NxStage Medical Inc. - Great Growth Opportunity

| About: NxStage Medical, (NXTM)

Summary

Home dialysis is a niche segment, which is now gaining visibility and experiencing growth due to technological advances and convenience factors associated with it.

Home hemodialysis in the US is still in its infancy stage, with over 1% market penetration.

According to NxStage’s estimates, between 35,000 and 50,000 ESRD patients in the US could benefit from home hemodialysis, thus creating a potential $1 billion market in the US alone.

NxStage, through its primary product, System One, has first mover advantage in the US home hemodialysis market.

The System One is the only portable hemodialysis system approved by the US FDA for in-center use (2002), for home hemodialysis (2005) and home nocturnal hemodialysis (2014).

NxStage Medical Inc. (NASDAQ:NXTM) - Company Analysis Report Introduction

Hemodialysis can be performed at a medical facility (hospital, clinics or dialysis center) or at home. Home-based dialysis includes Home hemodialysis (HHD) and Peritoneal dialysis (PD). HHD is the provision of hemodialysis at home for people suffering from end-stage renal disease. HHD treatment is done three times a week while the patient is awake and is being monitored by another person.

HHD gives the freedom to patients to decide when to dialyze. Also, patients do not have to travel to a dialysis facility for a treatment session. This makes HHD an ideal option for those who value their independence or need to fit their dialysis sessions into a busy schedule. Studies show that HHD also has a greater impact on the patient's wellbeing as they know more about their treatment and can control their own treatment. Despite the reported benefits, HHD remains under-utilized in many parts of the world.

Home-Based Dialysis - Global Market Valued at $3.3 billion in 2015

Figure: Global Renal Products Market, Revenue, 2015

Source:

Baxter Investor Conference Renal Overview (May 2016)

NxStage Annual Report and Form 10-K (2015)

Lately, HHD has gained huge popularity owing to mounting body of clinical evidence that suggests benefits of more frequent home hemodialysis. HHD products market was valued at $300 million and is expected to show strong and continued growth. Home dialysis is a niche segment, which is now gaining visibility and experiencing growth due to technological advances and convenience factors associated with it. The global home-based dialysis market, which includes peritoneal dialysis and home hemodialysis, was valued at $3.3 billion in 2015.

Home Hemodialysis - $1 Billion Potential US Market Opportunity

Home hemodialysis in the US is still in its infancy stage, with over 1% market penetration. According to NxStage's estimates, between 35,000 and 50,000 ESRD patients in the US could benefit from home hemodialysis, thus creating a potential $1 billion market in the US alone. (NxStage Fact Sheet, The NxStage Opportunity, 2010).

NxStage through its primary product, System One, has first mover advantage in the US home hemodialysis market. The System One is the only portable hemodialysis system approved by the US FDA for in-center use (2002), for home hemodialysis (2005) and home nocturnal hemodialysis (2014). According to the NxStage recent estimates, currently, 8,000 patients worldwide are using the NxStage System One for HHD (NxStage Annual Report 2015).

Home Hemodialysis - Competitive Landscape and Product Innovations

NxStage Medical undoubtedly has the largest share of the home hemodialysis market. The company is actively working on new product developments to further strengthen its position. Other than NxStage, the rest of the manufacturers have been slow to develop new products to encourage home hemodialysis.

Baxter's (NYSE:BAX) Vivia home hemodialysis machine is no longer a contender in the marketplace. In July 2016, the company exited home hemodialysis market by ending US and Canadian clinical trials of its HHD machine and halting production in Europe, where it already had CE approval.

Another FDA approved HHD machine available in the market includes Fresenius (NYSE:FMS) 2008K@home, which offers a wide range of dialysis prescription delivery irrespective of patient size or metabolic needs. The device, which received FDA approval in February 2011, is a smaller version of the company's in-center 2008-series hemodialysis machines for patients with chronic renal failure. Fresenius since a long time has been planning to launch a new sorbent technology-based HHD machine to replace its 2008K machine.

The closest innovation to be seen in the HHD market is Outset Medical's Tablo system. The California-based company has received FDA clearance for its Tablo system for use in acute or chronic care facilities. Currently, the company is focusing on creating self-service dialysis clinics, but eventually, the company plans to pursue FDA clearance for home use.

Comparison of System One, 2008K and Tablo

Attribute

2008K

System One

Tablo

Single pass dialysate

Yes

Yes

Yes

Batch dialysate

No

Yes

No

Minimum dialysate flow cc/min

100

0

100

Max dialysate flow cc/min

800

300

300

Sterile dialysate bags

No

Yes

No

Machine cartridge set up

No

Yes

Yes

Built in Heparin pump

Yes

No

Yes

Single needle use

No

Yes

No

Monitor arterial and venous pressure

Yes

Yes

Yes

Real time monitoring

No

No

No

Download encrypted data to clinic

Yes

Yes

Yes

Minimum Blood Flow cc/ min

20

0

50

Max Blood Flow cc/min

600

600

400

Water system part of machine

No

Yes

Yes

Portable Machine

No

Yes

No

Source: Home Hemodialysis Machines: How they can provide Optimal Hemodialysis, Annual Dialysis Conference

NxStage System One versus Conventional HD systems

There was an unmet clinical need for a dialysis system that could combine the therapeutic flexibility along with the clinical benefits associated with traditional dialysis machines in a compact, portable, easy-to-use form that can be used by healthcare professionals as well as trained layman users alike in multiple settings, including patient homes, hospitals and dialysis centers.

NxStage's System One is a technology designed to specifically satisfy this unmet need. Unlike conventional HD machines, the System One is well suited for home use and requires no special infrastructure to operate. It requires minimal renovations compared to the average $5,000 per install with conventional system, resulting in savings and better use of water. Trained patients can simply bring the System One home, plug it into a conventional electrical outlet and operate it.

Secondly, the NxStage System One Express package allows patients to carry their equipment anywhere, thereby allowing patients to maintain work schedules and participate in social activities. Also, fluid processing, which has been a major obstacle in making HHD accessible to patients, is addressed by the NxStage System One as it uses pre-packaged fluid bags that are easy to transport and can be delivered to a home or hotel.

Benefits of NxStage System One Over Conventional HD Systems

Features

Benefits

Area of Impact

Simple interface

Ease of equipment use/learning

Improved access to HHD and shorter training time/patient

Simplified setup

Minimized maintenance

Reduced risk of 'burn-out'

Integrated water treatment and dialysate mixing

Minimized water use

Areas with unreliable water

Simple plumbing connections and standard electrical plug

Minimized renovations

Renters wishing to do home HD

Compact, Lightweight and Portability

Freedom to travel or dialyze throughout their home

Patients seeking greater independence and alternatives to traditional dialysis schedules

System One is a crossover therapy that combines the best attributes of peritoneal dialysis with that of traditional hemodialysis. It offers efficient use of dialysate via lower dialysis flow rates and increased dwell time/saturation. Below table shows the similarities of NSO to peritoneal dialysis and hemodialysis.

NxStage System One - Similarities to PD and HD

Similarities to PD

Similarities to HD

Lactate based fluids

Blood flow rate dependent

Saturation of dialysate (dwell time)

Monitor blood and fluid circuit pressures

Dosing (prescribed clearance volume)

Any vascular access (graft, fistula, catheter)

Weekly Kt/V

Anticoagulation

NxStage Medical, Inc. - Company Snapshot Key Information

Table: NxStage Medical, Inc., Key Facts, 2016

NASDAQ

NXTM

Founded

1998

IPO

2005

Headquarters

Lawrence, Massachusetts

Overview

NxStage Medical, Inc. is a medical device company that develops, manufactures and markets products and services for patients suffering from acute or chronic kidney failure.

Headquartered in Massachusetts, the US, the company operates across Germany, Italy and Mexico and has distribution partners in the UK, Italy, Scandinavia and Netherlands.

NxStage Kidney Care, Inc., a subsidiary of NxStage Medical, Inc., has established a small number of dialysis clinics for patients with ESRD.

Major Product Offerings and Services

NxStage products and services currently target the home, critical care and in-center dialysis markets. The following timeline highlights some of the company's key product introductions since 2003:

Figure: NxStage Medical, Product Innovation and R&D Timeline

Source: NxStage Annual Report and Form 10-K (2015)

NxStage's primary product offering and one of main drivers for its growth is System One.

NxStage System One is a small, portable and easy-to-use hemodialysis system indicated for the treatment of renal failure or fluid overload using hemofiltration, hemodialysis and/or ultrafiltration. The machine is over a foot in height and consists of the NxStage Cycler and the disposable drop-in cartridge filter.

NxStage System One S is an advanced version of the System One. Both have similar design; however, the System One S comes with added functionalities such as higher dialysate flow rates and wider ranges of therapy options. Some of the enhanced features of the System One S are:

  • 18 L/hr dialysate flow rate
  • New ergonomic handles
  • Added clinical benefits for patients who dialyze five or six days per week
  • Decreased treatment time or frequency

NxStage System One S with NxView is designed to deliver the prescribed dose to patients. NxView allows intuitive touch screen navigation, real-time treatment information and 96 hours of therapy graphing.

In addition to the hemodialysis machine, the company also offers consumables and services, which are used for each treatment with the System One:

  • NxStage Cartridge: An easy-to-use drop-in cartridge that is easy to set up and wipe down after the treatment. The cartridge incorporates a proprietary volumetric fluid management system and includes a pre-attached dialyzer.
  • PureFlow SL and Premixed Dialysate: The PureFlow SL prepares dialysate fluid in batches before treatment in the patient's home using ordinary tap water and dialysate concentrate. In case of patient travel or in other circumstances in which the PureFlow SL is not available, the company also offers premixed dialysate in sterile five-liter bags.
  • Nx2me Connected Health: A telehealth platform that collects System One cycler data as well as patient medical information such as blood pressure and weight. Patients can review, confirm, and transmit this data to their dialysis centers after each treatment and dialysis center staff can access the transmitted data with their own clinician portal.

Table: NxStage Medical, Inc., Key Product Offerings by Care Setting, 2016

Setting

Product Type

Product Name

Home Hemodialysis

Hemodialysis Machine

NxStage System One

Cartridges

Chronic Cartridges

Dialysis Fluid

PureFlow SL

Telehealth Platform

Nx2me Connected Health

Nocturnal Ancillary Devices

Home Nocturnal Supplement, Venous Needle Dislodgment Device, NxStage Fluid Detection System

In-Center Dialysis

Hemodialysis Machine

NxStage System One, NxStage System One S

Bloodlines

Streamline, Reverso, Streamline Long, Streamline Express

Needles

AV Fistula Needles with MasterGuard, ButtonHole AV Fistula Needles with SteriPick, Medic Anti-stick Needle

Dialysis Fluid

PureFlow SL

Intensive Care Unit

Hemodialysis Machine

The NxStage System One S with NxView

Dialysis Fluid

PureFlow B Solution

Cartridges

Acute Care Cartridges

Acute Dialysis Unit

Bloodlines

Streamline, Reverso, Streamline Long, Streamline Express

Dialysis Fluid

PureFlow B Solution

Cartridges

Acute Care Cartridges

Needles

AV Fistula Needles with MasterGuard

Hemodialysis Machine

The NxStage System One S with NxView

Source: NxStage Website

Service Offerings

As part of NxStage's strategic initiatives to increase home therapy access, the company operates several NxStage Kidney Care dialysis centers that treat end-stage renal disease patients directly. These centers offer a range of treatment options, including home hemodialysis, peritoneal dialysis and flexible in-center hemodialysis. As of February 8, 2016, the company had 17 centers open in nine states, of which 13 have received Medicare certification.

NxStage is planning to enter the Peritoneal Dialysis market as the PD market is well established, largely favored by payers, and significantly larger than the HHD market. The company is working on developing a new machine for peritoneal dialysis based on its System One technology. The new PD cycler under development will eliminate the need for premixed fluid bags by offering on-demand dialysate generation from concentrate. The system is expected to be ready in 2017.

Financial Position of the company: One of the main financial characteristics that defines the success (and in many cases, survival) for a biotech technology company is its use and generation of cash. It is cash flow positive generating about $4 million in cash from operating activities as of last quarterly filing in October 2016. The company has a total of $60 million in cash and cash equivalents, unchanged from its cash equivalent balance at the end of 2015. Moreover, the company engages in hedging its foreign exchange risks to protect against currency fluctuations. The company is prudent in expending cash and is growing revenues at a steady pace with a huge potential market in front of it.

Business Risks:

Customer concentration risk is significant but expected in this segment of the industry. Majority of the revenues in this segment are provided by sales to Fresenius and DaVita (NYSE:DVA). However, these two companies combined also serve two-third of the US dialysis patients and home patients. In that sense, the risk is actually an opportunity.

Recommendation: Although the stock has run up quite a bit, it is clearly a leader in what it does with growing revenues and huge domestic and international growth in front of it. Although it is hard to value biotech companies, we feel valuation is defined by technology leadership and potential growth in its respective segment. This company clears any benchmark in these two areas and, therefore, we think it is a Buy with many fold gains ahead of itself.

Disclosure: I am/we are long NXTM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Some model portfolios at www.HedgedEquity.com have a long position in Nxstage Medical (NXTM) The use of this article is for educational and informational purposes only. NOT investment advice. None of the material presented in this article should be construed as investment advice (neither direct, explicit, or implied). It is strongly suggested and recommend that you do your own due diligence and/or consult a qualified financial advisor for any investment advice based on your situation.

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