Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NXTM > SEC Filings for NXTM > Form 10-Q on 8-May-2012All Recent SEC Filings

Show all filings for NXSTAGE MEDICAL, INC.

Form 10-Q for NXSTAGE MEDICAL, INC.


8-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

The following discussion should be read with our unaudited condensed consolidated financial statements and notes included in Part I, Item 1 of this Quarterly Report for the three months ended March 31, 2012, as well as the audited financial statements and notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC.

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition, including statements with respect to: the market adoption of our products in the U.S. and internationally; the growth of the home, critical care and in-center dialysis markets in general and the home hemodialysis market in particular; the development and commercialization of our products; changes in the historical purchasing patterns and preferences of our key customers, including DaVita Inc. and Fresenius Medical Care; the adequacy of our funding; our ability to achieve and sustain positive cash flows; expectations with respect to future demand for our products and revenue growth; the timing and success of our initiatives to improve our gross profit as a percentage of revenues; expectations with respect to our operating expenses and achieving our business plan; expectations with respect to achieving profitable operations; expectations with respect to achieving improvements in product reliability; the timing and success of the submission, acceptance and approval of regulatory filings and the impact of any changes in the regulatory environment with respect to our products or business; the scope of patent protection with respect to our products; expectations with respect to the clinical findings of our FREEDOM study and other ongoing clinical studies evaluating home and/or daily, more frequent hemodialysis; expectations as to the continued availability of raw materials, components, and finished goods, including from key single source suppliers; expectations with respect to our ability to supply on a timely and uninterrupted basis all products ordered by our customers; expectations with respect to the Gambro litigation; and the impact of new and future changes to reimbursement for chronic dialysis treatments. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, costs, plans and objectives are forward-looking statements. When used in this report, the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate", "potential", "continue", "predict", "may", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements.

Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Item 1A of Part II. We undertake no obligation to revise or update publicly any forward-looking statement for any reason. Readers should carefully review the factors described under the heading "Risk Factors" in Item 1A of Part II of this Quarterly Report and in "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as in other documents filed by us with the SEC, as they may be amended from time to time, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Introduction

We are a medical device company that develops, manufactures and markets innovative products for the treatment of kidney failure, fluid overload and related blood treatments and procedures. Our primary product, the NxStage System One, or System One, was designed to satisfy an unmet clinical need for a system that can deliver the therapeutic flexibility and clinical benefits associated with traditional dialysis machines in a smaller, portable, easy-to-use form that can be used by healthcare


Table of Contents

professionals and trained lay users alike in a variety of settings, including patient homes, as well as more traditional care settings such as hospitals and dialysis clinics. Given its design, the System One is particularly well-suited for home hemodialysis and a range of dialysis therapies including more frequent, or "daily," dialysis, which clinical literature suggests provides patients better clinical outcomes and improved quality of life. The System One is cleared or approved for commercial sale in the U.S., Europe, Canada and certain other markets for the treatment of acute and chronic kidney failure and fluid overload. The System One is cleared specifically by the U.S. Food and Drug Administration, or FDA, for home hemodialysis as well as therapeutic plasma exchange, or TPE, in a clinical environment. We also sell needles and blood tubing sets primarily to dialysis clinics for the treatment of end-stage renal disease, or ESRD. These products are cleared or approved for commercial sale in the U.S., Europe, Canada and certain other markets. We believe our largest product market opportunity is for our System One used in the home hemodialysis market for the treatment of ESRD.

We report the results of our operations in two segments: System One and In-Center. We distribute our products in three markets: home, critical care and in-center. In the System One segment we derive our revenues from the sale and rental of the System One and PureFlow SL equipment and the sale of disposable products in the home and critical care markets. The home market is devoted to the treatment of ESRD patients in the home, while the critical care market is devoted to the treatment of hospital-based patients with acute kidney failure or fluid overload. In the In-Center segment, we derive our revenues from the sale of blood tubing sets and needles for hemodialysis primarily for the treatment of ESRD patients at dialysis centers and needles for apheresis, which is referred to as the in-center market.

Segment and Market Highlights

Our customers in the System One segment are highly consolidated. Fresenius Medical Care, or Fresenius, and DaVita Inc., or DaVita, own and operate the two largest chains of dialysis clinics in the U.S. and collectively provide treatment to over two-thirds of U.S. dialysis patients. DaVita and Fresenius are our two largest and most significant customers in the System One segment. Direct sales to DaVita represented approximately 31% and 32% of our System One segment revenues for the three months ended March 31, 2012 and 2011, respectively. Further, DaVita is our largest customer in the home market, constituting over 40% of our home hemodialysis patients. Direct sales to Fresenius represented approximately 16% of our System One segment revenues for the three months ended March 31, 2012. Increased sales to DaVita and Fresenius have driven a large portion of our historical revenue growth and will be important to future growth. If the purchasing patterns of either of these customers adversely change, our business could be negatively affected.

Our In-Center segment revenues are highly concentrated in several significant purchasers. Our two largest distributors are Gambro Renal Products, Inc., or Gambro, and Henry Schein, Inc., or Henry Schein. Revenues from Gambro represented approximately 43% and 39% of our In-Center segment revenues during the three months ended March 31, 2012 and 2011, respectively. Revenues from Henry Schein represented approximately 31% and 39% of our In-Center segment revenues during the three months ended March 31, 2012 and 2011, respectively.

DaVita is also a significant customer in the in-center market. Sales of our products through distributors to DaVita accounted for approximately half of In-Center segment revenues for both the three months ended March 31, 2012 and 2011. DaVita has contractual purchase commitments under two agreements: one with us for needles and one with Gambro for blood tubing sets. DaVita's purchase obligations with respect to needles will expire under an agreement with us in January 2013. Gambro's long term product supply agreement with DaVita, entered into in connection with the sale of Gambro's United States dialysis clinic business to DaVita, obligates DaVita to purchase a significant majority of its blood tubing set requirements from Gambro. Our distribution agreement with Gambro, which expires in June 2014, contractually obligates Gambro to exclusively supply our blood tubing sets to DaVita.

We offer certain customers rebates based on sales to specific end users and discounts for early payment. Our revenues are presented net of these rebates and discounts. As of March 31, 2012, we had $1.5 million and $1.0 million reserved against trade accounts receivable for future rebates and discounts for customers in our In-Center and System One segments, respectively. We recorded $1.3 million and $1.4 million during the three months ended March 31, 2012 and 2011, respectively, as a reduction of In-Center segment revenues in connection with rebates and discounts. For the System One segment, we recorded $1.3 million and $1.2 million during the three months ended March 31, 2012 and 2011, respectively, in connection with rebates and discounts.

As an alternative to a cash-based rebate, we issued to DaVita a warrant that may vest and become exercisable to purchase up to 5.5 million shares of our common stock based upon the achievement of certain System One home patient growth targets at June 30, 2011, 2012 and 2013. This warrant-based rebate structure preserves our cash, and provides for the issuance of shares upon the exercise of any warrants earned only if patient access to home hemodialysis with the System One is materially expanded. The warrants have an exercise price of $14.22 per share, expire during 2013, are non-transferable and must be exercised in cash. The accounting for these warrants is similar to the accounting for cash-based rebates. Specifically, the warrants are measured at fair value through their date of vesting and recognized as a reduction of revenues, based on the number of warrants expected to vest over the same expected period as the related expected product revenues, which is 7 to 10 years. Estimates of the number of warrants expected to vest and the fair value of the warrants will be revised each reporting period through the date of vesting. At March 31, 2012, approximately 5% of the 5.5 million warrant shares have been earned


Table of Contents

based on the achievement of certain performance targets at June 30, 2011 and 3% has expired, unearned. While DaVita continues to grow, it is unlikely they will achieve the level of performance needed to earn a significant number of the outstanding warrants. The reduction of revenues recorded in connection with these warrants has not been significant during 2012 and 2011.

Financial Performance

During the three months ended March 31, 2012, we grew our revenues by 13% to $57.0 million from $50.6 million during the prior year comparable period with growth occurring in each market: home, critical care and in-center. Home revenues drove the growth, increasing $3.5 million, or 13%, for the three months ended March 31, 2012 versus the prior year comparable period, driven by an increase in the number of patients prescribed to use and centers offering the System One. Critical care market revenues increased $2.3 million, or 32%, for the three months ended March 31, 2012, versus the prior year comparable period, primarily due to increased sales of disposables from our growing installed base of System One equipment. We expect to see continued growth in our System One revenues, primarily driven by the annuity nature of our business, as well as the life-sustaining, non-elective nature of dialysis therapy. In-center revenues increased $0.5 million, or 3%, for the three months ended March 31, 2012 versus the prior year comparable period. The increase was driven by increased needle sales due to increased end user demand and fluctuations in inventory levels at our distributors. We expect future demand will continue to be susceptible to fluctuation as a result of increased competition and variations in inventory management policies with both our distributors and end users, particularly as they complete the transition of a majority of their blood tubing set requirements from our ReadySet to our Streamline product.

We continue to see improvements in our financial performance below the revenue line. We have not yet achieved profitable operating margins, but we continue to improve gross profit as a percentage of revenues from 36% during the three months ended March 31, 2011 to 37% during the three months ended March 31, 2012. The improvement in gross profit as a percentage of revenues was mainly attributable to favorable product mix with higher relative sales of higher margin products and lower product costs, partially offset by costs incurred by our In-Center segment related to the transition of manufacturing of certain blood tubing sets from a contract manufacturer to our own manufacturing facility beginning in the second quarter of 2011. While we expect to continue to improve gross profit as a percentage of revenues as a result of various initiatives, including the consolidation of our manufacturing network, these improvements will continue to be offset in the short-term as a result of costs to rationalize and consolidate our manufacturing operations and will be impacted favorably and unfavorably by foreign exchange rates versus the U.S. dollar.

We are encouraged by the improvements to our operating margins and are continuing to work toward our long-term goal of achieving profitable operating margins. However, there can be no assurance that we will be able to continue to improve our operating margins or achieve positive operating margins. Our ability to become profitable and the timing and sustainability, depend principally upon continued improvements in gross margins, growing revenues, and the leverage of our operating infrastructure including after taking into account the effects of any investment in selling and marketing or research and development activities. Additionally, our profitability will be impacted beginning in 2013 due to the 2.3% medical device excise tax which will be assessed on certain of our products sold in the U.S.

Comparison of the Three Months Ended March 31, 2012 and 2011

Revenues

Our revenues for the three months ended March 31, 2012 and 2011 were as follows
(in thousands, except percentages):



                                              Three Months Ended March 31,
                                              2012                    2011
            System One segment
            Home                       $ 29,553        52 %    $ 26,045        51 %
            Critical Care                 9,787        17 %       7,438        15 %

            Total System One segment     39,340        69 %      33,483        66 %
            In-Center segment            17,611        31 %      17,081        34 %

            Total                      $ 56,951       100 %    $ 50,564       100 %

In the home market, revenues increased $3.5 million, or 13%, for the three months ended March 31, 2012 versus the prior year comparable periods, driven by the increase in the number of patients prescribed to use and centers offering the System One. We have increased both the average number of patients at existing centers and centers offering the System One, primarily through our existing relationships with service providers, including DaVita and Fresenius. Critical care market revenues increased $2.3 million, or 32%, for the three months ended March 31, 2012 versus the prior year comparable periods, primarily


Table of Contents

due to increased sales of disposables from our growing number of System One equipment placed within hospitals and increased sales of the System One resulting from our efforts to further penetrate the market. We expect future demand for our products and revenue growth in both the home and critical care markets to be strong as we further penetrate these markets, expand internationally, and leverage the annuity nature of our business. As our international business grows, our System One revenue may be susceptible to fluctuations in international equipment sales and changes in inventory levels at our international distributors. Our two largest customers in the home market, DaVita and Fresenius, will be important to that growth, specifically in the U.S. market. If the purchasing patterns of either of these customers adversely change, our business could be negatively affected.

In-Center segment revenues increased $0.5 million, or 3%, for the three months ended March 31, 2012 versus the prior year comparable periods. The increase in revenues was driven by higher sales of our needles due to increased end user demand and fluctuations in inventory levels at our distributors. While revenues continue to be susceptible to fluctuations in inventory levels at our distributors, end user demand of both our blood tubing sets and our needle products continues to grow. We expect future revenues will continue to be susceptible to fluctuation, especially in the near term, due to the transition of our major distributors and customers to our Streamline blood tubing set and, longer-term, as a result of increased competition and variations in inventory management policies with both our distributors and end users.

Gross Profit

Our gross profit and gross profit as a percentage of revenues for the three
months ended March 31, 2012 and 2011 were as follows (in thousands, except
percentages):



                                          Three Months Ended March 31,
                                           2012                   2011
               System One segment   $  17,609       45 %    $ 13,921       42 %
               In-Center segment        3,703       21 %       4,112       24 %

               Gross profit         $  21,312       37 %    $ 18,033       36 %

Gross profit increased $3.3 million, or 18%, and increased as an overall percentage of revenue for the three months ended March 31, 2012 versus the prior year comparable period, driven in large part by the System One Segment. Gross profit for the System One Segment increased $3.7 million, or 26%, for the three months ended March 31, 2012 versus the prior year comparable period, due to increased revenues and improvement in gross profit as a percentage of revenues. The improvement in gross profit as a percentage of revenues was attributable to several factors, including lower product manufacturing costs driven by continued leveraging of our manufacturing infrastructure, certain cost saving initiatives and improvements in product design and reliability, and lower depreciation expense on our field equipment assets resulting from the change in the useful life of certain of these assets from five to seven years.

Gross profit for the In-Center segment decreased in absolute dollars and as a percentage of revenues for the three months ended March 31, 2012 versus the prior year comparable period. The change in gross profit was driven by increased revenues offset by costs incurred relating to the transition of certain blood tubing sets from a contract manufacturer to our own manufacturing facility.

We expect gross profit as a percentage of revenues will continue to improve in the long-term for three general reasons, all of which we expect will reduce costs in the future. First, we expect to introduce additional process improvements and product design changes that have inherently lower costs than the costs associated with our current products. Second, we anticipate that increased sales volume, rationalization and consolidation of our manufacturing operations, rationalization of our supply chain, and realization of economies of scale will lead to lower costs and better purchasing terms and prices. Finally, we expect to continue to improve product reliability, which would reduce unit service costs. However, there is no certainty that our expectations or the projected timing associated with our expectations will be achieved with respect to these cost reduction plans. Further, these improvements in gross profit as a percentage of revenues may be offset in the short-term for five general reasons, all of which could negatively impact gross profit. First, we manufacture a large majority of our products internationally and purchase products from foreign companies in other than U.S. dollars and, therefore, our product costs are subject to fluctuations due to changes in foreign currency exchange rates. Any unfavorable fluctuations in foreign exchange rates versus the U.S. dollar would negatively impact our gross profit as a percentage of revenues. Second, we expect that we will continue to incur higher transportation costs driven in large part by increased prices from carriers and changes in fuel prices. Third, we may see an increase in the cost of certain raw materials, due to increases in the cost of commodities, particularly resin. Fourth, we expect future demand for our products to continue to grow; however, higher relative sales of lower margin products and certain pricing strategies would have a negative impact on gross profit as a percentage of revenues. Finally, rationalization and consolidation of our manufacturing operations, in an effort to drive long-term gross margin improvement, will require us to incur additional costs in the short-term.


Table of Contents

Selling and Marketing

Our selling and marketing expenses and selling and marketing as a percent of
revenues for the three months ended March 31, 2012 and 2011 were as follows (in
thousands, except percentages):



                                               Three Months Ended March 31,
                                                2012                    2011
           System One segment            $   8,557        22 %    $ 7,896       24 %
           In-Center segment                 1,363         8 %      1,314        8 %

           Total Selling and marketing   $   9,920        17 %    $ 9,210       18 %

Selling and marketing expenses increased $0.7 million or 8% for the three months ended March 31, 2012 versus the prior year comparable period. The increase in selling and marketing expense was primarily the result of increased personnel and personnel-related costs due to expanded marketing programs within both segments.

Selling and marketing expenses for the System One segment decreased as a percentage of revenues for the three months ended March 31, 2012 versus the prior year comparable period due to our initiative to continue to leverage our infrastructure. Selling and marketing expenses for the In-Center segment remained consistent as a percentage of revenues for the three months ended March 31, 2012 versus the prior year comparable period due to our efforts to continue to broaden our marketing programs while still leveraging our existing infrastructure. We anticipate that selling and marketing expenses will continue to increase as we broaden our marketing initiatives, increase public awareness of the System One in the home market, and support growth in international markets.

Research and Development

Our research and development expenses and research and development as a percent of revenues for the months ended and were as follows (in thousands, except percentages):

Three Months Ended March 31, 2012 2011 Research and development $ 3,897 7 % $ 3,717 7 %

Research and development expenses increased $0.2 million, or 5%, for the three months ended March 31, 2012 versus the prior year comparable period but remained consistent as a percentage of revenues. The increase was primarily due to increased personnel and personnel-related costs and increased project related spending. For the near term, we expect research and development expenses will increase as we seek to further develop and enhance our System One and related products.

Distribution

Our distribution expenses and distribution as a percent of revenues for the
three months ended March 31, 2012 and 2011 were as follows (in thousands, except
percentages):



                                          Three Months Ended March 31,
                                           2012                    2011
               System One segment   $   4,002        10 %    $ 3,512       10 %
               In-Center segment          530         3 %        646        4 %

               Total Distribution   $   4,532         8 %    $ 4,158        8 %

Distribution expenses increased $0.4 million, or 9%, for the three months ended March 31, 2012 versus the prior year comparable period, due to increased business volumes but remained consistent as a percentage of revenues. Distribution expenses for the System One segment remained consistent as a percentage of revenues. Improvements in equipment reliability and distribution network efficiencies were offset by higher fuel charges. Distribution expenses as a percentage of revenues for the In-Center segment decreased due primarily to decreased costs associated with shipping certain of our products from our international manufacturing locations to our customers. We expect that distribution expenses will increase at a lower rate than revenues due to expected efficiencies gained from increased business volume and improved reliability of System One equipment. However, these favorable impacts may be offset by overall increases in fuel costs.


Table of Contents

General and Administrative

Our general and administrative expenses and general and administrative expenses as a percent of revenues for the three months ended March 31, 2012 and 2011 were as follows (in thousands, except percentages):

Three Months Ended March 31, 2012 2011 General and administrative $ 6,622 12 % $ 5,582 11 %

General and administrative expenses increased $1.0 million, or 19%, for the three months ended March 31, 2012 versus the prior year comparable period and increased as a percentage of revenues. The increase in general and administrative expenses was primarily the result of increased professional services, personnel and personnel related and other infrastructure related costs. We expect that general and administrative expenses will decrease as a percentage of revenues over time as we continue to leverage our existing infrastructure.

Other Expense

Interest expense increased $36 thousand, or 3% for the three months ended March 31, 2012 versus the prior year comparable period, due primarily to compounding interest on the interest amounts deferred until maturity with our term loan and security agreement from Asahi.

The change in other income (expense) during both periods is derived primarily by foreign currency gains and losses.

Provision for Income Taxes

The provision for income taxes of $0.2 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively, relates primarily to the profitable operations of certain foreign entities.

. . .

  Add NXTM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NXTM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.