contracts with (inaudible) any sense of how they are reacting to your care strategy with the critical centers of excellence, are they happy about it, or are they – how are they are reacting?

Jeff Burbank

We are focused on the first few. So it’s really early in the process. Obviously we have been pretty transparent about our efforts. So they are aware of what we are doing. I think they are going to watch closely and see how that progresses. So we will see but it’s pretty early in that process.

Danielle Antalfy – Leerink Swann

So no concern on your – and if they are actually the opposite of happy, or maybe what hurt you guys in your renegotiation process, because of that?

Jeff Burbank

We are making good progress in those discussions and when we conclude we will come back and we think we’ve incorporated those outcomes in the guidance. So it would give you some level of comfort based on that, that incorporates our views on that.

Danielle Antalfy – Leerink Swann

And then I was hoping to follow up on nocturnal because this is now back on the table in one or the other way, I think that it has been. And so wondering if you could remind us sort of how you view the nocturnal market, is that something that could take potential penetration and double it or how do we think about the progression of nocturnal one for you to hopefully get that indication?

Jeff Burbank

So we’re really excited about nocturnal for a couple of reasons. One is we think from what we have seen is a very good therapy for those that want to do it. It really can impact clinical outcomes potentially. The second is it’s possible they could further reduce burden. If you knew their sleep time versus your day time to do your therapy, we think that can liberate some patients of that. So that we think translates to either reduced burden or just better time outcomes and we think that ultimately leads to the patient demand. So it’s going to be one more driver of patient demand in this whole equation.

I don’t like to say there is one silver bullet on anything. That’s why we are investing in multiple solutions, to multiple directions because we think ultimately that’s what it will take to create this whole business opportunity or market opportunity here. So I think it’s a really solid addition as is high flow for an example. So we feel very good about it. It does prove to be very challenging from a regulatory perspective. We have been working on this a long time. We’ve got a lot of good discussions with the FDA. Again we think we know the pathway but we thought that in the past. So I just want to be a little bit cautious about any outcomes on that. But the clinical work so far looks really good for us.

Operator

Our next question is from Kumar Savo of Stephens Inc.

Chris Cooley - Stephens Inc.

Hey Jeff and Kristen, it’s Chris. Hope you all are doing well. I apologize I have to hop back and forth between two calls for this morning. But the two questions that I had was, one, when you think about the puts and takes for guidance for the remainder of this year, do you include anything for the ASCO program here in the back half and if so, kind of curious what your expectations are around that as it may pertain to incremental growth for home hemo? And then just as a follow up, on the centers of excellence, I heard you say mid-year for the first one. But I am just a little bit curious about what type of patient volumes you think you will see in these centers relative to say a traditional center or center network when we think about what they have from a home perspective?

Jeff Burbank

So on the integrated care ASCO managed care model for those that aren’t familiar with the acronyms, it’s ways too early in that. So from -- actual results from that program, that’s in the future to even understand before we see. Now there is some elements that are being discussed that we are pretty enthusiastic about. Remember the reason for our long term enthusiasm as we believe we can potentially demonstrate that this is the lowest cost approach to the highest quality outcome for a range of patients. So we think as the system moves to more and more care to patient, integrated care we are well positioned. That’s really been one of our long term stories but we are very positive about. So it’s raised the line as the reimbursements start to move in that direction, we think we are well positioned.

In terms of centers of excellence, these probably in general will be smaller patient number centers than traditional centers which are more like 80 or 90 patients or 70 to 90 patients. So we expect they’d be little smaller than that, and we don’t really have an experience of patient ramp. So we need to go, do a little bit of it before I can come back and set an expectation on that. We certainly have a lot of models but let’s go test a few of those and we will come back to you and tell you what to expect. But just focusing on getting the first ones up and then we will have some data to share with you.

Chris Cooley - Stephens Inc.

So if I can maybe just kind of paraphrase and put it back a little bit here to, on that last response, it sounds like you have a fairly nominal expectation for growth contribution from the centers of excellence when you think about the back half of the year, would that be a fair assessment?

Jeff Burbank

Yeah, for this year, there is basically no revenue and that’s really something that’s going to come ’14 and beyond and by that time, hopefully we will have a little bit of experience with our first one. Also, let me be clear on that because now that you said that raises another issue. We said that the 15% home growth rate would be – it would not include revenue from the centers of excellence. So that’s not what’s driving, we think it’s fundamental home therapy demand, not centers of excellence revenue in that growth rate.

Operator

Next question is from Matt Weight of Feltl & Co.

Matt Weight – Feltl & Co.

On high flow capabilities, how do you avoid potentially sending the confusing message to patients because on the one hand, the clinical benefits of System One are clearly the frequency of treatments and now you also have the capability of only doing it three times, and I understand the convenience factor of it but it could potentially lessen the benefits in terms of the clinical benefits side?

Jeff Burbank

I guess I look at it as just the opposite. Because if somebody is doing a treatment five times a week, that patient gets 3 hours and they see the benefit for them in doing that. They are going to see more benefit in doing the same thing only 2.5 hour of each treatment. So we are going to give them two to three hours back a week if they want it, and still receive the kind of benefit they are in frequency. If they are finding through that now, this is going to make it better. So I think it moves more patients in that direction, not less. So we think it expands the market.

Matt Weight – Feltl & Co.

So if I understand that correctly, then in that situation, it’s people who are currently on System One that they are doing it five times a week versus somebody who is already in center.

Jeff Burbank

I don’t mean to make it too simple. Everything is better. So we’ve always be able to do it three times a week but the treatment time was a bit longer than in-center type treatment time. So that was a bit more of a burden that we like. We – most patients have been doing five or six times a week to drive the clinical benefits which is so much easier to do it on our system versus traditional systems. So that’s why our market has moved to more frequency, they wanted the benefits and now they are receiving the benefits of the product but the treatment is a little longer. We can make that a better experience.

We think that moves more patients in that direction. We are also talking about – now we have a more reasonable treatment time for three times a week, so a patient that’s sitting in a center that says I can’t imagine doing it five times a week. I am doing it three and I hate that. But I love to do it at home. I love to travel with it. I love to have the flexibility of doing it, when I want to do it and the clinical data says just moving home is better for you than doing it in-center. So that’s an advantage that maybe some people will say, but I didn’t want to do it when the treatment time was much longer than what I am experiencing in the center. So I think that can drive some demand that will open the market further. So it’s not people aren’t going to drift backwards, they are already doing more frequent and we are just making that better. So we think it opens up the space more.

Matt Weight – Feltl & Co.

And then just last question here, center of excellence, can you remind us CapEx per center and then ultimately how many centers do you think you can look to get opened? I know you have one this year but what’s your long term expectation?

Jeff Burbank

Yeah, the CapEx per center is around $1 million of CapEx. And then we are focused on getting the first couple opened.

Operator

Thank you. There are no further questions at this time. I would like to turn the call over to Mr. Jeff Burbank for any closing remarks.

Jeff Burbank

Thanks for your time and attention everyone. We are pleased to put up the quarter as expected and we will look forward to talking to you after the second quarter. Take care.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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