NxStage Medical Executive Insights: Strategy Shift, Asahi Convert

On Tuesday, NxStage Medical, Inc. (NASDAQ:NXTM) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Strategy Shift

Benjamin Andrew – William Blair & Company: Jeff, maybe talk a little bit about some of the – what appears to be a little bit of a shift in strategy both of broadening the portfolio, adding the albumin dialysis, as well as the business model from the standpoint of taking equity ownership stakes in clinics?

Jeffrey H. Burbank – CEO: Sure, let me start with the critical care area; that’s been a strategy that we have always been pursuing, in other words, we think we have a very simple to use easy platform that does not only renal therapies, but now we do Therapeutic Plasma Exchange and we think through really good designs, we can bring some additional capability. We think Albutec has some of those capabilities that we want to incorporate into the System One. So, in the ICU, CCU environment, centers can dedicate themselves to one system that meets a broad swath of their needs. So, we think it’s a really exciting way to continue to expand the capability there. So, no new strategy there, it’s just a continuation of adding therapies and I think an exciting one at that. Turning to the centers of excellence; I think we’ve learned a lot and there are some great partners there that have been looking for some folks to team up with, some doctors and nurses that have been looking for leaders in homecare and I think we are that. I know we are that. So, we are just taking that – I guess I call it, taking the go-deep strategy to the next level in a handful of locations. We will team up with those folks, provide some capital and build these centers of excellence to demonstrate and refine what can really be the standard I think for a new business model for renal care

Benjamin Andrew – William Blair & Company: Maybe a couple of questions for you guys in terms of the quarter and the guidance. Can you give us the breakout of international HD revenues this quarter and what you have assumed in Q2?

Jeffrey H. Burbank – CEO: Sure, this quarter domestic was slightly up over last quarter, so a nice trend there. International obviously was stronger than we expected, because we were guiding a little bit conservative on the last call, so that came in little bit stronger. Again, our long-term view four to six quarters is that will be between $1.2 million to $1.6 million, so no changes there. We still feel confident about the drivers of growth. Domestic is looking solid, so we continue to see some good performance there. That’s a little bit more predictable than the international market, where timing of shipments and such can really move that number around. So, we need to average it out over multiple quarters. It’ll average in or out $1.2 million to $1.6 million. We have always said (indiscernible), that it could be as well as zero because you can offset that domestic growth with reduction in shipments on quarter-to-quarter basis or it could be as high as $2.4 million to $2.5 million. So, that’s hopefully helpful to tell you were I have that.

Benjamin Andrew – William Blair & Company: So, slightly up U.S. we should assume a couple of hundred thousand, I assume, which means that international was over $1 million and I understand it averages out, but seasonally, we’ve come to expect Q4 to be up…

Jeffrey H. Burbank – CEO: Let me interrupt, Ben, slightly up over last quarter sequential gain in domestic, so that was around $700,000, so it’s a little better than that.

Benjamin Andrew – William Blair & Company: I appreciate the clarity. I misunderstood that. So, seasonally though Q4 tends to be weaker and Q1 tends to be stronger. Did something change there? I’m curious, if there may be a shift in the market that you’re detecting in terms of the willingness of people to startup more structurally thus necessitating perhaps the strategic move into these other model.

Jeffrey H. Burbank – CEO: No, in fact that patient gains from fourth quarter to first quarter we’re up and up nicely, so I think we replicated what you were saying. In the fourth quarter we do see some seasonality and first quarter it tends to pick up, we did experience that.

Asahi Convert

Danielle Antalfy – Leerink Swann: Can I touch on the Asahi convert first. First of all, is there a lock-up and if so, when does that expire and second of all, any sense of why now from an Asahi perspective and does this signal any change in the Company’s relationship with Asahi going forward. Obviously, you have the collaboration in Japan, but beyond that?

Jeffrey H. Burbank – CEO: So, I need to step back a little bit for some of those that haven’t been around the Company for a while. We signed a strategic agreement with Asahi in 2009 that covered a number of different more operational focused thing and they were there for us at a time when our share price was very low and we needed access to capital to keep driving towards our vision. So, they have been a great partner for us for a number of years. We’ve executed probably on the high-side of that relationship since 2009, which included the execution on dialyzers. In fact, we’re making dialyzers for them and we’re at full capacity in our current plant and building an additional plant so that we can scale that even further which will continue to help our economics and provide great low-cost dialyzers for their commercial activities in Europe. So, that’s been a relationship that’s been ongoing for a while. We took the opportunity to convert the debt that was going to be due next year. We thought it was a good time to do that. They like our strategic clients obviously, because they are willing to take an equity position at this time. They have confidence in us. So we’re moving forward on that basis. I think it is just an evolution of a great partnership.

Danielle Antalfy – Leerink Swann: Any sense on the lock-up?

Jeffrey H. Burbank – CEO: So there will be registered shares. We can’t speak to their intentions, but we are long-term partners. So, I don’t see it as something that we’ll working against each other.

Danielle Antalfy – Leerink Swann: If I could touch on Q2 guidance, obviously you touched on it briefly in your prepared remarks, but you are guiding to a deceleration to about the high single-digit range. Can you talk about the drivers there? Is there any change in U.S. home hemodialysis adoption in the Q2, is it seasonality, is it international, any color you could give there would be great.

Jeffrey H. Burbank – CEO: We are going to be cautious about international, because we are finding it’s very unpredictable to know what the sequential growth rate is going to be due to the effect of international, largely international equipment shipments. But our guidance incorporates a gain in net patients year-over-year, so we think we are feeling pretty good about the basic market fundamentals. Both domestically and internationally we see net patient gains year-over-year, so we are feeling good. We continue to believe that we can deliver the kinds of numbers we talked about last quarter as well.

Danielle Antalfy – Leerink Swann: One more question if I could, PD any sense of penetration there and whether this might be a leading indicator for HHD?

Jeffrey H. Burbank – CEO: Sure. So there has been some discussion and I’m not sure we have a clear view of that yet, because it’s still early. We do have one clear view in that, due to a benefit of the bundle and enhancing the profitability of PD for the providers, there has been a lot more effort and a lot more training going on in PD since year than before that. So, that PD population is getting a lot of attention. I guess there is a theory of can that create an opportunity as those patients are not able to continue on PD. We haven’t yet felt that. We do have some programs focused on educating around that, and we are staying very close to it, but I don’t have enough experience at this time to report back on whether that’s an upside opportunity or not.