Outset Medical, Inc. (OM) Earnings Call Transcript & Summary

Okay. Thank you, everybody, and good afternoon. It's Bob Hopkins here from Bank of America for our next fireside chat presentation. Really excited to have the senior leadership team from Outset Medical, Leslie Trigg, who's the company's CEO; and Rebecca Chambers, who's the company's CFO. We're going to do a fireside chat format here but I will hand it over to Leslie for some opening remarks, and then I'll hand it over to Clay to run the Q&A and I'll chime in as necessary. So thanks, everybody, for joining us. Leslie and Rebecca, thank you for being here and look forward to a good discussion.

Thanks, Bob. We're really excited to be here. And I'll start with the very, very exciting reminder that our remarks are covered by the safe harbor statement that's available on the slides via the webcast. So that's the most important thing that you need to know about Outset, so I thought I would just say that right out of the gate. I know everybody has been dying to hear whether they are, in fact, covered by the safe harbor statement [indiscernible] But no, on a serious note, we -- and I don't want to take too much airtime here right up front, Bob, but we're excited to maybe share a little bit more about our progress in the acute space with the hospitals and health systems, both nationally and regionally, and also in the home, which received FDA clearance in 2020. And we've got our early cohort of commercial patients now using Tablo in the home setting with some -- I think, with some really encouraging consumer feedback and clinical feedback. So we're just excited to sort of get into the story and share the progress.

Terrific. Thanks so much for being here. I'm going to hand it over to Clay and then I'll chime in over the course of the Q&A. But Clay, why don't you go ahead and start us off? And for those who don't know Clay DeMarcus, he's a core member of our team and has been instrumental in the coverage of Outset and the analysis of the industry. So Clay, I'll hand it to you, and again, thanks, everybody.

Yes.

Yes. Thanks, Bob. And yes, to reiterate Bob's comments, thank you both for being here today. Maybe an easy place to start just with the report last week coming in about $1.5 million above expectations. Maybe just walk us through what drove that outperformance and just the dynamics you saw in the quarter.

Yes, I'm happy to do that, Clay, and nice to see everybody. The outperformance in the quarter was partially driven by incremental console placements for sites that we had on our implementation schedule but went a little bit faster than planned as well as higher treatment revenue for those installations. We had a number of very large installations in the quarter, and they had higher treatments associated with them than we would typically see for stocking orders. The other benefit we saw was ASPs broadly came in higher than forecast. So those are the 3 primary drivers of outperformance in the quarter.

Okay. And on that utilization point, is there anything there about potentially higher utilization going forward than you originally expected? Or is this something you saw in kind of more onetime in nature, given the accounts and actually more [indiscernible] consoles?

Yes. So I would say yes and yes, if you will. So we have seen, in general, higher trending utilization. And we do expect that to continue throughout the remainder of the year. That being said, Q1 was even higher than the trend line, if you will. So we do expect utilization to come back down towards the broader trend line but that trend to be an upward slope, if you will. So Q1 was a little unique, given the size of the installations and the size of the associated stocking orders. That being said, we do expect second half and Q2 utilization to be slightly higher in the hospital setting specifically than that we saw in the back half of last year.

Okay, okay. Got it. That's helpful. And then the guidance for the year that came about $3 million on the bottom and the top down. Maybe just sort of think about the cadence for the rest of the year. And how are you thinking about the moving cadences over the next few quarters?

Yes, happy to. So the reason why the guide came up was primarily the beat as well as orders came in greater than our forecast in the quarter, which was something that we were, obviously, very pleased to see. As we look forward, there are various puts and takes, primarily takes, at least, on the HHS side as well as Q1, we had a large revenue recognition from the XT deferred revenue, given we upgraded those consoles. So sequentially, we have a bit of a headwind each and every quarter from here and now. That being said, our console placements and then the associated utilization and services are expected to grow. And that's effectively what is baked into that $92 million to $97 million of guidance that we cited as of last week. We're not reiterating guidance today to be honest, to be clear. The guidance was as of last week.

Right. And so just thinking about the [indiscernible] with the headwinds you mentioned but then the increase [indiscernible] sequential growth and how you look over the rest of the year.

Yes, we'll see sequential growth in consoles and total revenue.

Okay, perfect. All right. With those out of the way, maybe we'll talk about the acute setting first. Obviously, you guys are having phenomenal success getting in the acute setting. So maybe just help to kind of level set the story a little bit and just talk about the opportunity in acute setting and why you're having such strong success so far.

Sure. I'm happy to provide some color there. So our focus is in reducing the cost and complexity of dialysis for both national and regional health systems. That's sort of, so what, who cares at Tablo, is cost reduction and operating efficiency in the acute setting. I think why -- the simple answer as to why we are seeing increasing uptake is the power of the results. Customers are really seeing meaningful cost reduction on a per treatment and aggregate basis. We talked last week on our earnings call, for example, about in abstracts that a hospital within the HCA network had presented at a scientific conference showing a $550 per treatment cost reduction with Tablo. Those numbers become very big very quickly when you think about the volume of dialysis treatments typically done inside your average hospital. And I probably should provide a context around that, which is hospitals are not separately reimbursed for in-patient dialysis. And that's why cost reduction, which is always welcome but is even more vital in the context of dialysis because if a patient comes in, let's say, for a heart valve procedure and they wind up needing dialysis, the hospital is going to get paid for kind of that umbrella DRG for the mitral valve procedure. Anything that they spend on dialysis is out of their own pocket. Typically, a hospital will spend anywhere or lose $5,000 to $15,000 on a procedure that requires dialysis. And so, we looked at some 2018 data. There were 600 different DRGs that actually ended up involving dialysis. And in the vast majority of those cases, the hospital loses money on the entire procedure. So there's obviously an acute, no pun intended, but a very acute sensitivity, particularly on the cost of dialysis because it is a pure-play cost center. So enter stage left Tablo, what we offer hospitals is an opportunity to lower the cost in order to expand their margin across a very wide range of elective procedure DRGs.

Okay, perfect. And then maybe talk a little bit about the kind of the pipeline today and the success you're having with opening accounts. And I know one dynamic you called out on the last couple of earnings calls is the high level of reorder rate you're seeing from existing accounts as well. So maybe just talk to us a little bit about that dynamic, both new customers in pipeline and then the success you're having with existing accounts as well.

Sure. So the commercial strategy, I would describe, as kind of a land-and-expand approach. We are entering at the C-suite, not only the C-suite at the hospital but really the C-suite at the network level, at the corporate level because it is -- it really is a financial story and then followed by kind of clinical benefit and quality benefit but led by economic benefit first. So that's the land part, we call it landing new customer acquisition. And I think the team has done a really remarkable job, as measured by our report at the end of 2020 was that we -- Tablo is being used in 6 of the top 8 national IDNs and health networks and about 20 of the top 50 regionals. We communicated last week in the earnings call that we expect to be in 7 of the 8 top nationals by this year -- in the end of this year and about 30 of the top 100. So team continues to really execute against kind of new customer acquisition. But I would say just as -- or even more importantly is the expand part of that statement, right? That's what you really want to see is entry but then expansion as the customer has a good experience, again, through better operating efficiency and cost reduction, they're going to choose to -- you want to see them choose to roll that Tablo program through the next facility and the next facility, the next facility. And that's really where our clinical sales and support team comes in, really managing each and every implementation as if they're doing it for the first time, which we consider every implementation to be just as important as our last because it's the quality of that experience for the patient, for the nurses, for the physician and the provider that really are going to determine the rate at which we can expand within the health network. And the fact that 75% of our orders in the Q1 time frame came from existing customers, I think, gives us a nice signal that the team's efforts to create a consistently positive experience are paying off.

Okay. And given the financial benefit that you called out here as part of the value proposition, who is the discussion typically with in the hospital, say you're going after a new customer? Where does that dialogue typically start? And where does that kind of decision ultimately reside when it comes to choosing Tablo?

It really starts and ends with the health system executives, the health system executive team, which is a little different for me. I come from kind of the single-use disposable cath lab world, right, where I think physician is both user and decider. In this -- in our kind of corner of health care, the physician is very important as a user, as a prescriber. The decision-making, however, is made at the health system executive level.

Okay, got it. And then I know this opportunity has been talked about as the smaller of the 2 relative to the home, I believe, around $2 billion that you guys have cited. But still at the same time, penetration level where you are today is still very, very low. And knowing the various modalities that Tablo offers, what's -- I don't know if you've stated this publicly before, but is there something reasonable to expect where Tablo could get to from an acute penetration over time?

Yes. I think -- well, first, I'll say, $2 billion is still $2 billion. That's a pretty darn healthy market opportunity and that's just in the United States, by the way. So we're excited about it. And I think from a penetration standpoint, I don't see any technology limitation to our ability to access and penetrate this market. We -- Tablo -- and we've actually worked hard. That didn't happen by accident. The engineering team here has been busy and worked hard to actually add incremental features that enables Tablo's use really across any and all patient populations served anywhere in the hospital, again, bedside dialysis maybe with short treatments all the way to long treatments in the ICU. So we don't see any limit to our ability to penetrate that full $2.2 billion acute market here in the U.S.

Okay, okay. Got it. And maybe as a natural segue to the home setting, maybe frame that opportunity and how going -- the acute setting being the commercial driver today, how that provides the foundation for the expansion you're making in the home for the longer term and how those 2 kind of work in conjunction.

Yes, sure. Well, you probably said it just as well as I could have. But the approach we're taking to the home is actually health system-centric. We're utilizing kind of this nice thick foundation of health system customers who now are comfortable, confident, competent with the use of Tablo in the acute now to start managing that patient all the way to the home. We sized the home market, again, just in the U.S. at approximately $9 billion. So there are -- the question really becomes not is there enough to go after but where do you start. There are so many different ways and avenues to make an imprint in home. The way that we've chosen that I think gives us, again, a lot of operating leverage and commercial leverage is starting to work with health systems that want to actually follow that patient all the way to the home. And this really is a part of a bigger trend. We've all been hearing a lot more about the -- this hospital to home macro, hospital to home companies, whether that's Dispatch Health or Oak Street or et cetera, like offering care in a home setting that might ordinarily be offered in a hospital setting. IC dialysis is just sort of an extension of that macro tailwind. And it makes sense to hospitals because prior to Tablo, I think, because the thought of getting into the home was somewhat overwhelming to them because the equipment was viewed as pretty cumbersome and difficult to train patients on. I think what we bring, again, is a technology now that is really truly simple enough for a consumer to learn quickly and makes the job of a health system that's interested in managing the patient home manageable. We have a number of health systems that look at the opportunity to now access a chronic revenue stream that they view as pretty highly attractive to higher top line revenue growth and also expanded contribution margin. When you look at the contribution margin for a hospital that's going to manage a patient at home, it's significantly higher than the, let's say, low single-digits operating margin that most hospitals are sort of stuck around. And so the financials of home make a lot of very good sense for a health system. So that's kind of the nucleus of kind of where we're starting, and they comprise a good proportion of our early partners on the home side.

Okay, okay. Great. That was great. And then there's been a product offering in this market for 15-plus years, and we haven't seen much in the way of those home hemodialysis numbers changing too much over time. What have been the kind of impediments historically that have prevented adoption? And just talk about Tablo and the differentiation offered there that's going to provide something that can solve that and get past those impediments.

Yes, sure. Well, we've obviously spent a lot of time studying this with patients who have chosen home, patients who have not chosen home to really get a good understanding. And I think, broadly, that question has been studied actually quite a bit, and there's some good literature on this, market research literature on this. Generally, you kind of hear 3 themes about why more patients haven't gone home on HHD in the past. One is the training time. With the incumbent technology, it's typically kind of a 4 to 6 week and that would be every day of the week, 4 to 6 weeks of training. That's pretty manual kind of with a binder and a nurse walking you through things. And that's not been viewed in the past as something that most patients are interested or able and tolerating. I think we've solved that. Actually again, through technology, most of the setup is automated so there just isn't as much to learn, and we have a touchscreen on there that gives the patient kind of a 3D animation. It's about 10 steps and so the patient doesn't have anything to memorize. So there's just less to learn, both because it's mostly automated and there's nothing to memorize. So I think we've kind of solved for that. And so far, our training times are not 4 to 6 weeks. The average train time is less than 2 weeks. So I think that's a win. The second thing you generally hear from patients in these market research studies is that patients don't want to dialyze more frequently at home. With the incumbent technology, most patients do have to dialyze 5 or 6x a week, whereas in the clinic, they only have to dialyze 3x a week. And so one of our major design goals was, hey, let's create a system where patients can continue to dialyze at home 3x a week, if that's appropriate for them. 3, 3 -- and maybe it's every other day, let's give people flexibility, right, let kind of choose your own adventure based on what you and the physician agree is most appropriate versus like force feeding. It has to be this number of times per week and we have achieved that with Tablo. So we think that's going to have a big impact on -- positive impact on keeping patients at home for longer. And I would say, lastly, we really went after -- we heard a lot of patients talk about, "I don't want to have to make my dialysate in advance with the incumbent technology." They have to spend 8 or 9 hours at a time a couple of times a week, making this tub of dialysate in advance. It's like a 60-liter tub, so it takes a long time, 8 or 9 hours, call that 20 to 27 hours. We made all that, that just goes away with Tablo. You walk up and you press Get Started. You can hear tap water whooshing into Tablo. And then the patient actually is going through the touchscreen as water is starting to circulate around Tablo and become purified. So we took kind of a parallel path approach to set up and just to give people time back, so they're going to pick up another 25 hours of their week to do stuff that they would vastly prefer doing rather than kind of dealing with a dialysis machine.

Okay. And then if we think about this, you have the differentiated Tablo. You had this offering that's offering these improved solutions and training times and all the things you just walked through. And then we also have converging with a number of macro tailwinds in 2021. And I know we're very early days on things like AAKHI and the payment model there and Medicare Advantage. But anything qualitative that you can offer? Anything you've heard from the field at this point about how those are going and how those are being received?

Yes. I -- yes. I mean...

Can I -- just -- sorry to interrupt, Leslie. Before you go in that direction, I was just wondering if you could comment on -- I think I know the answer to this, but is there any opportunity, as you gain momentum in the home, to cause patients to switch off of current home hemodialysis technology? Or is that just highly unlikely or only likely over time?

No. Yes, I think there is. And I say that because probably about half, and again, remember, it's a small number, but probably about half the folks on Tablo today were actually on the incumbent device and switched and about half are new to home. Now if you're a provider that's interested in growing your home population, for example, to be responsive to the ETC, to kind of fitting Clay's question, you're going to be more interested naturally in using Tablo to get new patients on to home because that will help you reach your goal, a bigger home population. But Bob, I haven't seen any reasons so far why we won't also pick up some conversion business. Although again, over time, I believe it'll probably be more expansion because I know that, that's the goal that these providers and health systems have is to grow their population. And I think they perceive Tablo as a tool to do that.

Okay, okay. I was just asking because like as Clay pointed out that the market hasn't developed like they originally hoped. And yet, it's still a couple of hundred million dollars of revenue that's out there. So I just was curious on that point. So sorry, go ahead.

Yes, yes. And it's actually reminiscent of our clinical trial. Interestingly enough in our trial, almost exactly half of the patients in the trial were on the incumbent machine and about half were new to home. And so again, so far, it's a similar ratio. So Clay, sorry, I was -- I got -- I captured your question. Let me answer it. I would say that the -- let's see, so probably more -- much more activation on the ETC side. The ETC is the CMS sort of substance behind this AAKHI program. There's like way too many acronyms in that sentence. But -- so we're seeing some early movements in a good way that's beneficial to Outset with, I would say, actually a conventional, setting aside health systems, from some conventional dialysis clinic providers that are actually making some interesting moves in adopting Tablo because they have set specifically high targets, like, "Hey, we organizationally want to be at 30% home, 35%, 40% at home." So a, I've been really -- actually really kind of encouraged and pleased to see some of the -- and these would be the smaller, more nimble but still dialysis clinic operators operating at scale, just smaller than the LDOs. And I think that they're more responsive because they can be. They are -- because they're smaller, I think, they can be a little bit more progressive and aggressive. And so, we're seeing nice activation and movement there. I haven't seen probably as much activation on the MA side and that's probably more of an early inning story. We continue to hear a lot of interest from payers, really activate on thinking about it. We got a lower cost and how do we move more patients in the home. There does seem to be universal agreement from payers that home is better. But I think they're still processing, what does that look like and exactly how are we going to participate in care delivery model change.

Okay, okay. Got it. And then one more on the home before we move over to a couple of last topics before we wrap up. Just Bob and I and others, obviously, very eager to hear more details in the home and the progress you guys are making so far. When do you think you might be able to share more details there? And what sort of metrics might we get to hear about?

Yes. So I think that the metrics that matter the most to us, again, just kind of being a student of history, are the training time, the retention during training. And this is something we did mention in the earnings call. There is a couple of studies in the literature that point to a fairly high dropout rate on the incumbent device, even just during the training period. To date, we haven't had anybody drop our training programs because they simply didn't want Tablo. We have had -- now you're always going to have some dropouts through due to changes in family, changes in health status. And we've seen a little bit of that. But in this early period, just if you look at our training population, the incumbent device had about a 66% higher dropout rate just during training, kind of on an apples-to-apples basis. So we're going to continue to look at that and hope to share more of that later this year. And then I think the other big one for us is retention. This is -- this would kind of be the Holy Grail is a longer attrition. The incumbent device was a little bit disadvantaged by a fairly high dropout rate at 1 year. You'll always have some dropout, again, due to changes in health status, transplant, death. We'll see our share of that as well. But what we control the controllables, we really want to apply everything that Outset, the product and the people, have to bear to affect a lower attrition rate just due to, let's call it, general burnout. That, I'm convinced we can have a really, really impactful -- just create an impactful experience for patients that'll show up in higher retention. And that helps patients, that helps providers, that helps payers. That's kind of an everybody-wins scenario.

Okay, okay. All right. So in about 3 minutes here, I'll try and hit 2 quick topics, probably not easy to talk about quickly but we'll give it a shot. First, just on the recent equity raise. I think you have about $400 million on the balance sheet today, as a result, in cash. Does this contemplate taking you through to profitability? And then the other question just being around the rationale for the raise and where those dollars are going to go?

Yes. I'm happy to take that one, Clay. And you're correct, we actually have over $450 million on the balance sheet as of early April, if you will. And we do believe that will take us to profitability. The use of proceeds really have 2 pieces. One, just even since we shared with you our expectations in the summer of last year prior to going public, they've been raised meaningfully, right? So for 2021, we had expected around $66 million of revenue. Obviously, with our guidance as of last week at $92 million to $97 million, that's a meaningful increase. What a good portion of these proceeds will be going towards is supporting the growth in that installed base and through the clinical sales team, the field service engineers, et cetera. So that is probably, if you think about it, the largest bucket of allocation of the cash. But in addition to that, we have some exciting things that we're looking at doing. One is funding more investment into home. We need to support the patient training as well as the physician education and program support to really continue to drive the home opportunity. We're also initiating some R&D programs and programs around data analytics. And then lastly, we're assessing -- I would put the international opportunity in more of the assessment base. But all in all, across all these buckets, we expect incremental growth and profitable revenue over the longer term, and that's effectively the rationale and reasoning in use of proceeds, if you will.

Okay, okay. And then the last one is on competition. Anything you're seeing from the incumbent competitor out there today or potentially new competitors coming in the market? Anything you would call out there at this point?

Clay, you had a little bit of an echo, but I think I captured that. I think regarding competition and if there's anything on the horizon, I think, we -- I mean, we're always obviously, probably like any company, going to keep a keen eye on the competitive space and sort of tracking what might be coming. I think why I feel so confident about kind of our future over the next 5 years is: one, it is a huge space, $11 billion just in the United States and the United States being just 1/3 roughly of the overarching world dialysis market. There really is plenty of space for more than 1 or 2 players. I actually have never, in my medical device career, been in a space that had so few competitors. So I think in many ways, another competitor or 2 in the home market, frankly, would be useful. We have still a lot of wood to chop in physician education, patient education, all the things that Rebecca just mentioned, if we really want to see home hitting 30-, 40-plus percent, which, I think, is totally achievable. We have other voices pushing the community and patients in the same direction, that's only going to be very, very helpful. So I think there is plenty of room and looking forward to others kind of sharing the lift on the education and awareness front.

Okay, perfect. Well, I think, unfortunately, we're out of time here. So Leslie and Rebecca, thank you so much for joining us. We'll have to give Bob credit here for joining us at no-fun Vegas, unfortunately, this year. And hopefully different next year. But thank you so much for joining us again. We definitely appreciate it, and thank you, everyone, for listening in.

Thanks. Thank you, Clay and Bob. Bye.

Thanks, Clay. Thanks, Bob. Bye.

Thank you.

Bye.