The MX Q&A: Jeff Burbank

Nearly 60% of dialysis patients use two U.S. medical chains, Fresenius and DaVita, for their treatment, and market statistics show that only a small percentage of patients dialyze at home. Those daunting facts present either a brick wall or an open door for any company trying to compete in the dialysis market. Jeffrey Burbank sees a door and has swung it open in hopes of nabbing a bigger share of the home-treatment business.

NxStage Medical (Lawrence, MA), the company Burbank founded and heads, offers the first FDA-approved hemodialysis tool, the System One. The size of a 13-in. TV set, the portable machine allows patients with end stage renal disease to dialyze six times a week without the use of either special water or electrical connections. Burbank can point to data that home dialysis treatment lowers the number of hospital stays and reduces the need for expensive medication. Those outcomes could result in the kind of cost savings that have been central to the healthcare reform debate.

Burbank, who recently expanded NxStage’s reach with the company’s first international partnerships, guided the company through its IPO and the 2007 purchase of Medisystems (Lawrence, MA), a manufacturer of dialysis devices. Burbank is also the cofounder as well as former president and CEO of Vasca (Tewkesbury, MA), a dialysis products company. He is a veteran of more than 20-years of managing companies that develop, make, and sell devices to help patients with end stage renal disease, including nine years at Gambro’s renal division. A graduate of Lehigh University with a BS in industrial engineering, Burbank is an inventor with his name on 50 U.S. medical device patents.

Burbank shared his thoughts with MX on healthcare reform, the recent CMS “bundle” ruling, the potential for better patient outcomes, and his aggressive plans for expanding NxStage’s market at home and abroad.

MX: Like many device companies, NxStage obviously has a stake in the healthcare reform bill. What would you like to see in the bill that would offer the best outcome for the company and its dialysis clients? And in particular, home dialysis patients.

Jeff Burbank: We support the Obama administration’s dedication to a revamped healthcare system because of the advantages our therapy can bring—including good, if not better, clinical outcomes, improvements in a patient’s quality of life and reduced healthcare costs.

Has NxStage had any input into the healthcare reform process?

I think we continue to be a good example of how innovative products can advance healthcare reform. Since 2005, when we launched the System One—which is the first and only truly portable home hemodialysis machine cleared by the FDA—NxStage has been changing the way the industry and insurance payers think about dialysis. With clinical data showing a 40% reduction in mortality and significant improvements in patient quality of life, NxStage is shifting the paradigm of dialysis care toward better therapies like daily or more frequent hemodialysis that can also help reduce healthcare costs. As changes are implemented, we try to be a voice for how innovation can improve healthcare while reducing costs, which are so important.

CMS issued a ruling in September on new standards for the “bundle” that affects end stage renal disease and reimbursement for dialysis. What’s your take on it?

Clearly, the bundled payment system can influence access to home hemodialysis. The good news is that CMS’ stated goal is to encourage utilization of home dialysis modalities, including home hemodialysis, which is mentioned throughout the proposed rule.

The basic “bundle” concept is favorable to home therapies because it is intended to remove historical disincentives related to how separately billable injectable drugs have been paid. We have been focused on three items that we think have the biggest impact on home hemodialysis: the unit of payment, payment for additional therapies when medically justified, and payment for training of the patient.

We agree with CMS’ direction on the first two items. In the proposed rule, the treatment is maintained as the unit of payment. They also included provisions for payment when additional treatments are medically justified. These are a continuation of what is done today. These provisions give the renal community the flexibility to prescribe therapy at the frequency and in the location that best suit the needs of the patient.

Our concern with the proposed bundle relates to the third item—how home dialysis training is reimbursed. In the proposal, there is no separate payment for training. Rather, it is incorporated into the bundled payment. This does not make sense given that training takes place during such a small subset of patient’s total treatment. In addition, it is a substantial up-front cost for the dialysis center. The arguments to maintain a separate payment for training are well founded, and many others share our belief on this topic. At a recent CMS Town Hall meeting to discuss the proposed bundled, training was the second most frequently raised issue regarding the proposed rule.

We are engaged in a number of efforts to affect a change in the proposal. We are working closely with patient advocacy groups and national organizations. Public comments are due on December 16. Until the final rule is published sometime in 2010, we really do not know how it will affect NxStage, patients, or providers.

As you said, NxStage says daily home dialysis patients show a better than 40% reduction in expected mortality compared with the overall ESRD patient population in the U.S. What is the source of this data, and is there a potential for an even greater reduction in the mortality rate? What’s the best we can expect?

The mortality data is from the FREEDOM study, which stands for Following Rehabilitation, Economics and Everyday-Dialysis Outcome Measurements. It’s a multicenter prospective cohort study sponsored by NxStage Medical, and it’s designed to measure the clinical and economic benefits of daily home hemodialysis with our system, as compared with conventional, thrice-weekly in-center hemodialysis.

FREEDOM data demonstrates a 40% reduction in expected mortality of patients using daily home hemodialysis (DHD) therapy with the NxStage System One when compared with patients from the United States Renal Data System (USRDS). The Standardized Mortality Ratio (SMR), calculated from actual versus expected deaths, was 0.6 for DHD patients compared with patients from the USRDS of similar age, gender, race and primary cause of ESRD.

This data is in addition to previous FREEDOM results showing a significant reduction in recovery time after dialysis and depressive symptoms, as well as significant improvements in quality of life metrics. We are very pleased with these results and believe that the FREEDOM trial is really delivering proof of what we see when we spend time with patients on NxStage.

I think we still have an opportunity for improvement until a person with end stage renal disease has the same length of life as a similar person without the disease. We still have a long way to go.

At more than $33 million, NxStage reported a 9% increase in net revenue in the first quarter of 2009 over 1Q 2008. What do you attribute the increase to, and what are the company’s revenue projections through the rest of the year?

We have actually accomplished more, as evidenced through the recent release of our third quarter 2009 financial results. Our efforts to drive further improvements in operating and financial performance worked out well for us during the third quarter. In fact, these led to better results compared with our expectations with stronger-than-anticipated demand across all three markets—home, critical care and in-center.

We achieved $38 million in revenue, representing 25% growth year over year. Revenue within our home market increased by 32% when you compare it with the third quarter of 2008. In addition, revenue for our critical care and in-center markets increased 29% and 17%, respectively, when compared with revenue for the third quarter of 2008. Q3 also delivered nice sequential improvement in other key financial, such as gross margin, adjusted EBITDA, and cash.

I am encouraged with our progress, as well as the increasing strength of our business fundamentals. So, to reflect our strong third quarter results in our 2009 outlook, we raised our full-year revenue guidance from $135 to $145 million to $145 to $147 million.

NxStage says that less than 1% of the patient population uses home hemodialysis. What are System One sales, and what do you expect to do in sales over the next few years?

The home market represents a $1 billion market opportunity for NxStage in the U.S. We believe that approximately 10-15% of the ESRD population would be appropriate for home hemodialysis. That’s approximately 350,000 patients. Currently, we are the only provider of a home hemodialysis system cleared by the FDA. NxStage really is pioneering the home market. To date, we have done a great job, and I continue to be encouraged by our ability to grow revenues quarter over quarter as we execute initiatives to create awareness and drive demand. I remain confident in our ability to grow the home market moving forward.

How do your differences from your competition help or hinder you?

As I mentioned, NxStage is the only provider of a home hemodialysis system cleared by the FDA—meaning we currently do not have any competition in the home market. We also see ourselves and our therapy as being complementary to in-center. In fact, we work with a number of in-center providers, including DaVita.

NxStage recently signed an agreement with Kimal to distribute the System One in Ireland and the United Kingdom. I understand it’s the company’s first international deal. Can you tell us about the financial particulars and how the agreement came about?

Yes, our geographic expansion into the UK and Republic of Ireland with Kimal, a distributor of medical device technology across the UK and international healthcare markets, is our first international deal. We believe this international distribution agreement with Kimal is a testament to the strength, reliability, and unique technological features of our product portfolio, namely the System One.

Under the terms of the agreement, the NxStage System One and PureFlow SL dialysate preparation system are now available to dialysis centers and hospitals throughout the UK and Ireland exclusively through Kimal. The UK’s National Health Services (NHS) has set the goal of increasing the percentage of UK patients who utilize home hemodialysis to 10 to 15% from its present level of under 2%. The NHS objective was set after a comprehensive study published in 2002 by the National Institute for Clinical Excellence (NICE), which suggested that future technology could aid in gaining wider acceptance of home hemodialysis. There are more than 20,000 patients currently receiving dialysis treatment in the UK and Ireland in centers.

This market represents a great opportunity to expand NxStage’s brand more broadly. Although we’re still in the early stages, we remain excited about the potential for growth in 2010.

You also worked out a debt-financing strategic alliance with Asahi Kasei Kuraray Medical in Japan that enabled you to pay off your obligation to GE. Can you tell us how you were able to make the agreement?

The multifaceted agreement between NxStage and Asahi leverages our production expertise in our existing dialyzer manufacturing facility in Germany and Asahi’s expanded high performance polysulfone hollow-fiber membranes. In addition, Asahi provided NxStage with $40 million of debt financing. We used these proceeds to pay off our entire debt obligation with GE. The remaining proceeds are being used to fund operations.

The alliance combines the complementary strengths of the two partners in innovative and competitive technology, product development, and market presence. This transaction is expected to enable both of us to accelerate our global growth strategy through mutual synergy.

These types of agreements clearly show confidence in the company. In a down economy what lessons can other device companies take from these successful deals?

I think a good takeaway is our ability to continue leveraging our innovative technology or assets to create more value—without further diluting our stakeholders.

Finally, I understand that from about 1975 till System One’s approval in 2005 home dialysis had fallen somewhat into disuse. What are the reasons for that, and with the CMS decision looming, what do you see for the future of home dialysis overall?

When hemodialysis (HD) first became available in the late 1960s and early 1970s, treatment was done predominantly in the home primarily because of the lack of hospital or clinic-based facilities. By 1973, roughly 40% of patients undergoing hemodialysis were doing it at home.

Beginning in 1973, a number of factors came into play that contributed to a steady decline in home HD usage. First, the hemodialysis reimbursement system set up in 1973 via congressional legislation, while covering nearly all hemodialysis patients, inadvertently created disincentives – making it more profitable to care for hemodialysis patients in multistation in-center dialysis clinics. In addition, dialysis machines and equipment in that era were very bulky and complex, making it more amenable for use by trained nurses or technicians rather than patients.

Further, in the mid 1970s, peritoneal dialysis emerged as another therapy alternative and was seen as being easier to train the patient on and easier to do at home than the bulky, complex hemodialysis equipment available at the time. As a result of these combined factors, home hemodialysis declined steadily to the point where less than 1% of patients on dialysis were treated with home HD. While interest in home HD began to grow again in the mid-1990s, the available equipment was still not optimized for this type of therapy. As a result, patient usage remained at less than 1%.

Since 2004, home HD has been reemerging as a strong therapy option and is once again growing. While reimbursement issues still need to be addressed—and if done appropriately, the new bundled payment system that has been proposed may aid in this area—several other factors have contributed to the recent re-emergence. One is the realization by doctors and other clinicians that more frequent home hemodialysis has significant health and quality of life benefits compared with conventional in-center therapy. Another is that the growth rate of ESRD patients is higher than the growth rate of medical professionals as well as recognition of the increasing costs of medical care overall. As a result, attention is being drawn to the need for ways to treat patients more efficiently and cost effectively.