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NxStage Medical, Inc. (NASDAQ:NXTM)

Q2 2014 Results Earnings Conference Call

August 07, 2014, 09:00 AM ET

Executives

Kristen Sheppard - VP of IR

Jeff Burbank - CEO

Matt Towse - CFO

Analysts

Margaret Kaczor - William Blair

Bill Plovanic - Canaccord Genuity

Danielle Antalffy - Leerink Swann Partners

Chris Cooley - Stephens

Raj Denhoy - Jefferies

Cairn Clark - Piper Jaffray

Gary Lieberman - Wells Fargo

Operator

Good day, ladies and gentlemen. Welcome to the NxStage Medical's Second Quarter Fiscal Year 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

I would now like to disperse this conference call to Ms. Kristen Sheppard. You may begin ma'am.

Kristen Sheppard

Thank you and good morning, everyone. Welcome to NxStage Medical’s second quarter 2014 financial results conference call. With me here today is Jeff Burbank, NxStage’s Chief Executive Officer and Matt Towse, our Chief Financial Officer.

For your convenience, a replay of this call will be available shortly after its conclusion. In addition, the press release for the second quarter 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 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 both domestically and internationally, our expectations regarding relationships with key customers, continued supply from key vendors, our plans with respect to regulatory filings, our plans with respect to future developments including NxStage Kidney Care, beliefs as to the expected impact of current economic, reimbursement or regulatory conditions on our business and anticipated improvements in the operating efficiencies, gross margins and product quality.

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 most recent annual or quarterly report.

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 would like to hand the call over to our CEO, Jeff Burbank.

Jeff Burbank

Good morning and thanks for joining us. As I am sure you all saw from our press release, we continue to build on our success this year with second quarter results that exceeded our expectations.

We are especially pleased with our performance in the System One segment, homeless tracking ahead of plan with second quarter revenue of $38.5 million. That's up 18% over the prior year period.

This performance was primarily driven by strong patient growth in the U.S. and international. Our critical care performance was equally impressive with 15% growth for the second quarter, again, ahead of our estimates and on the hills of a really strong first quarter.

Based on this strong start to the year, as well as our improving confidence in the second half, we're increasing our total revenue guidance for the year. We also expect home growth to top our 15% target for the year. Matt will take you through our guidance in a moment.

In brief, it continues to be a very busy and exciting time at NxStage. Our results show that we're executing well and that our growth strategy is working.

NxStage has now performed over 8 million home treatments for patients around the world. We're the clear market leader and this is a big advantage. It is incredible to think how many patients have gained more freedom and flexibility while using the System One for their therapy. We continue to leverage this leadership to identify new ways to improve the patient and provider experience and expand the market.

With less than 2% penetration in the U.S., we believe there's still significant opportunity for NxStage. We remain confident that the NxStage System One can help to provide the highest quality, lowest cost form of care for patients as our therapy continues to mature.

For the last several quarters, we've been delivering solid growths in the home. We're seeing these results because we're doing the things we told you we'd do and expanding as we learn more. We continue to see good momentum with our patient marketing initiatives. Together with our partners, we're increasing awareness and driving growth and training rates. We're always adding to these approaches to build on this success.

As one example, we recently kicked off our 2014 patient awareness tour to promote the benefits of home hemodialysis. This tour gives patients the ability to hear first hand from NxStage System One patients how home therapy helped them reclaimed their lives. Patients also have the unique opportunity to see our patient perform their therapy live.

These patient-to-patient interactions have proven very effective. Given the strong returns associated with all of our patient marketing initiatives, we're continuing to execute these programs through 2014 as planned.

In addition, we've been executing against a very robust innovation pipeline. We're now in exciting point in time where these market leading innovations have the ability to drive meaningful growth and adoption going into 2015 and beyond. Since transitioning to full market release of the System One S and early launch of our Nx2me Connected Health platform, we are seeing a very enthusiastic response from patients, nephrologists and our dialysis center customers.

This gives us confidence that these new innovations create an opportunity to provide a therapy that can be tailored to meet the clinical as well as the personal freedom and flexibility needs of more patients.

Patients frequently tell us that they want to regain their lifestyle. They want to reclaim time doing common daily activities like hobbies, like travel, which is having the energy to be able to be an active part of their family. With our new innovations, we believe we can even help more.

First, the System One S is proving to be the valuable expansion of performance. We had hoped that it would be. This can provide the ability to reduce burden of therapy for some or provide new options for others to help expand the market.

To facilitate understanding the impact of higher flow rates, we launched the online dosing calculator. This tool has proven to be a great way to engage with doctors to model the breadth of the System One therapy options, including solutions for their most challenging patients, again helping us to expand the market.

Our Nx2me Connected Health solution automates the collection and delivery of a significant amount of home treatment administrative paper work, hence should help build patient confidence. This tool also helps build the clinical team's confidence, knowing they have access to important treatment information, so they can be more proactive in their oversight. Early indications are that we hit the mark on these features.

Outside of the U.S., we will begin offering nocturnal dialysis and our single-needle technology. We think these capabilities can be compelling as patients will have the opportunity to use their sleep time for treatment time. We are also working to bring these capabilities to the U.S.

To that end, I am excited to report that we achieved another milestone having completed and submitted our nocturnal home indication to the FDA. I want to applaud our teams tremendous work in completing this endeavor. While I can't provide much information on timing of the decision, I expect we will continue to interact with the FDA on such a ground breaking indications.

We believe approval of nocturnal home hemodialysis would provide U.S. patients with an important therapy option and it seems to us that clinical trial data supports this conclusion.

Turning to our mid and long-term growth initiatives, I am excited to say that the level of innovation in our R&D pipeline is a strongest it's ever been. This includes our PD system and next generation technologies.

All of these programs leverage our demonstrated ability to innovate with the practical knowledge we've gained as the market leader in home hemodialysis. These programs remain on track and give me confidence in our ability to lead further transformations healthcare moving forward.

Based on our understanding of where we’re taking technology over the next few years, we continue to do the hard work of innovating and validating our therapy delivery model with next stage kidney care. While it’s still early, we are on track with our plans.

We are very excited to take advantages of our technology to innovate a different approach to therapy delivery. We believe we can demonstrate clinical quality life and economic advantages, therefore driving others to adapt a similar approach.

In wrapping-up, we are very pleased with our progress and the performance of our business in the first half of 2014. We believe we're seeing the positive impact of our strategic investments with increasing momentum in the home, enthusiasm for our key products and a strong innovation pipeline is deeper than at any other time in our history.

Based on all these factors, we believe we are well positioned to top our 15% annual home revenue growth target and exceed our previous guidance range for total revenue. We look forward to the second half of the year and sustaining long-term growth. Matt?

Matt Towse

Thank you, Jeff and good morning everyone. I'd like to review results for the second quarter, including details of our reportable segments and then wrap-up with some comments regarding our outlook for the rest of the year.

As Jeff mentioned, we had a strong first half of the year and for the second quarter total revenue came in well ahead of our guidance at $74.1 million. This represents a 13% increase over the second quarter of 2013. Our performance in the System One segment, which includes our fastest growing businesses Home and Critical Care was again key in driving the beep on the top line.

System One Home revenue increased 18% over the second quarter of last year to $38.5 million, exceeding our expectations and continuing the trends of strong demand and patient adaption in both U.S. International markets. We are encouraged by these results and look forward to continue the solid performance in the second half of the year.

We also had another good quarter in Critical Care with revenue increasing 15% to $12.4 million in the second quarter of 2014. This performance was also stronger than we anticipated. And for our In-Center segment we had revenue of $21 million in the second quarter and as we had guided for the year, this is down about a point from last year’s second quarter and flat year-to-date.

I’ll remind you that quarterly In-Center revenue will continue to be susceptible to fluctuations as a result of inventory management policy with both our distributors and end users. In our Service segment now as NxStage Kidney Care, we posted revenue of $400,000 in the quarter, while this is still very early in this initiative, we are pleased with our progress.

And then finally in other revenue we reported $1.9 million for the second quarter, reflecting the company’s dialyzer sales to Asahi.

Now turning to gross margins, System One gross margin improved to 47% in the second quarter up 2% over last year's second quarter and up three points comparing first half of this year to last. We are really pleased with our continued progress in driving gross margin improvements in the System One segment. These improvements demonstrate the strength of our market position and show a good trend as we drive longer term System One margins above 50%.

Our total gross margin for the second quarter was within our targeted range at 37% compared with 38% in last year, note however that excluding our investments in NxStag Kidney Care gross margin improved to 39% compared to 38% of last year.

And for the year as a whole we continue to expect our overall gross margins excluding Kidney Care will improve by one to two percentage points over the last year.

Also let me point out that going forward this year we expect our investment in Kidney Care to impact overall gross margins two to four points as we continue to open new centers.

NxStag posted a net loss of $7.1 million for the second quarter which was within our guidance range and included $3.2 million associated with our investment in NxStag Kidney Care.

The impact to the revenue bit was not itself the bottom line primarily due to a short term spike and distribution cost that we believe will normalize going forward. While revenue growth within the System One segment remains our key focus achieving operating profitability in the product business is equally important to us.

Excluding our investment in NxStage Kidney Care, the combination of revenue growth continued gross margin improvement and expense management sets us on a clear path to achieve positive operating income in the products business in 2015.

And turning to cash today's press release shows cash burn for the quarter of about $14 million approximately $7 million more than the first quarter of 2014 primarily as a result of an increase in working capital.

As DSOs have already returned to normalized levels, we expect sequential decrease and cash spend in the third quarter. Our cash spend in NxStage Kidney Care was flat with Q1 at $5 million consistent with their overall plans.

Moving forward our primary uses of cash remained focused on 10 to 15 NxStage Kidney Care centers again consistent with our plan. We do have a strong balance sheet with practically zero one debt. As planned during the second quarter we further strengthen our capital structure with a new $35 million revolving line of credit with GE Capital and Silicon Valley Bank which replaced our $15 million line that expired in March. We believe that we remain well capitalized to support our strategic growth initiatives going forward.

So the bottom line is this. We believe Kidney Care has a strategic investment for NxStage until it becomes soft funding our investments in this initiative will continue to have a negative impact on our overall financial matrices. That's a fact and we've included this impact in all of our guidance.

At the same time I want to reiterate that we have made and will continue to make significant progress in our fastest growing product segments System One. Here gross margin continues to improve and our overall products business is on the path to achieve positive operating income in 2015.

We believe the net result of all of our strategic growth initiatives will yield powerful returns, accelerated adoption, increased patient access to our therapy and expansion of our market opportunity, in all, a long-term sustainable growth trajectory that will increase shareholder value.

Now, let me wrap-up with the summary of guidance. As you saw in our press release, we are increasing our full year total company revenue guidance to be between $290 million and $293 million. This is up from our previous guidance range of $283 million and $288 million. This also includes a net contribution from our services segment of roughly $0.5 million to $1 million.

The increased in our expectations is primarily based on the revenue out performance in the first half and both Home and Critical Care and the increase confidence we have in the business based on the strength of our growth initiatives. We believe this supports home topping our 15% annual growth target for 2014.

Now specifically for the third quarter, we expect revenue to be in the range of $71 million to $72.5 million with the net loss in the range of $7.5 million to $8.5 million. And as a reminder, as you work through your models, please keep in mind that the Home revenues can be choppy at a quarter-to-quarter basis as a result of international sales.

So to wrap it up, we are very pleased with the results of the second quarter and the first half. This is a strong start to what we expect will be an exciting year for NxStage.

So with that, I’d like to open the call to questions. Operator, we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Margaret Kaczor with William Blair.

Margaret Kaczor - William Blair

Good morning, guys. Thanks for taking the question. Just wanted to go a little bit into more detail on the patient events that you guys are doing and Jeff you gave some interesting comments at our conference in mid-June, in terms of on average having about 25 patients per events in closing 25% of those.

So if I do the math correctly meaning 150 events times eight patients, let’s say that you're closing per event, get me the number of about 1200 patients that may be you are driving on average again from these events. Whereas if you look at the U.S. RDS number, I will tell you that there are between 5,000, let's say, 7,000 home hemo patients in the U.S. So is that the right way to look at it and how many of those patients are really incremental versus like you would have driven not doing those events?

Jeff Burbank

Yep. Good morning. We are on track for the number of the events, you know, there is a portfolio of events you described one approach. There are some other approaches that have very good rate of return and you can see all this building in the momentum of the numbers. The patient growth comes through in those revenue numbers.

So we feel really good about what we done. Your math is in the right ballpark but we haven't broken down into that level of specificity. But that's generally what one of those patient events can deliver.

Margaret Kaczor - William Blair

Okay. And then in terms of the 150 that you are doing, can you remind us how many MSAs you actually view in the U.S.?

Jeff Burbank

So again there is about 700 or 800 total MSAs but the majority was in – the patients are in a few hundred.

Margaret Kaczor - William Blair

Okay. And then we were looking through your Q this morning, in terms of growth on dividends and percents, and I know you guys don’t want to talk about specific customers, but those do seem to be accelerating at least on a dollar basis.

So can you give any more color really on may be these third part clinics? Have you seen them slow down and is there way for your to accelerate them. Are you seeing it accelerate with some of these initiatives that you are taking?

Jeff Burbank

I think from the revenue numbers, you can see the growth in both of our key customers there. So that's great and it's very consistent with what we are doing, across the board.

So I think we have a lot of demand opportunity. We have a lot of markets that we haven’t touched yet. We see this is a sustainable program moving forward and it's helping our existing customers both the LDOs and as well as the smaller ones. So its very board based.

Margaret Kaczor - William Blair

Okay. And just on the international side, you mentioned that international was actually a pretty good contributor to growth this year – sorry, this quarter, so the third quarter in a row now that international has come up strong. Is there a way – is there any visibility really into the third quarter is it just more stable market now?

Matt Towse

Good morning, Margaret. This is Matt. You know as we said early part of the year that, international contribute about 3% of the growth through the year. They are on that track a little bit more at this point. And we continue to see good performance out of them for the second half. So we feel real good about international growth going forward.

Margaret Kaczor - William Blair

Okay. And last one for me. In terms of the new products once you are doing the initiatives you get the clinics and you said yourself that the products really should start to ramp in the back half of the year.

Can you talk us through kind of the cadence of growth? Do you have some tougher comps maybe in the back half that may take at least on a growth rate basis, take it down, maybe from what we’ve seeing this quarter in the last year? Thank you.

Jeff Burbank

So, I’ll talk about the comps and then Matt can walk you through our view of how the guidance breaks out for you.

But that’s absolutely true. I mean we have 12% home growth rate in the fourth quarter of last year. So that's going to be a more difficult comp for us. But we are showing fundamental growth and this is an annuity based business model.

So as we build our base and we hit the growth rate that we are hitting in the first half of the year, it really positions us well to achieve a good growth rate in the second half of the year.

And beyond because we have the effects of the direct-to-patient marketing, we've done a good job over the last four, six quarters. Then we have as you mentioned, the new technologies that are kicking in, so we see that as the next layer of growth drivers.

And then beyond that, you mentioned, the success in international, we're starting to get more predictable execution in the international. So we have a little bit more confidence in their ability to deliver the numbers we expect out of them. So we feel good there.

And then we have the longer-term next generation products as well as the impact of NxStage Kidney Care, which we are even seeing some market response and others are investing in a similar model. So we are pretty excited about how that can be a next layer of growth driver. So we think we're in a good position for our initial target of a sustainable 15% annual growth rate in home.

Matt, why don't you talk about how we're thinking about guidance and how it breaks out.

Matt Towse

Yes, so let me break out the guidance for the year. As we said we raised guidance to 290 to 293 for the year. When you look at the pieces, before we were guiding home at 15%, we are looking a strong home growth here. So we are guiding a little above 15% for the whole year. Again, we're little conservative and it could be little choppy with international in the distribution model there. So keep that in mind.

On Critical Care, we originally guided 7% to 9% with the great results we posted in the first quarter. We are guiding and probably about 15% for the year. Again, we'll be little conservative in Clinical Care for the second half as we watch equipment sales and see how that leads out for the second half.

On In-Center, we are originally guided flat to down. We are still in that range, probably a little more down than flat at this point. So that as we are looking after the year.

And then Kidney Care, we really hadn't included in the original guidance and I think as we said in the call earlier that we're about $0.5 million, $2 million of net contribution for Kidney Care.

Margaret Kaczor - William Blair

And the other category there?

Matt Towse

Other category, we had guided about 5 to 6, they kind of keep in the same range.

Margaret Kaczor - William Blair

Thank you.

Operator

Our next question comes from Bill Plovanic with Canaccord.

Bill Plovanic - Canaccord Genuity

Great. Thanks. Good morning. Can you hear me? Okay.

Jeff Burbank

Yeah. Good morning, Bill.

Bill Plovanic - Canaccord Genuity

Good morning. As we think of the home growth, is this a function of adding new centers or more patients per existing center?

Jeff Burbank

The majority of our all of our growth has been and continues to be going deeper in the centers that we have. There are always few additional centers as new geographies open up, but that is a very small portion of this growth.

Bill Plovanic - Canaccord Genuity

I think one of your comments was that more assets are being added to training or something of that nature and I don't want to put words in your mouth, but I was wondering if that was correct if you could extrapolate on that?

Jeff Burbank

So I think that’s a good point Bill. You know it’s a bit of a chicken and egg, on the one side a center needs to feel like there is enough patient demand that it justifies putting an investment into headcount and have the training capacity.

So I think one of the things that's been so successful with the direct to patient marketing is it's shown them that there is demand and they have been rewarded for putting that training capacity in place with patients filling it up.

So it’s really been a chicken and egg kind of thing but I think we are obviously pushing through that because you can see it in the patient growth rate, the growth in revenue.

Bill Plovanic - Canaccord Genuity

Okay. And then I am trying to get a handle on the international. You mentioned 3% -- it sounds like a little 3% plus, contribution to growth this year. Is that when you say 3% plus a solid 3 or are we getting more into 4, 5, 6, 7 and you just don’t want to change that yet or how do we think about that?

Matt Towse

Well, 3% is the number we are kind of sticking with and the reason we are kind of being conservative on that is that, as I mentioned with the distribution model and shipments into the distribution it can be choppy. So not really willing to commit more that point, as you know…

Bill Plovanic - Canaccord Genuity

For the quarter was it more than – it seems like it had to be much more than 3% or else you added a ton of new patients?

Matt Towse

Well, it was around 3% and yes we added a ton of new patients. The patient count continues to grow and that's the underlying driver of our growth. U.S. patient growth is strong. International is strong.

Bill Plovanic - Canaccord Genuity

Excellent. And then my last question, I’ll just back in. Just on R&D that picked up pretty significantly. Is there any one project or anything specifically that's being spent on and should we expect that to pull back down once you launch these products? Thank you.

Matt Towse

Right. In the near-term we continue to target R&D around 8%. So there is nothing specific to point to but continued investment in our product pipeline, so, continue to model on 8% of R&D.

Jeff Burbank

And I want to stress that the investments we are making there not only is a clinical work that we wrapped up on the nocturnal trial, so we've submitted the nocturnal for a review and we’ll work through that process.

But the portfolio is incredibly strong. We are working not only on the product line extensions, but we also have the next generation and PD going through. We have another project there, but its pay for I don't want you to forget about [indiscernible] project which is really exciting for us as well.

So that's paid research, but we're going to benefit from that with product capability. So really have a tremendous portfolio there. And we think that's a great return on investment at this point.

Bill Plovanic - Canaccord Genuity

Great. Thank you. Look forward to seeing you next week at our conference.

Operator

Our next question comes from Danielle Antalffy with Leerink Partners.

Danielle Antalffy - Leerink Swann Partners

Hi. Good morning, guys. Thanks so much for taking the question and congrats on a great quarter. This was a great growth number, happy to see it. I know you guys have a lot going on right now as far as growth initiative go. So I was hoping I could press you guys to give us a sense of where you're seeing the biggest driver of this accelerating home hemo sales growth. Is it the new system, is it the Connected Health platform, is it the Kidney Care centers driving increasing referrals. What would you point to as the biggest driver of the increasing growth?

Jeff Burbank

So, first on [indiscernible] patient growth. This is what's driving the growth rate. And the reason the patient numbers are growing is a layer of initiatives. And when we initially focused on how do we get a sustainable 15% growth rate we said it's not one thing that will carry us for multiple years.

So we layered in a strategy of then task, or initiatives that would carry us through multiple years. And the first one that was the quickest lead time where the patient engagement in direct-to-patient marketing. So they're having the most effect at this point.

However, as we're moving forward and we're launching the new extensions of high flow in the System One S and Nx2me Connected Health and the dosing calculator and then you'll see hopefully nocturnal in the U.S. and nocturnal international, that was a layer of other growth drivers that came on the hills to continue the patient marketing, but add another layer on that to drive it further.

And then beyond that, we were hoping that international would turn around and start to perform the way, we were hoping it could. And that's been the results that we're seeing this year.

And then beyond that, we really wanted to use NxStage Kidney Care as a way to mature the business model, show the tremendous clinical benefits that can be driven with this technology, but also how it could be managed cost effectively and work for providers. And we think that will give the industry more evidence that this is a direction that they can go with confidence.

And we think as we show that success others will embrace that and we will grow that initiative, not only through our efforts, we are going to do our 10 to 15 centers this year. But we are already seeing some evidence that others like what they see, and they're replicating some of that model.

So that's exactly what we are hoping there. It's early but we really see these pieces of the growth drivers that we believe are capable of driving sustainable 15% home annual growth rate come into play and perform the way we had hoped it would.

Danielle Antalffy - Leerink Swann Partners

Great. Early is good that means there is lots of runway to go. My next question is on growth margins, Matt. Just wondering if you could give us a sense of when we can start to see growth margins improve? I mean, we were obviously modeling it incorrectly. So I want to make sure going forward, we are thinking about gross margins and the ramps there correctly?

Matt Towse

Thanks, Danielle. Well you are seeing gross margin improve in the product segment which is where our focus is on gross margins. System One - in the earlier comments were up two points for the quarter and three points for the half year-over-year. And our target for the entire product segment within centers about one to two points gross profit improvement year-over-year. So, around that track for this year.

I think the challenge with the model is that, is the Kidney Care piece that we've guided net loss earlier in the year around $15 million. So that's below the line and some of that is hitting cost of sales as we open new facilities.

So, there is about a 2% to 4% impact because of the new facilities that are coming online throughout the year. So, there is a little bit of math challenge there I think in the models when you are looking Kidney Care versus products, but again with the businesses in the two pieces and we feel very good, very strong about the margins in the product side.

Danielle Antalffy - Leerink Swann Partners

Okay. That's helpful.

Jeff Burbank

Let me add a little bit that Danielle, just because I think what we are trying to do now is provide you a little bit more information so you can start your model based on Kidney Care element of our P&L.

So we gave you the gross margin impact to that. We've started now to include the revenue. We gave you net revenue so make sure that you understand the difference between net and Kidney Care. We have 400,000 Kidney Care revenue but we had net of just over -- right around 200,000.

Matt Towse

Right, 300 for the year.

Danielle Antalffy - Leerink Swann Partners

Okay. Got it. Thank you.

Operator

Our next question comes from Chris Cooley with Stephens.

Chris Cooley - Stephens

Thank you. Good morning. I appreciate for taking the questions.

Can we dwell into Kidney Care a little bit. I just want to make sure I understand the number appropriately. I think you mentioned about $0.5 million to $1 million contribution this year. Obviously that wasn't initially in guidance after you did 400 here in the current quarter.

Did I hear that wrong, was that incremental in the second half or was that for the full year because I guess, if you're done 400 and I am just thinking about consumables, I am just trying to walk through how the number is so modest in terms of its revenue contribution in the second half of the year, if you just did 400 in the quarter?

Matt Towse

Right. Well, Chris, this is Matt. Little bit apples and oranges there, so when I – and back to Jeff's point earlier, there is interesting gross in that. So we did 400 gross revenue, so that's the services revenue that we build for the therapy in the second quarter.

There is no elimination amount for the sales between the products group for the side business price and Kidney Care.

So for the quarter the net contribution is about $200,000. And you can see that in Q in our segment foot note you will see the gross revenue for the services, and you will be the elimination so that the combination of those two gives you the net numbers.

So the net was 200 and the net and the number I guided to in the call is 0.5 million to 1 million that is the net number. So those are the two apples.

Chris Cooley - Stephens

Okay. Okay. I appreciate. Could you mean align that on that?

And then could you just update us in terms of your direct to patient initiatives. I know you guys had articulated as we started the year, 150 incremental markets. I think you touched on this a little bit earlier in Margaret's question about the total number of markets, but you didn’t se give us kind of where you were year-to-date.

Could you just kind of walk us through, I mean is this progressing readably through the year in terms of the numbers of MSAs that you are approaching and versus that kind of 150 that you would have added.

And also as you continue to do this rollout, are you seeing any further leverage in terms of the cost of patient acquisition? But also in terms of the retention rate once these patients identified and trained? Thanks.

Jeff Burbank

Sure. The programs are on track for the 150 that, again we still have a lot of run way on markets that we haven't touched. And then we don’t know, and this is the year that we want to experiment with, what's the impact of going back to some of those markets, can we hit them again, and grow - increase the growth rate again. Is there a benefit of going back in.

So we've got a little bit of testing going on in that. But we’re on track with 150. We’ve found some - we are always improving things. So we've seen some benefits and some tweaks on the theme and that has systematically improved the rate of return of those patient acquisition of that.

So, the cost per patient is coming down, it's continuing to do that. The number is on track or better and we've got plenty of markets to do this. And we've got an opportunity to see what we can do in the market that we've already touched that we haven’t scratched the surface on that, yet.

So there is a lot of work to do, but I think a lot of returns ahead of us on this.

Chris Cooley - Stephens

And if I may, just squeeze one quick in, just from a regulatory standpoint, and I will get back in queue.

Could you just update us briefly on timing for home hemo in Japan next year? I know that was kind of broader brush target, but you could maybe a help us guide little bit better that would be great? Thanks so much.

Jeff Burbank

That one, well again working very closely with Asahi. I think I am going to have a little bit more visibility on specific timelines of that as we go through the second half of this year. So I’d like to postpone that to give you a better answer shortly here.

But we continue to make some good progress with our partner there and again there is two steps we need to achieve the regulatory clearance. And then we need to establish reimbursement, yes, it is a new therapy there.

So it’s going to be awhile before we get a really good feel for what that opportunity is. It is the second largest market in the world. So that goes well. But we got a little bit of work before we can scope that in value creation for us.

Chris Cooley - Stephens

Understood. Thanks again.

Operator

Our next question comes from Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies

Hi, Good morning.

Jeff Burbank

Good morning.

Matt Towse

Good morning.

Raj Denhoy - Jefferies

I wondered if I could ask you a bit more about the NxStage Kidney Care programs, I think its – if I am not mistaken, you have five centers open now, I mean is the plan still to get to 15 or so by yearend?

Jeff Burbank

Yeah. We are targeting, we're going to do 15. And I don’t know, if we’ll get them all open by the end of the year, so we think between 10 to 15 will be open by the end of the year.

Raj Denhoy - Jefferies

Okay. And is there anything - you gave us the gross and net revenue numbers there, but is there anything more you can provide in terms of how the open centers or doing in terms of the patient center there? How many patients are in each of the various clinics in terms of getting treated there? Are there patients that are actually in the orbits of those company or those centers or they still really being usage kind of overflow referral centers at this point?

Matt Towse

So I think in general and the centers we hope we're happy with performance. We are on plan. We're not going to disclose specific patient counts but we are on plan and good results so far.

And just to remind you, these centers are models and build to revolving about 40 patients centers, breakeven 12 to 18 months. And beyond that through our positive cash flow, good our life force on these centers.

Raj Denhoy - Jefferies

Right. So if you think about that program in total, you are going to continue to add centers I imagine, when do you think the lines will sort of cross where the revenues you’re generating will exceed the investments you're making into that business.

Jeff Burbank

I think with our focus on 15 centers, is you stop investing, you got the capital investment and the operating losses and those turn the other way in 12 to 18 months on each of these invisible centers. So you have a portfolio of them, some will hit it sooner, some will hit it later.

But you just you have a negative cash flow in total, all of them are to that break even point which takes about 12 to 18 months.

Raj Denhoy - Jefferies

Right, I guess what I was getting at this, I don’t imagine you're going to stop at 15, right, you are probably going to continue to build, so.

Jeff Burbank

We totally focused on 15, we need to understand the business model, we know the cash we have available, we think it's a great thing that to be doing and to show the market how the mature the business model so that's our focus.

Raj Denhoy - Jefferies

Okay. And then just lastly, you usually don’t give us any metrics around this but I am going ask anyway, just in terms of how the attrition rate is tracking with some of the new product launches, have you seen any movement on that side of the equation?

Jeff Burbank

You mean has it impacted dropout rate?

Raj Denhoy - Jefferies

Yeah. Exactly, you know high flow or some of the connected systems.

Jeff Burbank

Yeah. That's exactly what they were designed to do. We did surveys to see what are the places that we could impact with technology, with product and this is what we came up with. Let's give a higher performance to the dialysis with the System One so that some patients can benefit from a shorter treatment time and others have more flexibility.

I have examples of that where we've seen that as the result. So I do believe its impact but it’s probably early to claim success on a statistical basis. Connected Health had very positive feedback both from the home training nurses which have to administer care and had a lot of paper work.

So it really enhances their jobs out of satisfaction and allows them to focus more on patients we believe that will benefit dropout. But also the confidence building of patients in the burden of patients.

So again these are kind of comments at this point we need to capture the statistical impact but that is the focus of all those products. It’s where they came from and early indications are those will be very beneficial for us.

Raj Denhoy - Jefferies

Okay. And just lastly, I know you mentioned that nocturnal was filed in the quarter you said it was going to be, has there been any initial feedback, anything you could provide in terms of when you think you could get approval at this point?

Jeff Burbank

No. It's a traditional 5-K, 10-K with clinical trial. So that's a 90 day review but I imagine multiple cycles. There are a couple you probably familiar with the process. There are a couple of hurdles, there is administrative acceptance and a reviewer acceptance, we have passed also those hurdles so they are under review at this point.

Raj Denhoy - Jefferies

Okay. Thank you. Nice quarter.

Jeff Burbank

Thank you.

Operator

Our next question comes from Cairn Clark with Piper Jaffrey.

Cairn Clark - Piper Jaffray

Hi this is Cairn Clark on for Kevin Ellich, thanks for taking my questions. Jeff, I am wondering if you could give us an update on the environment specifically what you think about larger companies like Medtronic dialysis. Yesterday we heard from Omar Ishrak, Medtronic’s CEO about, going norm care, I know they have the hemodialysis plants just open in China so any thoughts you can provide there?

Jeff Burbank

I think it’s really exciting that people see the opportunity that we see. We got such a lead and experience in execution there. It takes an awful lot of time. You've seen the time lines as even folks in this industry backs and representing and still have decades of experience in this industry have timelines that taken 10 years to get to market on these products.

So I think it's exciting to be validated. We are very excited about our product pipeline as well.

I think we have a little bit more experience and confidence, have the right to do a little bit more confidence in that than somebody that's never done it. But we wish them the best, we are excited about creating market. The more people talked about it, we are the ones with the product in the market, we benefit from it. So, I think it’s great.

Cairn Clark - Piper Jaffray

Thanks. That's helpful. And just one more, I am wondering if you can give us any more color on what's driving any operational improved that you guys saw on the quarter?

Jeff Burbank

Well, the operational improvements, we continue to improve our manufacturing processes and efficiencies. And I think that showing up in our gross margin improvement System One. It's just basic blocking and tackling that we do year-to-date both through product development - process development and efficiencies and manufacturing.

Cairn Clark - Piper Jaffray

Great, thank you.

Operator

Our next question comes from Gary Lieberman with Wells Fargo.

Gary Lieberman - Wells Fargo

Good morning. Thanks for taking my question. Was there anything that proposed dialysis, or that was notable?

Jeff Burbank

Yes. Just like last year, there kind of proposed drill. There wasn't anything. We worked really hard between the proposal and the final role to get an increase in – on training rate. We don't think the home training reimbursement is where it ought to be.

So we are again engaged in working aggressively to try to get that to at appropriate level. Other than that, we didn’t see anything that was a concern or benefit.

Gary Lieberman - Wells Fargo

Okay. And then, in the markets where you've opened centers during the process of opening centers? Any feedback either direct or otherwise from the existing clinics in the markets that are already offering home products?

Jeff Burbank

Yeah, we continue to grow. They continue to adopt. I think they are all very curious about the model. I think we've seen some early indications that others may migrate towards adopting the model and embracing it a little bit.

So that's really encouraging. So we feel pretty good about the initiative and the impact in the market because we really think many of the markets are underserved. So we needed to create access to clinicians they don’t have a good home training program to refer patients to and that's what we're focused on. And that seems to be validating as an opportunity as we put these centers in place.

Gary Lieberman - Wells Fargo

Okay. And then may be lastly, any visibility on any other contracts that are renewing on the In-Center business?

Jeff Burbank

No, there is, I think everyone knows we disclosed that needles with deal, will likely wrapped down at the end of the year. We're working hard to find other customers for those, other than that there is really nothing material.

Gary Lieberman - Wells Fargo

Okay, great. Thanks very much.

Operator

I'm not showing any further questions at this time. I'd like to turn the call back over to Jeff Burbank, for closing comments.

Jeff Burbank

Thanks for your attention, everybody. We are obviously very excited about the first half which gives us lot of confidence going into the second half. We look forward to talking to you after the third quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.

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Source: NxStage Medical's (NXTM) CEO Jeff Burbank on Q2 2014 Results - Earnings Call Transcript

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