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NxStage Medical (NASDAQ:NXTM)

JPMorgan Healthcare Conference

Jan 15, 2014 19:30 PM ET

Executives

Jeff Burbank - CEO

Analysts

Kim Gailun - JPMorgan

Operator

Kim Gailun – JPMorgan

Great. Good afternoon I’m Kim Gailun with the JPMorgan MedTech team and presenting next we have NxStage Medical and we’re thrilled to have with us the CEO Jeff Burbank

Jeff Burbank

Thank you Kim and thank you all for staying around for the presentation. I will try to reward you with a dazzling presentation here. The first is our Safe Harbor, I’m sure you’re very excited about that but please pay attention to it if you want to further reference it. It is on our website for your reading pleasure. So just a quick orientation NxStage is a company that endeavors to reduce the burden of kidney care and there are really two types of kidney failure, there is an acute failure that last for a period of few weeks and the patient recovers it's usually due to trauma or surgery one of those type of events and there is also chronic kidney care which is created a $100 billion worldwide market but a $10 billion to $13 billion product market so that’s the space we’re focused in.

Let me talk a little bit about what NxStage has achieved and how we have done it. We really have driven with an intense patient focus. It used to be that just clinical benefits were the way you drove products in the modern healthcare system. We really think it starts in total cost of care and quality of life for the patients. So we think an intense focus on the patient is a great place to start and with that design and develop disruptive technology that can really change the course of their life on a daily basis and lead to better clinical outcomes that ultimately lead to lower cost of care. We have been very adept at developing, conceiving, clearing through regulatory, watching and building markets in very innovative disruptive technology.

This innovation really drives our growth. One of the areas that focus most on about NxStage because it's our biggest market opportunity as our home hemodialysis franchise. We’re the leader in home hemodialysis, we have really built that opportunity of going to a lot more detail of that in a minute and we really are only getting started in terms of the opportunity for NxStage in general but even in the home hemodialysis market.

Let’s talk a bit about the parts of our growth. We have three business segments that we endeavor to grow, the first is In-Center, we acquired in this business as we were making progress on our core business and the In-Center is focused at disposable production so we do tubing sets and needles for traditional dialysis three times a week in-center type dialysis. We’re very strong in that, a market leader in the U.S. and have a very high quality differentiated product in the in-center.

It grows at about 3% to 5% a year and we have done a little bit better than that based on increasing our market share a bit but given our significant market share it will probably grow at about that rate moving forward. Critical care is a business for us where we take our System One platform; it was the first product application because it was an easier regulatory, faster regulatory path for us so we started our commercial activities as a company in the critical care business.

When we started out in that market there was really one primary competitor, a company called Gambro. They had about 90% of the market share. We’re up to about 40% of the market share and we place about two thirds of all new equipment and we have built a wonderful franchise there. Very high gross margin business that we have scaled over the years and continue to have great opportunities there. But what we are really all here to talk about is the home hemodialysis segment that we have. We have grown that from as you can see nothing to a substantial business and I will take you through that in more detail.

For 2013 we did revise our guidance on Monday. We were, did a little better than we expected so we revised our guidance upward we achieved 263 minimum in revenue in 2013. Let me talk a bit about our process of innovation, it starts really with a patient focus and what we found is if you can differentiate the lifestyle of the patient, the quality of life and the clinical experience if you can do that powerfully enough the product has the power to move patients in this dialysis industry. Dialysis is a very mature therapy, it's a very consolidated market so you have to have a very compelling story on why patients would choose your therapy and why they would choose that over the provider that they are being treated at.

So you’ve to have focus on distinctive innovation. Healthcare for chronic therapy has become an experience not just a product and it's very important to give an experience to that patient that they will seek out. What you can see in the top is the System One and below is one of our newer products that we believe is very innovative in the sense that it starts to create the IT network that creates a virtual clinic. So we can start to automate the billing practices, the following of the patient, the training of the patient, the charting that needs to occur and get rid of the paper flow that’s existed up until now.

So really innovative products are the key to driving the market. Then you’ve to develop the systems around it, the reliability. Demonstrate the reliability and one of the things it's different in chronic therapy is this becomes a consumer product. This isn't a dialysis machine in the clinic that when it goes down they pull another one out of the back and they switch the one that’s not working out and the patient never knows. This is a product that sits in the patient’s home that they count on to keep them alive, to keep them health and when it goes down you shake their confidence. So it has to be reliable to be able to build the business. We have a tremendous track record of reliability in our System One.

In addition to that when problems happen you have to have a wonderful customer service, world class customer service they can call it 724 and get the kind of support to help walk them through kindly with the issues that they are having. You can really differentiate yourself not just on the therapy platform but on the services that you build around it and the system that you put in place. Once we achieve that we have led leadership. Leadership comes from demonstrating the consistent delivery of the therapy, building the number of patients, building the treatment but more than that. We’re advocating a new therapy. You’ve to continue to endeavor to modify and improve and refine the business model so providers will more broadly adopt this. It's a new way of caring for the patient. It's harder than what they do. They have matured it over a number of years we need to help them to further mature it moving forward, that kind of leadership we’re talking about.

That takes us to growth the home business as you can see has been a very nice growth trajectory for us. We have had a I think we’re coming into a new phase of next stage, where in the past we have struggled a bit with how to create and push the market beyond what we’re able to achieve. We took a few years to really try to focus on what are the product features and what are the marketing capabilities that we needed to develop to begin to reaccelerate that growth for next stage. We had wonderful success in ’13 putting ourselves in a position to accomplish that in ’14 and beyond and I will talk a little bit more about that but the beautiful part of it is we’re under 2% penetrated with this type of revenue in the U.S. market alone so it's a very revenue dense business model. Less than 2% of the patients in the U.S. represent a $133 million in revenue. So we have this huge opportunity ahead of us. Over a $1 billion in the U.S. alone and more as we start to look at worldwide markets.

And speaking to that we have really taken the opportunity over the last 3 to 5 years to build our international footprint. Not only start to develop our distribution channels into the best opportunities in the international markets but also get a footprint that has the scale and the capability of a worldwide company that we want to become.

Now let’s talk about 2013, 2013 we set out as a building year for the company we wanted to make investments in direct to patient marketing, we wanted to make investments into our product pipeline and had a lot of the expectations about what we could achieve. At first is our product pipeline, we have done a phenomenal job of not only inventing technology but (indiscernible) that process through or that technology through the regulatory processes worldwide and launching them into the market in a very systematic and controlled fashion that derisk as we go. To name a few 2013 was a fantastic year. We brought a whole new technology in terms of the NxStage System One and upgraded the base. One of the great things that we have now is approximately a $1 billion of assets that our customers hold that treat these patients every day to the extent that we can continue to upgrade and improve those capabilities we really get to leverage the leadership that we have with the assets that we have in place. High Flow is simply an upgrade for our customer to gain that new capability.

We have nocturnal dialysis cleared under CE mark. We continue to pursue that trial, we’re fully enrolled if enough of those patients make it to follow-up then we will be able to submit to the FDA in the spring on nocturnal hemodialysis. Single needle again cleared and under review in the U.S. I don’t expect that will get cleared in advance of nocturnal just because I think FDA will be a bit conservative on that feature. Next to me Connected Health. We have version one in clinical pilots for over a year now, had very favorable success but this is what I mentioned earlier, how do we wrap an experience around a treatment therapy technology that replicates the control, the follow-up, the automation that is just in the center so they can continue to refine that business model that’s next to me Connected Health and dosing calculator that was really the sweeper [ph] for 2013 that combined with a High Flow gave a view of what we’re really capable of.

You enter the patients parameters, enter your clinical target and it will lay out all the different treatment regimes and options you’ve based on frequency and duration so it's a great way to go to the doctor and say tell me the patient you didn’t put NxStage on. Let’s enter them and let’s see if there is a better way to approach that patient and demonstrate the higher capability of High Flow. Had we launched it in the fourth quarter both that and High Flow and the launch is going well.

Longer term pipeline you’ve heard us talk about Peritoneal Dialysis, we set expectation when they announced that, it will take us about 3 to 5 years, we’re about a year into that so about 2 to 4 years away projects on track looks great, we’re very excited about that. Next generation technology is also progressing but really our key focus is going to be on leveraging and expanding the capability of our install base and then we were selected to participate in the data [ph] development of future technology for blood processing. So very excited to be recognized in that matter.

So the next thing that we spend a lot of time on is how can we take control of demand? How can we drive demand independently of what’s appropriate for provider but reach-out directly to patients? Simulate and then form the demand and then (indiscernible) it all the way through to achieve their goal of being on therapy. To give you a little bit of an overview of what that takes. We have finally figured out a way to get the patient addresses in a HIPAA compliant manner, do direct mail. So we will do a direct mail campaign of about 500 to a 1000 patients to invite them to education forum. We will have patients and clinicians there to show them what the option really looks like for home hemodialysis.

We typically have 25 to 50 patients attend that event, off the 25 to 50 we will get about 5 or 10 that will start the therapy in the next month or two. That is a result of a process that engages with them after they express the interest, make sure that they talk to their clinician, make sure they talk to their center. If they are getting their needs met great, if they are not we will help them get to a facility that will meet their needs and (indiscernible) through a process that’s a workflow that we have developed over the years and improved the efficiency.

When we started out with this about two years ago, it's about $2000 for delivered patient on the therapy. We’re down to under $600 on that. We did about 50 of these programs in 2013 and have now done it in all of the sales territories we trained and operationalize this in a way we think we do a lot more as we move forward. So direct to patient is helped us to increase our growth rate and I think you start to see the effect of that in the fourth quarter. We saw it before that because we can see the benefit and the results of these programs but it's starting to show up in the numbers and it will be key, the key driver for us to achieve our targets moving forward.

The next area that we’re spending a lot of time on is to demonstrate and refine the best way to approach this care model. If you walk into a traditional center it's typically rows of stations. They are designed to treat patients most efficiently three times a week so you have a Monday, Wednesday, Thursday, Tuesday, Friday, Saturday schedule 2 or 3 shifts a day and to get the efficient need it's a very regimen and schedule, you have to be there when you want to be.

Our concept is very different, we have the circle of care where you come in and you’ve full care on one side of the center as you move and look across the other side it becomes limited care then you see home training, then you see Peritoneal Dialysis training. So the day you walk in a patient sits next to a NxStage System One and they see this is achievable, it looks simple, it looks reliable, it looks safe. I see how they load it versus sitting next to a traditional dialysis machine that will only convince you, you can’t go home. It's very large it has a water treatment plant in the back of the facility; they have technicians and nurses that run it. You’re only communication from that is wow, this is daunting, this is overwhelming. Walking into a center that shows you that staff can use it and you can learn it overtime. You don’t have to have three weeks of training for home and go home and be independent you can migrate your way through and when you sit down you’re going to see patients doing it themselves, you’re going to see patients in home training.

If you want to come back in after you’re at your home for a while because maybe your partner needs a break you can come back in. So it's a continuum of care that we think encourages more home care with the idea that if we invest upfront, if we teach those patients that they can do these things and make an upfront investment we can reduce labor, give them more flexibility, give them a higher quality of care and more independence and a high quality of life and do it at a lower cost overtime. So we’re very excited about this. That’s the aspiration; we got to go execute it. We have had St. Louis up since July it's going well so far. We started Chicago at the end of the year, we have Jacksonville coming online and we will have two to three more operational by the end of first quarter and then we got to see how they grow. We have a pretty good idea how much they cost us to build and run but we don’t know how quickly we will attract patients and grow the revenue side, we need more experience there. We will be cautious and paced out as we move forward but we’re pleased about the execution in 2013 on that.

All this is about strong discipline we really had a good solid growth; we did have two revenue challenges in 2013. We weren’t able to scale our facility for dialyzer production fastens up so we couldn’t deliver all the dialyzers that Asahi wanted. So we missed about 4 million in revenue there and we had some challenges in international, one was the change in accounting by going direct in the UK, so it wasn’t a year-over-year comp and we lost some revenue there and there are some timing and some execution so we lost. We couldn’t make up; the total was 8 million between those two. We couldn’t fully make those up so in Q3 we had to adjust our guidance and did a good job of meeting our Q4 for our guidance. In relative to management of cash we ended Q3 with about 83 million and ended cash of 80 million at the end of Q4. So we’re doing a good job of managing that and pacing our investments in our activities like our centers based on our capital available.

With that said we did a good job of delivering what we said we would in Q4 with the other benefit of it's not listed here but we had a 12% home growth rate which starts to give you the evidence that these activities are working. We’re driving an increase in the growth rate. The other thing that we filed on Monday was our 8K of the signing of the Fresenius contract. So as we go into ’14 we have got a three year contract with Fresenius. We have three year contract that we signed in July with DaVita so we have some stability in those negotiations and lays great groundwork for little bit more predictability going into ’14 than we had in ’13. So all in all we feel pretty good about how we executed against ’13.

Now talking about ’14 how we’re going to drive the business moving forward. Direct to patient marketing is really going to be the key driver in increasing the growth rate. We have seen it to be effective, we have now replicated across all territories we have put the infrastructure in place; we did about 50 in 2013. We expect we can do about a 150 in 2014. The one that we have seen is we do have these campaigns, we do get those first 5 or 10 patients but in addition to that the training rates in those geographies go up by 25% or more and it seems to persist for at least a year. We need a little bit more experience. So not only are we getting that initial benefit but we’re seeing a persistent benefit of in a sense catalyzing those markets through more knowledge and information to the patient and providers that are more active in promoting the therapy. So direct to patient marketing is key driver of our growth in ’14.

The next will be new product innovations, we have the High Flow cleared and launched in the fourth quarter. We think that can reduce burden, it can bring us to patients that might not have been appropriate treatment time so that opens up the market for us and is an opportunity to go out and talk to clinicians about our new capability, the other one is the next to me. Now that does bring it's a subscription [ph] service so it does bring some revenue. We think that revenue is very justified, has great value because when you automate the collection of all that data you ensure that you don’t miss the required documentation to bill a treatment. So we think the billing and the revenue captured more than offsets the cost of what we’re asking customers to pay. In addition to the home nursing automation that should give that person more bandwidth and hopefully we can reinvest that bandwidth in training more patients as well as making patients more confident and less burdened on the therapy because they are not filling up paperwork as much as they are today.

So we’re very excited about those two products and we have the continued pipeline of trying to finish the execution on nocturnal and clearing the single needle product.

International, we grew well last year not quite as well as we anticipated and nor was that reflected in our revenue. So there is a bit of miscalibration between the company’s view of international and what’s obvious to you folks through our financial results. So I think a couple of things have happened, we have went through it [ph], it took us a while to digest that. We had some management turnover to try to get the right team in place and we had the comp and accounting. Those are behind us, those were things that we executed and finished up in ’13. We have a good team, we got some experience. We were a little conservative in our fourth quarter guidance for international that’s really where we would be. The team did what they told us they were going to do but Matt and I were a little conservative given their performance early part of the year. They came through and beat [ph] that’s what took us over our guidance. The other three areas met the high end of what they predicted.

So international will be a contributor to our growth from where we are to our target of growth for ’14.

And the last although this won't be a significant impact in 2014 it will start to build to help grow in future years for us the NxStage Kidney Care and we really want to continue to refine and move that business model forward and we’re very transparent about this, we will have five or six as I mentioned open at the end of first quarter. We will be very paced and measured in this activity, we really need to focus and get it right from the start because it's a very exciting thing if we can make the dream turn into a reality.

All that we’re setting our target for 15% annual growth that was the target we set for 2014. At the beginning of 2013 we executed the things we felt we needed to do to position the company to be able to achieve this goal. So we haven't changed the goal, we’re making good progress to it.

So we really think the company is uniquely positioned. I think people underestimate the barriers to entry you know it's not just the product it's a whole system of services that go around it and it's proven awfully difficult just for folks to replicate what we have done in the product. We still believe we have got 2 to 3 years before we might have our first entry competitor into the U.S. but we will have competition because this is going to be a great business and it needs to grow a lot, 15% of the patient population 10% to 15% is over a $1 billion market opportunity. So we never expected to have it along this long, but that’s been a wonderful thing and we continue to move forward and innovate our platform.

Our leadership in hemodialysis, our ability on home hemodialysis is to start to improve our growth rate through very good systematic direct to patient marketing. It's now becoming proven, we have got a lot of work to do, lot of execution but we’re not expecting things to work better than we have already demonstrated they could.

So we think it's great market opportunity. Management team, we have made some nice moves in 2013 as well. Robert our CFO who moved over to lead the Center of Excellence initiative. We had the opportunity to bring new talent in and Matt in the CFO position so Matt's had a bigger scale experience. So he is bringing new ideas and looking with a fresh set of eyes which is a great opportunity for the company and we do have a strong balance sheet of $80 million and essentially no outstanding debt.

With that I think the timing is working out pretty well given this is the first time I’ve presented this new presentation. So thank you for your attention.

Question-and-Answer Session

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