NxStage Medical's (NXTM) CEO Jeff Burbank on Q4 2015 Results - Earnings Call Transcript

| About: NxStage Medical, (NXTM)

NxStage Medical, Inc. (NASDAQ:NXTM)

Q4 2015 Results Earnings Conference Call

February 10, 2016 09:00 AM ET

Executives

Kristen Sheppard - VP, Investor Relations

Jeff Burbank - Founder and CEO

Matt Towse - CFO

Analysts

Kevin Ellich - Piper Jaffray

Danielle Antalffy - Leerink Partners

Kyle Rose - Canaccord

Margaret Kaczor - William Blair

Raj Denhoy - Jefferies

Operator

Good day, ladies and gentlemen and welcome to the NxStage Medical Fourth Quarter Fiscal 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Kristen Sheppard with NxStage. You may begin.

Kristen Sheppard

Good morning. And thank you everyone for joining us. Welcome to NxStage Medical’s fourth quarter and fiscal year 2015 financial results conference call. My name is Kristen Sheppard, Vice President of Investor Relations of NxStage.

The press release containing the Company’s financial results for the fourth quarter and fiscal year 2015 was issued earlier this morning. It is also available on our Investor Relations website. For your convenience, an audio replay of this event will also be available on our website, shortly after we complete today’s webcast.

Before starting, I would like to inform you that today’s presentation contains forecasts about our future, including financial guidance for 2016 and beyond, anticipated demand for the our existing products, the timing and features of our new product launches, market opportunities, our plans for growing our business and other forward-looking statements that do not describe the historical facts. You should not rely on any forward-looking statements as assurances of future performance.

These forecasts are subject to uncertainty and contingencies outside our complete control, including market demand, regulatory approvals and other actions, healthcare reimbursement, our customers’ purchasing patterns, competition, economic conditions, litigations, information security breaches, supply constraints, medical advancements and other factors described in the risk factors and Management’s Discussion & Analysis section of our most recent quarterly and annual financial reports. Actual future results may vary in materially positive or negative manner from today’s forecast. And we do not undertake any obligation to update today’s forecast.

With that, I would now like to introduce our Founder and CEO, Jeff Burbank. Jeff?

Jeff Burbank

Thanks Kristen and good morning everyone. NxStage had a terrific fourth quarter, finishing a great 2015. We exceeded our guidance on revenue, narrowed our net loss and delivered a strong year of operating profitability in our Products Business. These strong results reflect increased demand for our System One products. We expect this to continue in 2016. For the third consecutive year, we’re targeting 15% annual Home revenue growth, another strong year in Critical Care growth and improved operating profitability. We also continue to target total Company profitability in 2017.

You’ll recall from our Analyst Day how our product pipeline can expand our market opportunity to $5 billion and significantly enhance our long-term growth opportunity. Our strategy remains exactly as we communicated it. We’re leveraging the tremendous technology, assets and infrastructure we spent the last 10 years building to grow and expand our business.

In addition to our current drivers, we have exciting new product introductions over the next three years, including our next generation hemodialysis system, our new peritoneal dialysis system and our next generation critical care system. Our strategy is clear: Continue to grow the System One segment and launch this amazing group of products.

Let’s turn to the drivers we have in place right now.

Our patient [ph] marketing activities will continue to support Home growth in 2016. These include our proven initiatives that increase awareness and attract new patients. We keep improving and refreshing these efforts with good results. We feel really good about the recent [ph] product capabilities we have today and the unique market leadership position we continue to hold. We have tremendous experience knowing what works and what is needed to expand the market and extend our leadership.

Let me review a few compelling aspects of our current product offering.

Nx2me Connected Health: Nx2me has been a tremendous success for us. And we believe it will play an even bigger role in the future. From the beginning, we’ve invested in the information technology, starting with online prescriptions; then moving to online asset management; then to tailored training systems; and now, the seamless transfer of home treatment information from patients’ fingertips to their care nurse, their center, and then seamlessly into their EMR billing systems. We have customers taking advantage of this end-to-end connectivity and efficiency, right now. A recent analysis of 250 Nx2me patients showed a 44% reduction in drop rates excluding transplant and death. I’m really happy with the impact of this product and have a really nice flow of additional enhancements on task.

Next is nocturnal: We have a lot of pride in our nocturnal clearance, given that we were the first and the only product with this indication. With most customers now having policies and procedures in place, we’re working to expand this option more broadly. We believe nocturnal therapy has a number of advantages. One, it’s lifestyle friendly. So, we believe it can help with retaining current patients. Second, there are about 3,000 patients that do nocturnal in-center right now, and there is an opportunity for them to sleep in their own bed every night. Then thirdly, there are places that don’t even offer nocturnal at all, not in-center or at home. Given the clinical and lifestyle benefits of the therapy, we think there is an opportunity to drive growth.

You’ve also heard us talk more about how we’ve been building a presence in the skilled nursing market. We believe this represents a tremendous opportunity to improve patient care with the System One. Let’s bring dialysis therapy to the patient versus bringing the patient to dialysis. We’re working hard to expand this approach. There is about 30,000 to 40,000 patients in skilled nursing facilities. So, we believe it’s a significant long-term growth opportunity for us.

Another growth opportunity is international expansion. The worldwide dialysis market is about 80% outside of the U.S. and NxStage revenues are about 90% inside the U.S., thus providing us a huge opportunity. Quite frankly, there were some things in our technology that we needed to adjust to be more aligned with international market preferences. You’ve seen some of those enhancements already in the System One S, nocturnal indication, and single needle.

We believe international will contribute a similar portion of Home’s growth in 2016 as they did in 2015, about 3 points. Over the longer term, our pipeline will support our expanded growth goals for international.

We also remain excited about the role of NxStage Kidney Care. Over time, NxStage Kidney Care really serves three very important purposes. It helps us optimize our technologies, both current and future; it helps us develop best practices; and it provides patient access where there isn’t enough. All of these are intended to support our customers and drive growth in the market. Operationalizing this therapy is more than just creating great products.

Our efforts through NxStage Kidney Care allow us to develop effective end-to-end solutions. It’s early but we’ve helped over 45% of our total hemodialysis patients to go home. We believe these efforts are going to be very important in making the Products Business even more successful.

So, those are some of the highlights in our robust current growth drivers. Now, let’s turn to our mid and longer term growth drivers. This was really the focus of our Analyst Day in November. We provided a lot of content. So, I’m just going to cover the high points because there aren’t any changes to what we said. Please refer back to our Analyst Day slide deck on our website, if you’re interested in more detail.

NxStage has built tremendous capabilities and infrastructure, which will leverage for amazing new products. These include three major system launches over the next three years: Our next generation hemodialysis system; our new peritoneal dialysis system; and our next generation critical care system. Combined, we believe these innovations can take us from our current $1 billion market opportunity to $5 billion market opportunity.

The next generation hemodialysis system is designed to reduce costs, make it easier to learn and use all while expanding its capabilities. We’ve built on a decade of experience and successes, and invented of slew of new technologies. Online, on-demand bicarb buffered dialysate generation with more efficient use of disposables, higher flow rate capabilities and a new touch screen interface; these are just a few of the key features. We continue to work towards introduction late this year.

With PD we’re building off of our success in fluid systems to change how PD is done, there is a number of firsts with this product, but let me focus on the patient. Our system is designed to reduce the weight of [ph] supplies by 80% and the setup time [ph] by around 90%. We do this by getting rid of the pre-mixed bags of fluid and providing a lot of therapy flexibility. With our innovation, we hope to improve clinical outcomes for PD. We continue to work towards its introduction late next year.

And finally, year after PD, we expect to introduce our next generation critical care system. This system is the result of the work we’ve been doing with DARPA. We’ve developed some really amazing technology with this program and we expect to delight the market in terms of flexibility, simplicity and ease of use, all in a surprisingly small package. We believe this will expand our market gains in the U.S. and accelerate our activities globally.

For all of you that saw the presentation or saw the products in person, you understand how this product pipeline really comes together. Today, we have tremendous assets in our current generation of System Ones and PureFlows. Our Home customers currently have over $100 million of NxStage hardware deployed and we are doing everything possible to allow them to leverage and extend that capability moving forward, as we bring these great new products to market. So, one of the key features of our product pipeline is its universal interoperability with both current and next generation technologies. This means the upgrade path is simply amazing for our customers and patients.

Wrapping up, we have a rich portfolio of existing opportunities to accelerate growth, extend our market leadership, and drive shareholder value. We look forward to another great year and remain confident in our outlook for 2016, which includes strong top line growth, 15% annual revenue growth for Home, and improving operating profitability.

Before turning the call over to Matt, I want to thank all our employees for their hard work. In addition, I want to thank all our customers and patients. We are humbled by the level of trust and confidence you place in us and our products each day, and we greatly appreciate your continued support.

Now, I’ll turn the call over to Matt.

Matt Towse

Thank you Jeff and good morning everyone. As Jeff mentioned, we had another strong quarter, topping off a solid year. We are very pleased to again exceed our guidance on revenue, narrow our net loss and deliver a year of increasing profitability in our Products Business. We also have a great story on cash, all while we continue to fund our growth initiatives and new product pipeline. So, let me walk through for some from the numbers for the fourth quarter and for 2015.

Starting with revenue, we beat our fourth quarter guidance solidly, posting total revenue of $89.8 million, which is a 12% increase compared with the prior year period. We also beat our upwardly revised annual revenue guidance, with total revenue of $336 million for 2015, which is 11% increase over 2014.

System One is our largest high growth segment, representing approximately 75% of our revenue across both the Home and Critical Care markets. This segment once again led our growth with revenue increasing 14% for the quarter and 16% for the year. In Home, we ended the year solidly with fourth quarter revenue increasing 13% and full year revenue increasing 16%, exceeding our 15% annual growth target, as we continue to add patients and grow adoption of the System One at Home.

So, moving to Critical Care, revenues for the fourth quarter increased 19% year-over-year and revenue for the full year grew 17%, capping off another very successful year for this team, as we continue to grow our installed base with new and existing customers. While we expect Critical Care to continue this momentum, its growth rate will be tampered by these strong comps.

Turning to our In-Center business, we posted fourth quarter revenues of $18.9 million and for the year $74.8 million. That’s a 5% decline for the year over 2014, a bit better than we anticipated, as we successfully managed through demand changes on yields.

Within NxStage Kidney Care, we recorded fourth quarter revenue of $2.8 million or $1.8 million net of eliminations. For the year, we reported revenue of $6.4 million or $3.3 million net of eliminations. While it is still very early in this initiative, we are pleased with our progress.

Turning to gross margins: We’ve been doing a great job keeping pace with our target of 50% System One gross margins, still well [ph] in fact that throughout 2015 System One gross margin has been at or above 50%. For the fourth quarter, System One gross margin increased to 53% compared with 48% for the prior year period. While for the full year, System One gross margin increased to 51% compared with 48% and for the year currency rates provided some tailwind and contributed about 1.5 points to the improvement while remaining 2 points was a blend of product mix, operational improvements and contractual pricing improvements. Moving forward, we expect to sustain System One gross margins above 50%.

Gross margins for our overall Products Business improved to 45% in the fourth quarter compared with 42% last year. For the year, product gross margin increased to 44% compared with 41% in 2014 and includes just under 2 points of currency impact. For the total Company, gross margin for the fourth quarter improved to 40% compared with 39% last year, and for the year, improved to 39% compared with 38% in 2014. And as we discussed before, NxStage Kidney Care negatively impacts total Company gross margins by roughly 5 percentage points for the year as we continue to support these centers.

Beyond our top line growth, the big stories of Products Business, operating income and positive cash flow for the total Company. As our high growth System One segment continues to grow and scale, we are seeing the operating leverage drive products profitability. In 2015, our Products Business generated $3.8 million in Q4 operating income and $9.2 million for the year. This is the first year of operating profitability in the Products Business and about $16.5 million annual improvement from 2014. With this improved operating performance from products, offsetting $6 million of losses from NxStage Kidney Care, we narrowed our total Company net loss to $2.7 million in the fourth quarter.

Our full year 2015 net loss was $15.3 million, and included $23 million in net losses from NxStage Kidney Care, offset by the $9 million of total operating income from the Products Business. I am also pleased with our cash performance and the strength of our balance sheet. For the year, we had over $10 million in positive cash flows from operations, as a result of strong operating performance, coupled with substantial improvements in our balance sheet, particularly areas like inventory, field equipment and other working capital. As a result, we increased our total cash by about $6 million for 2015 and ended the year with $59 million. This was well ahead of our revised expectation for an annual burn of under $10 million.

Summing up here, we drove solid growth across our largest high growth markets, Home and Critical Care; we made meaningful improvements in our gross and operating margins and delivered strong year of increasing profitability within the Products Business.

As we head into 2016, we remain focused on continuing this momentum. For the full fiscal year 2016, we are forecasting total Company revenue to increase to a range between $355 million and $360 million at a net loss in the range of $7 million to $12 million. Our net loss guidance reflects our expectations for continued operating income improvement from the Products Business offset by our continued investment in NxStage Kidney Care. Importantly, this revenue range reflects strong top line growth on our core businesses, while at the same time guides to a much lower revenue level for our lower margin In-Center segment.

So, let me break down our guidance for 2016. For the third consecutive year, we are targeting 15% annual revenue growth in Home and for Critical Care, 9% annual growth; NxStage Kidney Care at approximately $6 million of net annual revenue; Asahi at approximately $10 million in annual revenue; and finally for our In-Center segment, our guidance range assumes $20 million reduction in the Gambro blood tubing set business over the remainder of 2016. As you know, this is a low margin business, and this change gives us the opportunity to reallocate and leverage our manufacturing capacity to higher growth, higher margin products. In fact, we’ve started pilot production of our next generation system.

Again, as this guidance reflects continued strong top line growth in our core business, we remain on track with our growth plans and our long-term financial targets for both the top and bottom line. From a cash perspective, we are also on track for sustainable total Company positive cash flow in 2017, as we targeted in our long range plans.

For 2016, we expect cash to generally correlate more or less with our net loss, while we increased the products business profitability on working capital and continue investing in our growth initiatives including our innovate pipeline and NxStage Kidney Care. And specifically for the first quarter, we expect total revenue to be in the range $87 million and $89 million, and a net loss in the range of $2 million to $4 million with operating income in our Products Business offset by losses in Kidney Care.

So, 2015 was a great year for the Company, and I am very pleased with the achievements we’ve made and results we posted. We continue to execute on our objectives as we drive through our long-term financial targets. And we look forward to delivering another strong year of performance in 2016.

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 the line of Kevin Ellich of Piper Jaffray. Your line is now open.

Kevin Ellich

Hey, good morning guys. Nice quarter to start off with. But Matt, I just wanted to make sure I got it right. Did you say that In-Center was a $20 million reduction from Gambro blood tubing set business? And then, if that was -- if that is the case, can you give us a little bit more color as to the cadence, how that’s going to wind down and what change from the last time you guys gave us an update on that contract?

Matt Towse

Yes. Good morning, Kevin, good question. The $20 million, we expect that. But first of all, we learned recently, just recently that the demand for blood tubing sets from Baxter is being reduced. So, we decided to de-risk it and take the $20 million -- put going forward, the $20 million blood tubing out of our guidance. So that’s what you’re seeing in this morning’s numbers. This is -- the timing of this is a little earlier than we expected but not a surprise. We’re certainly not concerned with this. This was part of our long-term plan in any case; we’re not focused on In-Center blood tubing business from Baxter.

So, we’re not concerned with it at all. This allows us to reallocate capacity to our System One segment and our new products, which we’re getting twice the margin off of than we are in In-Center. So, not concerned with the drop in the blood tubing part of long-term plan, but the timing is a little earlier than we expected.

And I think as far as timing goes and the cadence, we are sitting in Q1, we expect it to drop more in Q2 and then in our guidance we are considering to be out [ph] in Q3 and Q4.

Kevin Ellich

Okay. So more, it just accelerates as we go throughout the year. I guess -- so does that mean that Baxter and DaVita are going to other sources for blood tubing sets?

Jeff Burbank

I don’t have any idea. So, it’s actually -- let me step back and go at a high level. When you look at the business, there is really three things that are fundamental drivers, one is we want to make sure we’re driving against growth. And at the Analyst Meeting, I think you saw a phenomenal pipeline of products. In addition, you’re seeing solid guidance in the System One segment for the business in general. So, I think we’re doing a really good job with the growth initiatives. The second is profitability, so that means higher gross margin business, better operating level, leverage; I think you’re seeing that as well. And the third one is the dirty little secret is diversification of our customer.

When we -- to go back a couple of years, one of our primary customers was over 40% of our revenue; this change will take them down under 20%. So, we’ve done a phenomenal job of growing the business, putting up guidance, mid-300 or above, consistent with what you’re expecting, all while we’re taking those consolidated customers down to a smaller percentage. So we feel really great about that dynamic. This is something we had planned to do, came a little sooner, it was a little bit more of surprise but we’ve got to take the risk out for you guys, us, just rip it out of there this year, and we’ll move forward and get through the transition.

Kevin Ellich

Got it, that makes sense Jeff. And then, I guess since we’re on it, could you give us an update on the DaVita hemodialysis contract or Home Hemo contract? Has that been automatically renewed, or I guess where do we stand there?

Jeff Burbank

So, we have a contract in place; it automatically renews and it’ll stay in place unless or until both of us choose to change that. So, we have a contract in place.

Kevin Ellich

And then, in the past release, you talked about I guess starting the pilot production for the next gen hemodialysis system. Just wondering, if you could give us a little update in terms of, is that where the resources are going to be reallocated to? And then what’s the path to approval on the next gen products, and I guess where do we stand at this point; have you completed the trials and what about the filing of the 510(k) for System One in [Multiple Speakers]

Jeff Burbank

Let me see if I can hit this.

Kevin Ellich

Thanks.

Jeff Burbank

Timing, we had targeted to launch that at the end of this year; we’re focused on getting all the work done to do that. So, we continue to make progress towards that goal. Next is in terms of pilot production. Obviously in preparing for that kind of launch, you have to start, you have to make all of your prototype now moving into production to do validation and do all the final work for regulatory approvals. So, we’re making good progress there. Our allocation of that capacity was always planned to go to these higher growth areas. So, we’ll work through the timing of that, but it does come at a good time, so we can allocate that towards both the next generation hemodialysis system, but also the peritoneal dialysis system. We’ve got a lot of activity in production going on, on both of those actually. So that’s a good opportunity for us. So, we don’t see any massive realignments or things like that. We think we can manage all this and stride. Last question, part of that was the regulatory…

Kevin Ellich

Yes, regulatory. So, the trials and the 510(k) clearance.

Jeff Burbank

So, obviously, we’ve got a lot of experience in those. We think we’re on track with that. We think we understand that pathway. So again that will be consistent with launch later in the year.

Operator

Thank you. Our next question comes from the line of Danielle Antalffy with Leerink Partners. Your line is now open.

Danielle Antalffy

Hi, good morning guys. Thanks so much for taking the questions. And, apologies if you’ve touched down on this in the prepared remarks. But, I was hoping Jeff, you could a little color on the outlook for the services business. You talked about a modest increase. And just wondering, given the fact that you are ramping NxStage Kidney Care centers, what the driver is there, why it can’t be higher than that?

Jeff Burbank

So, Matt in his prepared remarks gave you the allocation of the revenues to that. And I think we said a net of about $6 million...

Matt Towse

Net of $6 million.

Jeff Burbank

Which gross would be considerably more than that due to the elimination. So, it’s growing nicely for us at the small scale that we are at. We also -- it’s a little bit unpredictable in timing of certifications and revenue collection on those. We have now 13 centers certified and 17 centers open. And we expect to add some to that based on opportunities. But making good progress there, but we are going to be a little bit pragmatic, little bit cautious because we’ve seen a lot of choppiness, if you will, in timing and revenue base there. And so, it’s not going stead state [ph] yet.

Danielle Antalffy

Okay, got it. I am sorry to ask a question you already talked about. I am just thinking about the HHD growth outlook. So, you are looking for another strong year at 15% growth. And I am wondering if this is without a new product which is coming at the end of the year? So, could you walk us through some of the different growth drivers? So, obviously your direct to patient initiatives, where you have success, NxStage Kidney Care centers help with that. What are the different growth drivers that are driving you towards that 15% in your confidence that you can achieve that?

Jeff Burbank

So, let me take to you through those, Danielle. Certainly, the direct to patient marketing continues to be a strong lever for us. So, we feel good about those. We continue to refresh them and they work well in driving awareness and adding patients to the therapy. The next thing is nocturnal. Nocturnal, now most of our customers have their policies and procedures in place and can start to push forward with that therapy. And we think there is some really targets for that that could add some growth.

Next one would be probably skilled nursing facilities. And we’re seeing that business start to get a little bit more momentum as we see clarification to the regulations in states and we see some really entrepreneurial companies coming in and bringing good solutions for those patients. Because it just makes so much sense in quality of care to bring that care into their skilled nursing residence versus bringing these patients to a dialysis center; really think we can get better outcomes doing that. So, we are excited about that, both on a clinical and a business opportunity perspective.

International again will contribute about 3 points to our total growth to that 15% target. So, feel good about what’s going on in the international markets with the little bit -- maybe constrained a little bit fourth quarter just due to exchange rates and things like that. And now we’re things moving forward there. So, feel good about that. You mentioned kidney care; that’s really not our significant growth driver but it does help us to help other customers with some of the activities that we are doing there.

Then, Nx2Me Connected Health, both the efficiency that that can drive when you get the information from the fingertips of the patients all the way through to having dashboards for their care team, and then through -- and populating their EMR and their billing software automatically, just the tremendous opportunity there. And I wanted to again point to the reduction about over 40% reduction to dropout rates, so the controllable dropout rates for those patients that using it. And we’re exciting to get some pretty good numbers. That was an analysis on 250 patients. So, feel really good about its contribution.

So, we think we really have a tremendous portfolio of new products going into this year that can drive that growth and then gets even more exciting as we bring the next generation on into the future.

Danielle Antalffy

That’s great. Thank you for the color, Jeff.

Jeff Burbank

Thanks.

Operator

Thank you. Our next question comes from line of Margaret Kaczor of William Blair. Your line is now open.

Kristen Sheppard

Operator, I think we lost Margaret. Do you want to go to the next one and hopefully she’ll dial back in?

Operator

Sure. Our next question comes from the line of Kyle Rose of Canaccord. Your line is now open.

Kyle Rose

A lot of questions have been asked on Home. I just wanted to see if we could talk a little bit about OUS; you just mentioned some currency dynamics into Q4. What was the amount of FX that impacted into Q4?

Jeff Burbank

Well, that’s really hard to nail down specifically in terms of revenue side of that. So, I am not sure. We had a couple of things going into fourth quarter, so on a year-over-year; the fourth quarter was our strongest quarter in 2014. So, it was a pretty tough comp, plus exchange rates were pretty tough. And I think some of our distributors were holding off to see where they go before they place their orders. So, we perceived that there is little bit of a delay there and it will bounce back to the more traditional growth numbers in this year.

Matt Towse

We typically haven’t sliced currency impacts in revenue and in the rest of the business and manufacturing. But we did save our gross profit; it was about 2 points of currency impact for the year; positive and favorable.

Kyle Rose

When you think about the growth drivers in the U.S. this year, I mean it seems like nocturnal is now starting to come on line and really start to move; skilled nursing, some of the pieces are getting in place. Would you say the momentum is going to build throughout the year on the Home side or is that something that we should expect some of those in the nocturnal and the skilled nursing to pick up in the first half? Just trying to think about the cadence of [Multiple Speakers] for the year.

Jeff Burbank

Yes, I know as you’re building your models. So, growth rates were more normalized last year, they were little more choppy the year before. So every next quarter there is that variability due to the unpredictability of international. However, feel good about our 15% growth rate for the year. So, I’d encourage you more to think about it at a level across the year, although you might want to hedge it a bit on any given quarter due to the unpredictability of the international.

Kyle Rose

And then just last question, I’ll hop back in the queue. I think historically we’ve modeled for around about $1 million from the Medtech tax. I guess one, where did you guys include that in your P&L, and how should we think about the impact of that tax going away for the next two years, just if that could be reinvested or should we see some improvements in margins from that?

Jeff Burbank

I’ll give you the overall and Matt can give you the numbers. Overall, we will invest some of it. We think that’s kind of part of our obligation to try to accelerate R&D to being able to reinvest that. But Matt can you give you the -- and obviously our plans are reflected in our guidance on what we want to do there in total. But Matt, why don’t you give the numbers.

Matt Towse

Yes. So, Kyle, I mean for 2015, med device tax was about $3 million and it was in G&A. So, you will see some improvement in G&A, which just point we’ll be able to allocate some of that money and invest in other areas and that’s included in the guidance.

Operator

Thank you. Our next question comes from the line of Margaret Kaczor with William Blair. Your line is now open.

Margaret Kaczor

So, first question is I just wanted to clarify the In-Center guidance. I know it’s not a big growth driver of the business, not for the revenue guidance or long-term strategy. But -- so Gambro last year was $20 million and then you’re taking it to zero but they will have some amount of sales this year?

Jeff Burbank

Last year, it was about $30 million; we’re taking $20 million out because we are assuming [ph] in the first quarter and a little bit in Q2.

Margaret Kaczor

And then Matt, you talked a little bit about the gross margin profile of that business, but I’d imagine it’s actually pretty nice tailwind for you guys as we go out both next year and then into ‘17?

Jeff Burbank

I mean long-term, it helps improve the mix because In-Center is mid-20% margin versus System One at over 50%. So by reallocating and growing System One versus In-Center allows margin growth just on product mix shift.

Margaret Kaczor

And then, international has been a strong point for you guys, clearly; you’re even guiding to the 3 points impact, which I think is on the high end of historical range. So, what are you seeing that’s causing the growth OUS to be so strong, and is it the UK or a number of countries and what’s kind of the sustainability of that as we go even further past the 2016 timeframe?

Jeff Burbank

So, that growth rate has had to grow just because we’re growing whole that 15% and have always allocated about 3% of that to that growth rate. So international is growing at much higher rates; if you do the math you’ll figure that out, which I know you will do. And they continue to do well. I think it is broad based. We’ve got some great distributor partners and we have a couple of countries we’re direct in and doing very well in execution there. So, continue to grow that business nicely. We’re tiny compared to the opportunity. So, we still have a lot of room to run in front of us and continue to hope to see more and more from that.

And I think as we’ve adjusted the product to those specific market needs, we’re going to do a little better. And I think you’ve seen a little bit of that in those numbers. And I also think as you see our product pipeline come into play, you’re really going to see significant upside for international revenue growth as we move forward.

Margaret Kaczor

And then last one from me just the path to PD approval, is that yet decided and when will we get a better sense of the requirements there? You’ve in past said that you’ve handicapped that date but what are the brackets I guess; where is the improved approvals of 510(10) versus the drug approval for the fluid? Thank you.

Jeff Burbank

So, PD, we’re still going to be a little quiet on our strategy there. We think that’s the better way to approach it. There is clearly less predictability on those clearances than there are on our next generation hemodialysis system. We’ve done hemodialysis systems many times and think we understand the process better there, so we can be a little bit higher. I do -- we predict those times based on our regulatory experience that no guarantee; that is out of our control. So, we do want to bring your attention to the fact that there can be some variability on that. But we think we’ve done the right thing. We think we understand the process and the pathway and we think we’ve built those into the timelines we’re giving you. So, no changes to what we said at the analyst meeting, continue to believe in the pathways, and the execution has continued to progress in line with that.

Operator

Thank you [Operator Instructions]. Our next question comes from the line of Raj Denhoy of Jefferies. Your line is now open.

Raj Denhoy

Hi, thanks for taking the question. Jeff, maybe I could just -- I hate to come back to this Gambro issue because it’s not really central I guess to long-term growth prospects. But I guess, it’s a little bit perhaps jarring that you guys announced from the second quarter results that you’d renew this contract and I agree on the fourth quarter call talking about $30 million of revenue going away. And so, perhaps you could just provide a little bit more about how to frame that and what really happened in the subsequent months from there? What does this suggest about the relationship you have with DaVita longer term given that they had -- my understanding is they sort of standardized on the streamline tubing…[Multiple Speakers]?

Jeff Burbank

Let me give you a little bit background. It’s little harder when you’re not selling product directly. We are an OEM manufacturer for Gambro or Baxter now. And so, we don’t manage that relationship directly with DaVita. So that probably speaks to why we got a little bit more surprised than we liked to be on this one. We certainly weren’t surprised at all with needles, as we transitioned to that. We had plan that this is probably where it’s going to go; if nothing else that was the prudent strategy to make sure we were appropriately positioned. So, it’s not a surprise that it’s happening, the timing was the surprise. We didn’t get really any warning. And when you’re opponent, best thing, [ph] let’s be clear about it, let’s take it out, let’s take the risk out, let’s protect ourselves and you moving forward. Might we do better than that, we might; don’t really care, it’s not where the focus of the business is. And so, we just -- we’re hitting it head on; de-risking it and we’ll grow through it. And yes, it wasn’t the timing, but I think a lot of that’s because we’re one step removed from that direct interface. So, we got a little surprised. I have no idea how surprised Baxter Gambro was; I can’t really know that.

Raj Denhoy

Maybe I can ask one about a product you’ve highlighted at the end analyst meeting as well, the Nx2Me product. You’ve given us a lot of very positive data about the attrition rate on that product. Maybe you could give us some information on how broadly that’s been rolled out at this point; how many patients are on it; how quickly you can get that rolled out even more broadly?

Jeff Burbank

Yes. So, at least 250 patients were on it, as we did the analysis to show you that reduction rate; it’s passed that now and growing pretty quickly. There are steps that now are starting to happen where the data can flow seamlessly in the EMRs and billing which really accelerates the adoption. So, I think you’re going to see significant expansion in that product across this year. But I’d say, this year is really the year where we’re putting pedal to the metal to try to drive that. We’ve got the evidence that shows how effective it is; we’ve got the examples of implementation. I think we have the infrastructure at NxStage built to make it a positive customer experience. So, it’s really exciting time for that product; it’s in its prime now.

Raj Denhoy

Any thoughts on when it could be the majority of the patients, or when every new patient would be on that from the beginning?

Jeff Burbank

I think that’s probably two, three-year type of timeline.

Raj Denhoy

Okay. Thank you.

Operator

Thank you and our next question comes from the line of Kevin Ellich of Piper Jaffray. Your line is now open.

Kevin Ellich

Hey, Jeff just -- and actually let me start Matt. Matt, good to see the cash flow numbers in 2015. Just wondering if you have any guidance or thoughts on where cash flow could come out in 2016 and thoughts on capital expenditures and cash for year as well?

Matt Towse

Right. So, 2015 was a great year for cash. I mean the improvement in operating income of products was a huge boost to the cash position. We just rate things on the balance sheet; we encourage you to look at that in detail, you’ll see this. We actually reduced inventory in 2015 versus last year. But in 2016, we’ll be building inventory as we grow the business; we’ll have normal levels of CapEx. I think from a Kidney Care standpoint cash flow will be similar to what we had in ‘15. So, as I said in the prepared remarks that cash for the year will pretty much track plus or minus where our net loss will be for the year.

Kevin Ellich

Okay, that’s helpful. And then Jeff, just kind of high level thoughts. We saw one of the big medical device companies Medtronic; they went out, made an acquisition. Just wondering what your thoughts around that if that’s going to increase competitive landscape or kind of non-event?

Jeff Burbank

So, I think it’s great that there is some attention paid to the industry. I think it’s absolutely a non-event for us given where those assets are focused. We really don’t compete against in the areas, the geographies that they seem to be focused on and where that acquisition brought them. So, see absolutely no consequence to us. We’re focused on our growth plan and believe we have really significant product leadership with our current products and the pipeline we have. So nothing you guys should be concerned about in the near-term, mid-term or probably even long-term.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to hand the call back over to Jeff for any closing remarks.

Jeff Burbank

Thank you for your attention. We’re excited about ‘16, continue to have great growth drivers in place, and we’ll look forward to talking to you after Q1. Take care, guys.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may now disconnect. Have a great day everyone.

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