NxStage's (NXTM) CEO Jeff Burbank on Q4 2016 Results - Earnings Call Transcript

| About: NxStage Medical, (NXTM)
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NxStage Medical, Inc. (NASDAQ:NXTM) Q4 2016 Earnings Conference Call February 28, 2017 9:00 AM ET

Executives

Kristen Sheppard - Vice President, IR

Jeff Burbank - Founder and CEO

Matt Towse - Chief Financial Officer

Analysts

Margaret Kaczor - William Blair

Kyle Rose - Canaccord

Matthew O'Brien - Piper Jaffrey

Danielle Antalffy - Leerink Partners

Chris Cooley - Stephens

Raj Denhoy - Jefferies

Operator

Good day, ladies and gentlemen. And welcome to the NxStage Medical's Fourth Quarter Fiscal 2016 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 maybe recorded. I would now like to turn the conference over to Kristen Sheppard. You may begin.

Kristen Sheppard

Thank you, and good morning, everyone. Welcome to NxStage Medical's fourth quarter and full fiscal year 2016 financial results conference call. My name is Kristen Sheppard, Vice President of Investor Relations with NxStage.

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

Before starting, I would like to inform you that today's presentation contains forecasts about our future, including financial guidance for 2017 and beyond, anticipated demand for 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 historical fact.

You should not rely on any forward-looking statements as assurances of the future performance. These forecasts are subject to uncertainty and contingencies outside of our complete control, including market demand, regulatory approvals and other actions, healthcare reimbursement, our customers' purchasing patterns, competition, economic condition, litigation, information security breaches, supply constraints, medical advancements, and other factors described in the Risk Factors and Management's Discussion and Analysis sections of our most recent quarterly and annual financial reports.

Actual future results may vary in a 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 like to turn the call over to our Founder and CEO, Jeff Burbank.

Jeff Burbank

Thanks, Kristen, and good morning, everyone. NxStage had a terrific fourth quarter, finishing off a great 2016. We exceeded our guidance on revenue. The Products business delivered the nine straight quarter of operating profitability, more than doubling it year-over-year and we occur a net lost by over two-thirds.

Beyond the numbers, the team has been firing on all cylinders, expanding adoption for our therapy within the U.S. and internationally, continuing to make progress on the pipeline and delivering great new customer wins in critical care. Our focus on innovation and execution is delivering results and setting a foundation for our next wave of growth. Most importantly, we believe we are having a positive impact on patients’ lives.

As a result of all our hard work, there is been a number of positive developments. I am excited to highlight these and the opportunities they create. As well as give you an update on the rollout of our next generation system and how we are progressing against our pipeline targets, which include our Peritoneal Dialysis and Critical Care Systems.

Just recently, Dr. Allan Collins joined the NxStage team as our Chief Medical Officer. Dr. Collins is a worldwide leader in nephrology and has the deepest understanding of the data drives the industry. We are confident he will be a tremendous asset as we advance our pipeline and expand excess to our therapy.

In the late fall, the American Journal of Kidney Diseases issued a significant publication highlighting the compelling clinical data in support of more frequent hemodialysis. This publication is a powerful resource for the renal community and we continue to work to ensure that physicians and policymakers use this data to expand their understanding and support of the therapy.

CMS provided a meaningful improvement in training reimbursement that took effect this year. This represents nice progress essentially doubling a payment for home training. Our patient marketing activities continued to drive market growth. We have done a good job of keeping this fresh and continue to see good performance into the future.

Nx2me Connected Health has momentum. To-date, we have performed over 150,000 treatments with Nx2me. In addition to increasing adoption within the U.S. we are expanding Nx2me into international markets this year.

Dialysis and skilled nursing homes is a tremendous opportunity for us. There are about 30,000 to 40,000 dialysis patients SNFs. We believe our product can improve economics, clinical outcomes and quality life for these patients. We are investing to drive further regulatory clarification to improve patient access. This is one of the growth drivers we are very focused on.

All of this contributes to our strong leadership position that has proven difficult to match. We are excited to further leverage all these positive developments and drive growth in 2017. We are targeting 15% annual home revenue growth for the fourth consecutive year, above market growth in Critical Care and solid topline growth for the total company around 10% and consistent with previous comments, total company profitability in 2017.

Now to the next-generation rollout, as I have indicated in the past, our next-generation rollout consists of three phases. We believe this will help ensure that our customers receive maximum benefit while not overly stressing one. We are well into the first phase which started midpoint this includes software improvements resulting in improved setup time and very introduction with p. This includes software improvements, resulting an improve set up time and ease of use. It’s been a very smooth introduction with positive customer feedback.

Currently, we are under review for FDA clearance in CE Marking for the second phase, which includes the new touchscreen user interface and integrated blood pressure monitor. We expect to get the go-ahead any day now and start this introduction. We think this rollout will take us well into 2018, experience the new users that have been part of our extensive testing, we have been very impressed with these new capabilities, so we are excited to put this into the market.

Based on the timing of the first two phases along with positive market developments I mentioned earlier, we are happy to now have both the time and opportunity to make the third phase even better than planned.

Our online dialysis generation system in its current form is amazing technology that's working well. However, we’ve decided to complete one additional product evolution cycle before launching it. In addition to leveraging this opportunity for the next-gen launch, we expect to benefit from more resources and focus on our PD regulatory activities.

Now to the pipeline, PD is a significant opportunity for NxStage. It’s an established $3 billion dollar market that we believe have the potential to double with the right innovation. Our goal is to deliver a compelling and differentiated PD system that gives physicians and patients exciting new options and improve clinical outcomes.

We are building off of our success in on-site fluid systems to change how PD is done. There are number of first with these products. But let me review the benefits for patients that I have shared in the past.

Our PD system is designed to ultimately reduce the weight of supplies by 80% and the setup time by around 90%. We do this by getting rid of the premixed bags of fluid in providing a lot of therapy flexibility, very similar to our approach in home hemodialysis. We remain on track and continue to target our first market introduction of the PD system at the end of this year. Additional geographies will follow with their clearances.

We are also on track with our next-generation Critical Care system that we are targeting to introduce in late 2018. The system is a result of the work we've been doing with DARPA. We have 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 the surprisingly small package. We believe this will expand our market gains in the U.S. and also provide us with a feature set to successfully compete globally.

When you take all of these efforts, our depth of experience and the positive market developments, you can see why we are so excited about the growth and financial opportunity for NxStage. We’ve performed over 14 million treatments and believe we’ve made over a quarter billion leaders of dialysate on-site, in the home for thousands of patients around the world. This is an amazing feet.

We know how it works and what’s economically viable. We also believe we know what’s needed to extend our market and extend our leadership. With continued execution on the programs I have just reviewed, we expect to take our market opportunity from $1 billion to more like $5 billion and as promise we are doing it in a way that enables our customers to continue to leverage their current investment in NxStage technology.

Before I turn it over to Matt, I want to thank our customers, patients and the NxStage team for a great 2016. It’s always extremely difficult to be a change agent. We had a lot of hard work ahead of us this year, probably more than ever before. We will keep our heads down, stay focus and continue executing exactly as we've done in the past. I believe NxStage can help improve the lives of many more patients and I appreciate the commitment of everyone who shares that vision. Matt?

Matt Towse

Thank you, Jeff. NxStage’s strong fourth quarter capped off a solid year of progress and execution. We are very pleased to again exceed our guidance on revenue. We also cut our net loss by over two-thirds, while we more than double the profitability of our Products business.

Let me walk you through some of the numbers for the fourth quarter and full year of 2016. Starting with revenue, we beat our fourth quarter revenue guidance posting total revenue of $93 million, which is a 4% increase compared with the prior year period. We also beat our upwardly revised annual revenue guidance, with total revenue of $366.4 million for 2016, which is the 9% increase over 2015.

System One is our largest and fastest growing segment representing over 75% of our revenue across both the Home and Critical Care markets. This segment once again let our growth with revenue increasing 10% for the quarter and nearly 50% of the year.

In Home we achieved our revised growth targets ending the year solidly with fourth quarter revenue increasing 13% and annual revenue increasing over 14% and reflecting almost a 4 point of unfavorable currency impacts due to the weakening of the British pound for the quarter and over a 0.5 point for the whole year. This is consistent with what we discussed on our last call.

In Critical Care, revenues remained solid, increasing 3% for the quarter over last year’s strong comp and increasing 16% for the year capping off in other very successful year for this team as we continue to grow install base with both new and existing customers. While expect Critical Care to continue this momentum, it is growth rate will be tempered by strong comps in the first half of 2017.

In-Center revenue was $15 million for the fourth quarter and $63 million for the year, better than we anticipated as we successfully manage through demand changes on our blood tubing sets. Within NxStage Kidney Care we reported fourth quarter revenue of $4.1 million. For the year we reported revenue of $14.8 million. And finally, Inter-Company eliminations totaled $1.9 million for the fourth and $7.5 million for the year.

Now turning to margins, for the fourth quarter, System One gross margin was 53%, which was relatively consistent with the prior year period. However, for the full year System One gross margin increased to 53% compared with 51% in 2015.

Gross margin for our overall Products business improved to 47% in the fourth quarter compared with 45% last year. For the year, Products gross margin increased to 47% compared with 44% in 2015. The results in both periods reflect original product mix as a result of the strong growth in our higher margin System One products.

For the total company gross margin for the fourth quarter improved to 41% compared with 40% last year and for the year improved to 41% compared with 39% in 2015. Keep in mind that as we have discussed before NxStage Kidney Care will continue to negatively impact total company gross margins by roughly 5 percentage points on an annual basis as we support these centers.

Beyond our topline growth, the highlight is the Products business operating income. The operating leverage we have been talking about for a while now is kicking in pretty nicely. To puts numbers around that we generated nearly $5 million in operating income for our Products business in Q4 and about $23 million of the year, more than double what it was when compared with the prior year’s income of just under $10 million.

With this improving operating performance from Products, we narrowed our total company net loss to $1.6 million in the fourth quarter and cut our net loss by more than two-thirds for the year to $4.8 million, within our guidance range and making solid progress toward our next financial milestone total company profitability this year.

We also did better than planned on cash, ending the year with $60 million in cash, up slightly since 2015 with no material debt. This was well ahead of our earlier expectation for an annual cash burn of under $12 million.

Summing up the year, 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 a strong year of increasing profitability within the Products business, which drove dramatic improvements in our net loss.

Now let me wrap up with guidance. For 2017 we expect revenue to increase to a range between $400 million and $405 million, around 10% growth for the year. So breaking that down by segments, for the fourth consecutive year we are targeting 15% annual revenue in Home. We are guiding Critical Care to 10% annual growth and In-Center to annual revenue of roughly $58 million. In addition, we are guiding NxStage Kidney Care revenue to approximately $10 million for the year net of elimination and finally, Asahi or our other revenue to approximately $11 million for the year.

Given all of these inputs and consistent with our long-term targets, we expect to achieve total company profitability this year and deliver positive cash flow for the year as well. Longer term we also continue to target $700 million in revenue in 2020 with 15% operating margins and Kidney Care profitability by the end of 2018.

Now specifically for the first quarter, we expect total revenue to be in a range of $95 million to $97 million with the net loss in the range of $1 million to $3 million. As you know we do have choppy elements of our business that seem to become together this quarter, so we are looking at Home revenue growth for Q1 to be closer to 10% versus 15%, but as you look across the remainder of the year, we continue to target 15% annual growth Home revenue growth.

Our bottomline will start below breakeven and we expect profitability in the second half of the year so that we are profitable for the total year. So we are excited about 2017 and our plans to build upon on momentum. We have many milestones on the horizon and we are looking forward to another exciting year ahead of us.

And with that, I would like to open the call to question. Operator, we are ready for the first question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Margaret Kaczor of William Blair. Your line is now open.

Margaret Kaczor

Good morning, guys. Thanks for taking the questions.

Kristen Sheppard

Good morning.

Jeff Burbank

Good morning, Margaret.

Margaret Kaczor

The first one for me is maybe a little bit more detail on the Home growth both this quarter as we look at Q1 and then throughout 2017 and so maybe taking a step back. You had the biggest sequential change in company history and Home in Q3. This quarter was maybe a little bit softer, but if you average the two it’s still above average versus what you've done in the past. If you look at Q1, I have been looking sequential, but just given the 10% number it’s probably a little bit lower than average as well. What does that gets you towards back half of the year in terms of Home growth. How much of this is kind of the normal ebbs and flows associated with international? And then as you guys look at patient education and maybe the investments you have made there in the past couple years, how deeply penetrated are you guys going into MSAs at this point, are you still seeing the ROI you did initially.

Jeff Burbank

Yeah. Thanks, Margaret. I will lay the kind of overall and then Matt can talk more specifically to the details of some of the numbers? I think we are going into ’17 with the best set of growth drivers we have had number really. When you look at some of the things we accomplished in the last part of ’16, like the increase in trading reimbursement. We think that's a really compelling growth driver going into this year.

As you mentioned, your question about the direct-to-patient activities, they continue to perform real well for us, we’ve been able to keep a fresh mix up a little bit to get a lot of life and as you know, we’ve seen a tendency to be able to go back into markets and continued to drive growth on top of the growth from the previous activities. So we feel good about their ability.

In addition, we are in the middle of a really great next-generation launch. We haven't disrupted any customers by overwhelming them. We are pacing it right. We are giving them advantages with Phase 1, now we are happy end of that, ready for Phase 2, almost have the clearance and the products ready to launch.

So we feel good that hasn’t disrupted the activities and in back as it had some and then really what’s we are seeing some traction in the skilled nursing facilities. So we feel like that’s going to contribute more to the growth going forward then it has in the past.

International continues to be a solid performer. However, there is choppiness and we have talked about this choppiness in a couple of these areas in the past. We’ve see it coming together and obviously we are couple months into the first quarter, so we have got a little bit more visibility. So I will let Matt to give you the details on that. So, yes, stronger in the second half than this first quarter the great growth drivers and feel good about the year and on our path to achieving our target of 15% growth in the Home this year. Matt, why don’t you talk about the specifics for Q1?

Matt Towse

So, yeah, Margaret, you're right, there’s an ebb and flow related to international. We had a great quarter in Q3 and we indicated last quarter that Q4 we will like under national, same for Q1 as well. So international is little like the Q1. Also the British pound, we’ve talked about that in the past, that’s about 50 basis points to 100 basis points for Q1 and Q2, weaker than last year. So we have that.

Skilled nursing sales can be choppy and that could be more so as that business continues to grow, that segment continues to grow, so that’s another piece of it. And then, finally, on Kidney Care, we are looking at lower revenues to Kidney Care this year in the equipment sector primarily because we’ve built out the 20 centers we have. So we will continue that revenue -- net revenue stream that level. So we are looking at about $2 million reduction in Kidney Care revenue for the full year, so we will start to see some of that in Q1. With that all gets offset by these other factors we talked about, Jeff, talked about with Home direct-to-patient marketing products international. So we will see some of this choppiness move the other way for us going forward and target of 15% of the year.

Margaret Kaczor

Great. And then, just to make sure I understand the cadence throughout there, you start at 10%, of course, you get to look at it is can you finish the year at a 20% clip and would that just be related to the comps, is that related to some PD revenue, maybe your including in the guidance, is that next-gen revenue maybe you will pick up in patient adds, a little bit more clarity would be great?

Jeff Burbank

Sure. So, first of all, we are on track for PD, but we don't count any revenue for that this year. So that that not one of the drivers. It’s the drivers that we’ve talked about. So we see solid patient growth, good execution in international, despite the choppiness, so we will pick up some there going in to the rest of the year. Good execution on SNFs again mentioned some choppiness there, but that will sort itself out cost.

I think, a number of, now let’s say, it’s been a couple of years, where we wanted to shift your focus on the annual basis versus the quarter basis, because we do this choppiness. Now ironically we haven't seen much of it over the last eight quarters or so, but it is there, it has come together in the first quarter, but we don't see it as a reflection of the growth in the business.

Margaret Kaczor

Great. And then, in terms of the sort of update on improvement, I think, Jeff, that you referenced in Phase 3, which is the on-demand dialysis program, is it technological improvement, is that one that benefits patients or the clinician or maybe one that could lower your costs even further for you as you launch that product.

Jeff Burbank

Got it. Can you be my straight person here, yes, yes and yes. Certainly, we have the time and the available window to do it and we thought we have a number of improvements that we could drive there. A couple of things have changed in the environment. The cost of taking a product from being finished to clearance has increased dramatically with some of the new testing requirements from the FDA.

So in the past we might have move this into the market and then iterate it in the marketplace. The economic don’t really support that and have the time and the availability do it. So we think we can make it meaningfully better by taking this iteration, so we are going to take the shot. We really think we were given a gift by the market.

The technology is amazing. We hit the performance targets we were looking for in terms of creating dialysate and ease of use, all that. So we feel great about the technology. We just think we can improve it and we have the window time to do it, so we are going to do it.

Margaret Kaczor

And you don’t care to give us a little bit more detail on that, do you? Thanks.

Jeff Burbank

On?

Margaret Kaczor

In terms of what the improvement is…

Jeff Burbank

Oh! So…

Margaret Kaczor

… we have seen

Jeff Burbank

We do think there's an opportunity to reduce the costs. We do think there is an opportunity to kind of get further in on tooling components and potentially improving the reliability at launch. Things like that. So, yeah, there is a number of elements that we think we can improve. Just it’s going to be a mature product by the time we get it to the market.

Margaret Kaczor

Great. Appreciate it.

Operator

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

Kyle Rose

Great. Thank you very much. Can you hear all right?

Jeff Burbank

Yeah.

Matt Towse

Yeah.

Kyle Rose

And I’ve dropped out of the call there for a minute. So I apologize if I'm -- if I ask a repeat question. But just, one, I understand you are going to be limited in the information you gave on the PD opportunity. But one of the bigger questions, we get from investors is just, how do we frame that opportunity in the first several years of commercialization as relative to the larger global opportunity. I wondered if you could just take a minute to step back and kind of walk through how you view the PD market both in the U.S. and then OUS, just recent growth trend from the competitors, et cetera?

And then, how we should think and investors should think about NxStage entering that market in the first one to two years of commercialization? How much of that market is really up for grabs, is it 5%, 10%, 50%, I mean, how should we think about, where you guys will be able to compete over the course of the one to two years of the commercialization?

Jeff Burbank

Okay. So, this is going to be balance of opportunity versus pragmatism. Hey, guys, can I just take a moment, we just got notification that our Phase 2 user interface has just been cleared for CE Mark, so we will be launching within a day or week or something like that.

Kristen Sheppard

Exactly.

Jeff Burbank

So just add that note handed to us. So congratulations to the team and that’s fantastic news. So stepping back to PD. The opportunity is huge and to give you a few things. We think that there's been somewhat of the technology limitations to adoption of PD, so our focus with our technology is to bring the tools that really can expand that market and not just us, but others have said, with the right technology we think that market could double. So that’s an additional $3 billion market opportunity, it’s about a $3 billion worldwide market now.

So we think not only can we enter a very large market, but we can expand that market, so we are less focused on competition and those factors. We don’t think those are going to play a bigger role as what our technology, what our capability can drive in terms of market growth.

With that said, you are probably referring to what is the available market, what are the contract terms, what’s -- how does that market work. That's one of the reasons why we want to have some conservative miles, one, we don't have experience yet, and two, there is some contractual obligations that depending on how good our product is can either have an influence on that are not, but typically contract terms in this industry for PD range from something between three years and five years. And I can imagine competitive forces are in place now to try to, it’s done that more than the five years than three year, so that says about 20% of the market is available each year.

That's a huge number. That’s not going to be a limitations to our growth given what we’ve built into our models for our 2020 and beyond plans. So I would be cautious in your numbers but I don't want that to reflect our optimism relative to the technology and the opportunity that we have. It will take us some time to build it. It will take us some time to get all the clearances in all the markets that we want to go into, but it's a wonderful opportunity for the company.

And we have already shown you what we are doing. We have shown you the product. You have seen how exciting it is. You have seen how it needed to us. We have showed that over a year ago and that continues to move forward in the development program quite nicely and everything we showed you is working well. We are on track. Feel really good about the technology and what we are going to bring to the market here.

Kyle Rose

Okay. Great. I appreciate that incremental color there. And then, I have got ask, but have you estimated the PD platform into the FDA and just where we are as far as that and any questions and things with the agents you may be concerned about?

Jeff Burbank

So, we believe we are on track to launch it in our first market at the end of this year. That’s what we are prepared to say at this time. Very competitive market. We know this is a point of contention. I think over time you'll realize that we are handling it the best way for value creation, but I'm not going to be able to answer your question at this time.

Kyle Rose

Understandable. And then, just last question and I will hop back in queue. We saw some commentary ending the Q4 as far as [ph] CARES Act Q (28:30) potential Medicare Advantage plans for ESRD patient. Just, obviously, strong uptick in some of the alternative payment models and the escrow programs. Just wondered if you could take a step back and frame the opportunity for the NxStage in a broader capitated model and just what your expectations for long-term market adoption here is just how that type of environment is different from LDOs perspective in adopting new technologies like Home Hemo and the System One?

Jeff Burbank

So, you gave me a great opportunity here, I am going to take it, because, I think, many of you understand why we create this company, but I want to remind you there were two long-term fundamental drivers that we believe would shift the way dialysis have provided. One is the cost of labor. And the industry has been really fortunate, labor increases have not really come if you look over the last 10 year to 15 years. So that hasn’t been a driver. But we’ve always believed that with labor increase costs that delivering therapy at home can be more economically advantageous and more clinically advantageous than the way we do it today primarily in center.

So that’s one of the overarching. The other was we believe that if you customize the therapy to the individual patient, you can have an impact on total cost of care and we thought that this industry ultimately would move to a total capitated model and that’s very exciting. The indication right now and when you get on the calls with the LDOs and others in this industry, the evidence is we are getting closer and closer to that world.

We thought expansion of the ASCO here recently, with for any us taking a huge expansion in their activities there, really good infrastructure getting put in place there and we think with the data we have and we’ve created over the years and the capabilities that we are bringing in the product pipeline that that is all going to converge and we are creating a world that says we exist as the best therapy and the lowest-cost therapy either on a therapy delivery basis or a total capitation basis.

So if you feel, Jeff, being a little more enthusiastic, it is because of the backdrop that we are seeing, we are seeing evidence that the market is moving in that direction and the [ph] CARES Act (31:00) put us stake in the ground and said, they can do a Medicare Advantage plan. I think it’s 2019, 2020, in that timeframe it phases in. So we now have a stake in the ground that that world is coming and we can also see the providers making a path to creating the infrastructure to putting it in that place. So we are feeling more validated about the work we've done and how it’s going to position in the future than we ever have.

Kyle Rose

Great. Thank you very much for taking the questions.

Kristen Sheppard

Thank you.

Operator

Thank you. Our next question comes from the line of Matthew O'Brien of Piper Jaffrey. Your line is now open.

Matthew O'Brien

Good morning. Thanks for taking the questions. Jeff and Kristen, just the push on the HHD side of things a little bit here, you had about 13%-ish growth in Q4 here, I know currency was a headwind as well, but that was off of fairly easy comparison, relative speaking. You have got -- you are talking about 10% growth in Q1 and I think most investors are going to say, okay, what you are not calling for an acceleration for all of ’17 with Q1 being soft. I just don't believe it or I have a hard time feeling comfortable with that type of an outlook. So is there a little bit more concrete kind of visibility you can provide for us from a growth driver perspective to help investors get comfortable in that type of growth rate here in ’17?

Jeff Burbank

So, I think, if you look back, you can find a bunch of quarter choppiness even though it’s been relatively within band. This business ebbs and flows. We have done a great job of heading the annual numbers. Yeah, we got hit with a little bit headwind of currency last year. But other than that we hit our numbers. So I feel really good about it.

And again, I can’t emphasize enough the growth drivers that are in place that are delivering the growth. We are seeing the execution. We just have a stack of issues in the Q1 which relates to the exchange rates is a big chunk of it and then some seasonality or choppiness relative to equipment purchases and the change in the purchase rate, because we're not building out centers anymore at Critical Care. So, it looks good to us. I understand the concern, but we believe we are on track for the 15% for the year.

Matt Towse

And Matt, we haven’t really talked about much of this choppiness and SNFs, because that’s becoming a bigger growth driver for us, you will see a bit more of that. Some of our customers in skill nursing do kind of buy like a distributor, so it can be a little lumpy and obviously, we will start to see that in Q1.

Matthew O'Brien

And Matt, when you talk about lumpy, I mean, is it like a function of like what we do a kind of more in the back half for the year versus the first half of year or is it the last kind of couple weeks of the quarter?

Matt Towse

It will be last predictable, a little bit more like the Critical Care business in terms of back half of the quarter. There are some instances that can drive some of that, but I -- it’s and it’s equipment base. It’s not consumable base. So I am getting messages here. But, again, we don’t think you should be overly concerned. That's why we are not overly concern. We believe we are on track to the 15% for the year.

Matthew O'Brien

Okay. And then, as far as the Phase 3 adjustments that you are talking about here, when you talked about, Jeff, a lower costs or the ability to lower the cost of that system. Can you give us a sense for how meaningful that reduction would be and is that that something you're going to capture economically at NxStage or you are going to pass through some of that benefit to your customers i.e. lower the potential costs to the centers and potentially make it more profitable to the Home Hemodialysis for the centers versus In-Center?

Jeff Burbank

We are vetting a couple opportunities, so I need a little bit of time to be more specific on that, I mean, our thinking is always about what’s the balance between sharing it to drive growth and capturing it for ourselves and our investors. Need a little bit more time. There are couple things that we don't have fully vetted to see, but we do believe it could be in the, I don’t even want to go on record yet, but there are some opportunities, there is couple things that have become available, technologies that we want that to that might have a pretty dramatic impact, if we choose to take the time to incorporate them at this point. So we are going to take a little bit time vet those and come back and I could give you a more precision on that. But we are not quite ready to call that.

Matthew O'Brien

Fair enough. Thank you guys on the Phase 2 approval.

Jeff Burbank

Thank you.

Operator

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

Danielle Antalffy

Hey. Good morning, guys and congrats on the strong end to the year. I was wondering if you could touch on Critical Care for a second. This was -- you hit the expectation for the year, but this was a quarter that was slower growth than we've seen historically. Can you talk about anything that's going on that should be called out for this quarter that drove the 3% growth versus what had been pretty sustainable at the lowest high single-digit growth for a while?

Jeff Burbank

Yeah. Year-over-year choppiness, I mean, it was a really strong fourth quarter last year, nothing in the industry, we are doing really great in that market segment, continue to have some significant wins, continue to expand our market share, so feel really good about the team and the technology there and the pipeline. We did a refresh on that and that’s been working really well. That’s been keeping the growth of equipment sales going and then we’ve got the next-generation queued up towards end of ’18. So feel really good about that business.

Danielle Antalffy

Is there -- is that a business because of somewhat capital equipment intensive that, does that have any impact from uncertainty around ACA repeal-replace, we have been doing some work on the impact to CapEx there for hospitals, just wondering…

Jeff Burbank

Yeah. So maybe quarter, quarter a little bit, but I don't think we are seeing a strong signal. We are always cautious about that when we give guidance, because we have been one of legacies you have is it, a Founder, CEO, I have been through a lot now. So I remember some things. So that that was an issue about five years or six years ago, but I don't think we have a strong signal on that. But there might have been something pushed from Q4 to Q1. It didn’t -- that didn’t seem to come out of the numbers to us.

Danielle Antalffy

Okay. And then just a quick follow-up…

Jeff Burbank

And remember, Danielle, to that like 90% of revenue is disposal side that’s useful, does that annuity stream.

Matt Towse

And fourth quarter is it can be, I mean, we had a really solid fourth quarter last year too.

Danielle Antalffy

Right.

Matt Towse

So, year-over-year basis, I think, you have a little bit of impact there.

Danielle Antalffy

Right. Not trying to net pick, you guys hit the number for the year. So and just a follow-up on PD. Jeff, you made a comment about entering your first market by the end of the year, I was always under the impression that market was the United States. Could you elaborate on whether that's the case or if not how we should be thinking about this rollout from a geographic perspective?

Jeff Burbank

So we are working hard against a bunch of different markets. I am not going to pick which one to give ourselves a little bit more flexibility. But we do believe we can enter the market at the end of this year.

Danielle Antalffy

Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Chris Cooley of Stephens. Your line is now open.

Chris Cooley

Thank you. Good morning and I appreciate you taking the questions. Maybe just quick one for Matt, just going back on the guidance for NxStage Kidney Care $2 million, I believe you said, net of Inter-Company eliminations and I appreciate additional color there as well for us. I think you mentioned the stocking in essence as you built that those systems out. But could you talk about the assumptions that you have in terms of mix and also in terms of utilization to get to that roughly $10-ish million for the full year net and also maybe how you see utilization of Kidney Care in a growing capitated world that you alluded to earlier. I don’t think you enough scale at this point to really be aggressive in the ASCOs. But maybe just how you could also maybe do some research for your in customers off of that base would be appreciated? Thanks.

Jeff Burbank

Yes. I think, I will take the start of that…

Chris Cooley

Okay.

Jeff Burbank

…which was the second half of your question, so our objective is to build centers that we can participate in ASCOs in. Our objective is to show the market how you can scale and efficiently deliver Home therapy and what percentage of patients you can grow to with Home therapy. IN fact, we are over 50%, closer to 60% of our patients on Home therapies. So we are doing a pretty good job of helping patients to get home. I don't know that that's fully sustainable, because I am sure there is some selection bias based on as being NxStage, those being NxStage centers. So we are focused on the operational execution to show how to deliver Home therapies in a way to get the best clinical outcome in the best economic footprint.

So that's really our objective around that. Now in terms of utilization, Matt, probably answer this as well. Our -- we have an In-Center portion of that and we have a Home of that. The In-Center portion is generally way underutilized, but you have to purchase the equipment and put them in the facility when you build the facility. So there's a ton of underutilization there. But the consumables will grow and the demand -- the sale to Kidney Care patient numbers will continue to grow. So it will consume more disposables. But we won't have the In-Center equipment sales like we have when we built out those 20 centers.

Matt Towse

And Chris, specifically on the guidance for ’17, so we guided $10 million net, this is through working the math. The Inter-Company sales, the sales from products, the Critical Care is about $7 million last year, so I said, $2 million down this year, so it’s about $5 million. So if you do the math, $10 million net with the $5 million eliminations gets about $15 million gross revenue, service revenue on the Critical Care business. That's roughly flat to our run rate right now. So we are being conservative in how we guide Kidney Care for this year.

Chris Cooley

Okay.

Jeff Burbank

And there is business we don’t have a good visibility. There is some choppiness in revenue collection, those types of things. So we are going to stay with what we know there.

Chris Cooley

No. That’s super. That’s why I was hitting that. Thanks so much.

Operator

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

Raj Denhoy

Hey. Hi. Good morning. Maybe I spend a minute on the SNF opportunities, you guys have been talking about this morning. Maybe you could give us a bit on. You mentioned regulatory work you are going to be helping with, perhaps, you could describe some of the challenges still in SNF adoption, understanding is there a several states that are poised to begin here very soon, California is being one of them maybe you can confirm that and I have couple of follow-ups as well.

Jeff Burbank

Sure. I mean, in the past we have talked about regulatory being one of the key limitations to delivering this better approach at least we have it’s a significantly better approach. There are some states that are getting a little bit more flexible. The issue that we work on is probably a more of the global level, although, we do support customers and give them a lot of information tools and support at the state level. We also spent a lot of time and at CMS to try to get national level -- guidelines developed, so that everybody knows they are playing by the rules. For now it's been a state-by-state and depending on where those rules come out can either open up this opportunity nationally or could put some barriers in place. So we work a lot at the national level to make sure we get a good outcome there.

It just makes so much more sense to bring the therapy to a fragile patient then to shuffle that fragile patient to a dialysis center. And some of the clinical evidence supports that as well. We are just scratching the surface on that market, because we have maybe a dozen states or so and as you mentioned there are couple more, so that's growing maybe to the 13 to 15 states this year, without any national support. So we see growth there even within those states and you can see it from the numbers we are very low penetrated. So we think we have got a lot of growth within those states that seem to be developing the regulations in the fashion that supports this type of care and then the kind of the Holy Grail if you will would be a national level regulation that supports the delivery of this therapy for these patients. So, there is, I would say, we look at this two tiers, we are going to execute on the states where we can this year and we are going to work to create the market nationally.

Raj Denhoy

Okay. And then, I don’t know if you ever given us numbers around how many patients, how real patients are in skilled nursing facility, I doubt you are willing to that, but I thought I asking you?

Jeff Burbank

Really sorry for the trial, no, we haven’t given numbers. It given, you can look at state like Illinois, it’s pretty obvious that we have a higher penetration and you can go on the web and find some of this stuff out.

Kristen Sheppard

And it’s a growth driver.

Jeff Burbank

And it’s been a growth driver. So, yeah, the percentage is growth, but it’s still small percentage of the total patient population.

Raj Denhoy

Okay. Let me just switch to…

Jeff Burbank

… little fast on those segments.

Raj Denhoy

Right. Understood. Maybe just lastly just on the competitive landscape there. You guys do have very optimized system for the SNF, but there are other options that it has in terms of billing out dense and sort of dedicated centers using In-Center equipment. How do you think that market is developing going forward, with which model do you think will be dominant progressive both, maybe give us a sense of how you think the shares will shakeout?

Jeff Burbank

Yeah. So, huge market, that’s the nice factor I have to walk into. But I think if you look at we -- the growth is largely accrued to us, so we've done a really good job of our value proposition for that execution. I think, take some of the fundamentals is pretty hard to make to build many dialysis centers and skilled nursing facility, nobody wants to open up the walls, you have no idea what’s you are going to find, nobody wants to put water systems and things like that. So we found that our value proposition worked very well there and the economics seem to work for all parties concern.

Raj Denhoy

Great. Thank you.

Operator

Thank you. That is all the time we have for questions today. I would turn the call back over to Jeff Burbank for any closing remarks.

Jeff Burbank

Thank you everybody. Looking forward to this year going very strong, I want to remind you we just got our CE Mark for our Phase 2, so we will be launching that and you will hear more about that in our next call. Look forward to talking to you after the first quarter. Take care everyone.

Operator

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

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